Facebook Was Never Worth $15 Billion

Back in December, Valleywag and Silicon Valley Insider tried to estimate the current valuation of Facebook by calculating the price at which employee shares are transacting on closed markets.  Valleywag wondered if Facebook was only worth $1.3B while Insider said it might be worth around $2B, thereby facing the prospect of a down round in their next financing round. As we all remember, Microsoft had invested a $240M in Facebook for a 1.6% stake in the company in October 2007, valuing the company at $15B.

I don’t buy it.  Not Valleywag or Insider’s calculations of Facebook’s current valuation. I don’t buy the fact that Microsoft thought Facebook was once worth $15B (even though their press release says so).

Let’s review what I think happened. In October 2007, Microsoft announced that they had taken a 1.6% stake in the company. The Wall Street Journal wrote at the time: “Facebook sells ads on its own and also struck a deal last year that allows Microsoft to broker display ads on Facebook’s U.S. site until 2011. (…) As part of yesterday’s agreement, which lasts through 2011, Microsoft will sell advertisements on international versions of the Facebook service”. The press release adds “Microsoft will be the exclusive third-party advertising platform partner for Facebook” Interesting.  An exclusive search/contextual/banner ad deal is part of the agreement.

Go back one more year, in 2006.  Fox Interactive Media announced in August 2006 that they had “entered into a nearly $1 billion, 3+ year deal with Google to exclusively power search across most Fox online sites, including Myspace.” That deal had minimum revenue guarantees for Fox. If I remember correctly, Microsoft had bid for that business and lost it.

Go back further, in December 2005. Google and AOL announced the expansion of their strategic partnership through a $1B investment from Google in AOL (for a 5% stake).  Microsoft had previously lost that one as well.

With a fledgling search advertising business and a recently acquired ad network/ad technology (through the purchase of aQuantive in May 2007), Microsoft needed strategically to have at least one sexy partner. When Facebook exploded into the scene, they had found the deal they needed to absolutely make. I remain convinced today that the partnership business case was mostly built on the ad deal, which allowed Microsoft to claim Facebook as a partner, offer more inventory in their ad network and keep Google at bay. The small investment made sure the Facebook’s exec team remained aligned with that goal. Facebook must have made the request to include the valuation in the press release and Microsoft obliged. In a sense, this really worked for Facebook given that the Microsoft deal might have helped them strike two subsequent consecutive funding deals (for a total of $100M) with Li Ka-shing in November 2007 and March 2008.

In conclusion, Facebook raised (hopefully) enough money ($340M!) for a good runway and Microsoft got the strategic partner they needed while shutting off Google. But I don’t think Microsoft ever really thought Facebook was worth $15B.

8 thoughts on “Facebook Was Never Worth $15 Billion

  1. I’m certain you are correct that Msft did not value Facebook at $15B. And perhaps you make this point, but said explicitly, there are accounting advantages to Msft in treating ad spend as investment rather than operating cost.

  2. I’m certain you are correct that Msft did not value Facebook at $15B. And perhaps you make this point, but said explicitly, there are accounting advantages to Msft in treating ad spend as investment rather than operating cost.

  3. Also that the MSFT investment was when hopes of finding a revenue model for Facebook were as wide as the blue sky. As we have seen over the past few months consumers are not in the mood to research rather they want to connect and interact — so will there really be a viable revenue model?

  4. Also that the MSFT investment was when hopes of finding a revenue model for Facebook were as wide as the blue sky. As we have seen over the past few months consumers are not in the mood to research rather they want to connect and interact — so will there really be a viable revenue model?

  5. Hi Sebastien!

    Interesting piece, although there is not really anything new to this, as Mark Zuverberg said exactly that at the web 2.0 summit in November 2008. MSFT needed that deal, and bought the right to do search etc. on facebook.

    Best regards
    Benjamin

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