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5 Questions for Facebook Investors

Posted By Barry Ritholtz On January 12, 2011 @ 11:15 am In Valuation,Venture Capital | Comments Disabled

Back on December 17th, I wrote that Facebook’s founder Mark Zuckerberg getting tagged as Time’s Man of the Year meant the top was likely in for Facebook valuation at $58.75 billion dollars (Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year [1]).

This meme has slowly propagated, and quite a few other analysts have looked at the same; See Douglas Rushkoff [2] and the Reformed Broker [3], amongst others. Goldman Sachs does not agree with this assessment, as they just poured $500 million into FB at a $50 billion dollar valuation, with an option for another $1.5 billion right behind it.

If and when Facebook goes public, they must monetize their user base — I find it hard to see how they do that without annoying their base of users away. Mine is a decidedly non-consensus viewpoint.

The free web app has to figure out a way to have the site generate revenue and profits from its immense user base. Currently, they generate about $ 1 billion dollars in revenues at about a 25% margin.

The challenge for FB is that as a free site, there is a dynamic tension between the users and the people who seek to monetize those users. The 15-25 year old demographic is well represented on Facebook, and while advertisers want to reach them, they don’t have all that much discretionary income.

But most intriguing for potential FB investors are the Facebook numbers:

How accurate are they?  Facebook claims more than 500 million users, each one of whom can have as many as 5,000 friends. Yet as a privately held company, there are no real disclosure obligations as to this data. Their announcements have little legal impact; they can pretty much say WTF they want and there are no consequences. Publicly traded companies do not have that freedom.

Any investors into a Facebook Private or an IPO may want to get the answers to the following questions:

1. FB claims 500 million subscribers. How many of these are active users — at least once or twice per week? How many of these are dead accounts, with no activity for 30 days? 90 days or more?

2. What is the average revenue per subscriber? How are you planning to grow this?

3. How much churn does Facebook go through? For every 100 new subscribers, how many subscribers leave?

4. What is the life cycle of the typical Facebook subscriber? How active are they for how long, what sort of arc do they cut across theirFB life cycle?

5. Besides advertising, how will you monetize your user base? Are you selling their data to buyers? What about anonymized data — are you selling this also?

Bonus question: What is the subscriber growth like outside of the US? Where are your fastest growing areas? What area is not seeing big penetration ?

Investors have to consider if the Facebook business model has staying power, or if it will eventually morph into the next MySpace or Yahoo  . . .

>

Previously:
Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year [4] (December 17th, 2010)

Magazine Cover Indicators [5]

See also:
Facebook hype will fade [2]
Douglas Rushkoff
CNN January 7, 2011
http://www.edition.cnn.com/2011/OPINION/01/07/rushkoff.facebook.myspace/index.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/01/5-questions-for-facebook-investors/

URLs in this post:

[1] Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year: http://www.ritholtz.com/blog/2010/12/uh-oh-facebook-founder-zuckerberg-is-time-man-of-the-year/

[2] Douglas Rushkoff: http://www.edition.cnn.com/2011/OPINION/01/07/rushkoff.facebook.myspace/index.html

[3] Reformed Broker: http://www.thereformedbroker.com/2011/01/09/if-you-could-short-facebook-would-you/

[4] Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year: http://www.ritholtz.com/blog../2010/12/uh-oh-facebook-founder-zuckerberg-is-time-man-of-the-year/

[5] Magazine Cover Indicators: http://www.ritholtz.com/blog../?domains=http%3A%2F%2Fwww.ritholtz.com%2F&sitesearch=http%3A%2F%2Fwww.ritholtz.com%2F&cx=015905226837203657063%3Ax1cwdcykvvw&ie=UTF-8&oe=UTF-8&cof=FORID%3A11&s=Search&q=Magazine+Cover+Indicator&sa.x=26&sa.y=19#1533

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