High-tech entrepreneurs grapple with quandary of buying, selling
Facebook.com’s mastermind, Mark Zuckerberg is sitting on a potential gold mine that could make him the next Silicon Valley whiz kid to strike it rich.
The developer of the Internet’s second–largest social–networking site also could turn into the next poster boy for missed opportunities if he waits too long to cash in on Facebook Inc., which is expected to generate revenue of more than $100 million this year. The bright outlook is one reason Zuckerberg felt justified spurning several takeover bids last year, including a $1 billion offer from Yahoo! Inc.
"We clearly have a bias toward building than selling," Zuckerberg said in an interview. "We think there is a lot more to unlock here."
The build–or–sell quandary facing Zuckerberg is becoming more common among the precocious entrepreneurs immersed in the latest Internet craze, a communal concept of content–sharing that has been dubbed "Web 2.0."
Besides Facebook, other Web 2.0 startups frequently mentioned as prime takeover targets include online video site Metacafe Inc. and Photobucket Inc., which has emerged as one of the Internet’s busiest destinations by hosting personal videos and photos that routinely are linked to top social–networking sites like MySpace and Facebook.
These sites find themselves at a critical juncture reached several years ago by the Internet’s first big social–networking site, Friendster.com, which chose to stay independent instead of selling. That decision is regarded as one of Silicon Valley’s biggest blunders.
Web 2.0 startups have emerged as hot commodities because they are drawing more people from television, newspapers and other media traditionally used for advertising. Online video channels and social networks, a catchall phrase attached to sites that enable people with common interests to connect and deepen their bonds, are particularly hot.
Deep–pocketed companies are angling for a piece of the Web 2.0 action: A quest that has yielded a couple of big jackpots, helping to propel the sales prices of startups to their highest levels since the dot–com boom.
News Corp. paid $580 million in 2005 to buy MySpace, the largest social–networking site, and Google Inc. snapped up video–sharing pioneer YouTube Inc. for $1.76 billion late last year.
"I’m surprised a lot more companies haven’t already been bought," said Reid Hoffman, a veteran Silicon Valley executive who has invested in many startups, including Facebook. "My hunch is the deals are only going to get more expensive in 2008 and 2009."
Startup values rise
In 2006, the average price paid for a startup funded by venture capitalists rose 19 percent, to $114 million. That was the highest amount since the frenzy of 2000, when the average price of venture–backed startups peaked at $337 million, according to data from Thomson Financial and National Venture Capital Association.
If the dealmaking market continues to heat up, Zuckerberg will end up looking smart for rebuffing Yahoo! Inc. and other suitors that included Microsoft Corp. and Viacom Inc.
Assuming Facebook hits its financial targets, the Palo Alto–based company should be able to command a sales price well above $1 billion or pursue an even more lucrative initial public offering of stock in the tradition of Google, Yahoo!, eBay Inc. and Amazon.com Inc. That’s a group of Internet icons worth a combined $250 billion.
A Facebook sale or IPO is bound to happen so the startup’s early investors, consisting mostly of venture capitalists, can realize profits. Facebook has raised $38.5 million since Zuckerberg started the site in 2004 while he was a sophomore at Harvard University.
Zuckerberg has some flexibility on when to cash out because Facebook is profitable.
An IPO or sale will "make sense at some point for the company, but I never think that’s the goal," said Zuckerberg, who is believed to control nearly one–third of Facebook’s stock. "The goal is to . . . continue introducing certain revolutionary products that push us to the next level."
Timing is everything
Marc Andreessen, who made a fortune during his 20s as co–founder of Web–browser pioneer Netscape Communications, is among those who say that Facebook is going to become even more valuable in the next year or two.
"Facebook is doing the smart thing. If you are in a big market like social networking, you are usually better off waiting (to sell)," said Andreessen, chief technology officer for another social–networking startup, Ning Inc.
Had MySpace remained independent, it would be worth $5 billion now, Andreessen estimated.
Should Facebook stumble, it eventually may suffer the same pangs of regret tormenting Friendster Inc., which turned down a takeover bid from Google in 2003 when it reigned as the Internet’s hottest social–networking site.
Had that offer been accepted, Friendster founder Jonathan Abrams and a small group of early investors reportedly would have received $30 million in Google stock that would have been worth about $1 billion today.
Abrams left Friendster in 2004 after a falling–out with the company’s venture capitalists.
Now working on its fourth chief executive since Abrams’ departure, Friendster has yet to recapture the buzz that once made it a prized commodity.
More tales of woe are bound to emerge after the latest dealmaking cycle winds down, predicted Ken Marlin, a technology investment banker in New York.
"The world is filled with companies that waited too long to sell and missed their window of opportunity," he said. "We think this land grab (on the Internet) probably will only last another year or two."
Focus is on Facebook
Facebook began as a site exclusively for college students before opening up to high school students in 2005 and accepting all comers last fall.
The site has nearly 17 million registered users, most of whom fall into the younger–than–35 demographic prized by advertisers. Facebook gives advertisers plenty of marketing opportunities because its users churn through about 1 billion Web pages per day.
Facebook struck its first major financial partnership last summer with Microsoft, which reportedly guaranteed delivering $200 million in ad revenue through 2008. Zuckerberg said the advertising contract with Microsoft recently had been extended through 2011. Terms of the extension have not been disclosed.
Although he dropped out of Harvard in 2004 to move Facebook to Silicon Valley, Zuckerberg leads the ascetic lifestyle of a college student as he runs a business with 200 employees.
Zuckerberg said he keeps little more than a mattress in his apartment, which is a few blocks from Facebook’s office. The proximity allows him to walk to work every day, usually wearing sandals ideally suited for lounging around a campus dorm.
Being comfortable is important to Zuckerberg because, like so many of the Silicon Valley prodigies before him, he tends to spend long hours at the office plotting strategy.
"For now, I just think it’s very important to have a good sense of direction about where we are going," he said.