- Russian Internet investment company invests in Facebook $200M at $10 billion valuation -- 33% discount versus Microsoft's 2007 $15 billion valuation
- Zuckerberg's statement about Facebook being cash-positive for last five quarters before before interest, taxes, depreciation and amortization is not very meaningful because of the cost of company's infrastructure ---
- In 2008 Facebook was planning to spend $200M on servers
- GigaOM estimates that Facebook spends $20M -$25M to host their servers
Facebook today confirmed that it has received a $200 million investment from Digital Sky Technologies, valuing the Palo Alto, Calif.-based company at $10 billion, significantly less than it was in 2007 after an investment made by Microsoft valued it at $15 billion. In a conference call discussing today’s news, Facebook CEO Mark Zuckerberg blamed the differences in valuation on the current economic conditions, and the fact that Microsoft was seeking a strategic relationship with the social network.
In a nutshell, DST operates or has a stake in several top social networks in Russia and Eastern Europe that actually make money. Zuckerberg said he hopes to capitalize on his new investor’s experience monetizing those social networks, but stressed that this deal isn’t about the cash. I beg to differ.
On the call Zuckerberg noted that an IPO wasn’t imminent and said this money was more of a cash cushion given that Facebook has been EBITDA positive for the past five quarters (going on six). The company expects to be cash-flow positive in 2010, he added. I’m not privy to Facebook’s financials, but using EBITDA for a business that requires a constant and continued purchase of servers is meaningless. The metric measures earnings before interest, taxes, depreciation and amortization and is often used as a substitute for cash flow. But in businesses in which equipment costs are high and replaced in a short amount of time (servers typically only last 3-5 years), EBITDA is essentially a meaningless metric.
For example in January 2008 Zuckerberg said Facebook expected EBITDA of $50 million for the year, which sounds lovely until you do the math (as Kara Swisher did) and realize that given Facebook’s plans to spend $200 million on servers in 2008, cash flow would have been negative by some $150 million. Today Zuckerberg said that Facebook expects to be cash-flow positive in 2010, which means that Facebook will continue to lose money throughout this year. And it may be losing a lot of money, given its expenses. In March, Facebook was looking for $100 million in debt for equipment, and Om Rich Miller over at Data Center Knowledge has estimated Facebook spends $20 million to $25 million a year just to house its servers. [link]
Questions for all of us to think about:
- Do we know the cost of web infrastructure of our business?
- Do we have a notion of how effective and cost-effective is our system architecture?
Chances are many of us would be hard-pressed to answer these questions.
posted by: gqpartner