I'm reading the Techcrunch post re: Twitter and it's Series C round of $35M. Congrats to them. In reading the comments, I noticed there was a fair amount of hate re: why anyone would continue to fund a company that doesn't have a revenue generating strategy in place. That's a legit stance. Still, I don't have as much pessimism about Twitter than I do about say, Facebook. For one, Twitter hasn't unveiled its revenue generating products yet. For all we know, it could hit a monster homerun. Facebook on the other hand has made several attempts at generating revenue with some success (and some failures - Beacon anyone?). Still, I'll reserve judgement until after they roll out those proposed revenue generating products.
 
One comment in particular was from a guy named Nathan:

Useless is a bit much. The service is useful to millions of people who use it multiple times every day. The issue isn't the usefulness of the service, it's the fact that it doesn't generate revenue. A big difference. Also, it seems that Nathan is a little bitter that his revenue generating start-up can't get funding. On that point, I feel for him. Fundraising is not easy. You'd be lucky to get one second meeting out of ten first meetings with investors. We've been fundraising for about a month and had to hear a lot of no's before we got to the handful of promising second/third meetings we are entering into now. Our business, like Nathan's, is not that sexy though we do generate revenue and have very strong growth projections.
 
The analogy I like to use is this. Someone comes up to you and asks for a million dollars to open a couple of Denny's franchises. The person provides solid sales numbers, tons of historical data, etc. and tells you that you'll most likely make back your money in 3-5 years and then receive a nice 10% dividend each year. Then another person comes and tells you they need a million dollars to open a new concept high-end restaurant with a new chef who has worked under the best chefs in the country. Who would you fund? My answer would be the Denny's franchise, but that's because I'm not rich and like the stability of a safe investment. For investors who already have money, the idea of a nice solid investment throwing off 10% just doesn't excite them. They need the next billion dollar payout - the next YouTube, Yahoo, or Google. Otherwise, they'd just go buy bonds and commodities.

I've posted before about Facebook and its valuation ... not always in the most optimistic light. I'm reading a post today about rumors that Bebo is being actively shopped by AOL. Now I'm doing some very very rough calculations based on some very very vague assumptions, but I think I might have undervalued Facebook.
 
My take has always been that Facebook should be valued at about 5 times revenue. I still hold to that value and have said I would revise my numbers should I get more detail into Facebook's real revenues. Well based on the TechCrunch post, Bebo is rumored to be valued at about $200 million which supposedly is two times its current annual revenues (or $100 million). I pulled some traffic numbers from QuantCast for both these guys:

Making a very simple assumption of traffic = revenue, I'll assume that Facebook has 11.47 times the revenue of Bebo or $1.147 billion. Based on that, my new valuation for them is about $5.735 billion. Still a far cry from the $15 billion valuation they raised their last round with but not too shabby. Again, this is a very rough estimate and who knows whether I'm still above or below their true revenue number. My hope is that Facebook is doing well and that they can still grow. We all know the Bay Area could use a big employer nowadays.

I've parked myself outside of Peet's for a brew. Also snapped a shot from our balcony earlier today - you can see Marin County across the water! A beautiful day today - slightly on the warm side; just the way I like it.

It's a great way to start what will be a hectic week. We're starting our big fundraising push tomorrow and while Ike is on the road, I'll be pushing out some interesting improvements to some of our core products. Good news is that January is shaping out to be a blockbuster month for us (best month of our existence!). The right combination of the post holiday credit card rush (always happens - people max out their cards and need more) plus news that the Fed lowered interest rates a few weeks back have opened up the floodgates for mortgage apps. Let's hope the remaining 19 days of the month are just as good as the first 12.

As reported by the Wall Street Journal, Facebook has pulled its planned employee stock sale. This would have allowed the 800+ employees of Facebook to sell a portion of their stock to private investors - supposedly $900,000 worth or 10% of vested shares, whichever is less. Reasons that some outlets are stating was that Facebook couldn't find any private investors who wanted to buy the stock at a company valuation of $4 billion - a far cry from the $15 billion valuation Microsoft got for its $240 million investment.
 
I'm not really shocked that there were no takers at $4 billion. At the time of the original Microsoft investment, I thought Facebook's value was somewhere around $7 - $8 billion. Then when Techcrunch got a hold of some internal financials, I did a back of the envelope recalculation and stated that they should be valued at $4.5 - $5.25 billion which is 15 times projected 2008 revenues. Contrast that with Yahoo or Google which are valued at 2.19 and 4.13, respectively. These have gone down some recently but even if you calculate at January 2008 share prices, Yahoo and Google would still only trade at 4.44 and 10.91 times revenue, respectively. You can make the argument that these are more mature, slower growing companies but these are also PROFITABLE companies - in the case of Google, VERY PROFITABLE. Facebook, on the other hand has huge capital expenditures for servers/bandwidth ($200 million according to Techcrunch) and a hard to monetize audience. They may be GAAP profitable or break-even but most definitely not cash flow positive. Given the eventual slowdown in the online advertising market, I don't think it will get easier for them to squeeze more revenue from their users. However, the cost to support their growing legion of users is going to grow as they'll need more servers and bandwidth.
 
With that said, my new calculation of Facebook's value would only be at best 5 times revenue or $1.5 - $1.75 billion. Of course if they had allowed the employee sale to reset the value of their company, I doubt they'd raise enough through an eventual IPO to cover their growing capital expenditures. The more important question is, how much of the $516 million that they've raised is still there? My guess is that if they can't raise another $100+ million round soon, Facebook could be in for some tough times.

Not literally, of course. Anyone who knows me will agree I could lose a few lbs. I'm speaking from the start-up sense. I just read an article on Techcrunch that VC backed start-ups are having a hard time exiting. The post right after it was that Eyespot ran out of cash and shut down. I've never used the Eyespot service but it looks like it took some heavy engineering to get it done. To that end, they raised about $3.6 million and hired 22 people. I'm sure they also got an office, computers, water, etc. to support these 22 people. That's a lot of infrastructure cost and it looks like they didn't have the revenues to support it.

Taking the lessons learned from our last start-up, we definitely decided to go lean the second time around. Case in point, at our last start-up we got a 3 year lease on almost 5,000 sq. ft. of office space when we only had 6 employees (we were going to grow into it - so we thought). Turns out that the lease was one of our biggest cash sinks. Start-up number two? We share desks in a shared office space. Here's a shot of our messy work area.

We did this when we didn't generate any revenue because since we boot-strapped this venture, we thought it better to spend our limited funds on talent versus rent. It turned out to be a good move as we weathered through some lean months before ultimately hitting our stride and becoming cash flow positive. Fast forward to over a year and we're still sitting at the same desk except now we rent out a few more desks as we've grown. Once we have built enough of a cash flow cushion, we MIGHT think about getting a separate office space. Part of me has become attached to the more intimate setup, though. We now easily bounce ideas of each other which will become harder once everyone has their own desk. I guess that's the price of progress though.