Facebook’s cash infusion whets appetite of investors


Everyone wants a piece of Facebook Inc.

News that investment bank Goldman Sachs Group Inc. and Digital Sky Technologies, a Russian Internet investment firm, will invest a combined $500 million in the social networking site has only whetted the voracious appetite of investors seeking to own a chunk of the wildly popular but privately held company, which now has an implied value of $50 billion.

Facebook board member Peter Thiel has said Facebook would consider going public in 2012, in what would undoubtedly be one of the most anticipated initial public offerings ever in the Silicon Valley.

In the meantime, an elite club of private investors lucky enough to snag a sliver of the company stand to make a fortune when Facebook finally takes the plunge. Even some speculators who have paid steep prices to snap up shares on private stock exchanges from former employees and early investors could profit handsomely. Analysts predict that Facebook’s already sky-high valuations may hit the stratosphere, putting it in the same rarified league as Google Inc.


“We think Facebook would trade at a $100-billion value if it were public today,” said Lou Kerner, a social media analyst at Wedbush Securities.

What’s driving the Facebook derby? The massive yet unproven moneymaking potential of the world’s most popular social networking site, which boasts more than 500 million users. The company has raised nearly $1 billion without tapping the public markets, creating pent-up investor demand for the next big Internet IPO. The anticipation is similar to the frenzy surrounding the 2004 initial public offering of Google, the world’s most popular search engine. Google raised $25 million before going public.

“There’s this expectation that just like Google went through the roof, Facebook will too,” UC Berkeley law professor Robert Bartlett said.

Facebook is the undisputed — and seemingly invincible — leader in social networking, the latest trend to grab eyeballs and dollars on the Web. Seven years ago, Facebook founder Mark Zuckerberg came up with a new way for college students to connect, sparking an online revolution in the process. Now the billionaire digital age mogul talks boldly of doubling Facebook’s users to 1 billion. There are no guarantees that Facebook won’t stumble like News Corp.’s MySpace before it, but the money continues to pour in.

Facebook’s explosive popularity got a boost last year with the movie “The Social Network.” At the time, Thiel tried to capture the exuberance in an interview with The Times.

“Great consumer companies grow fast, and this is definitely one of the greatest consumer companies in all of history,” he said. “It is culturally really important, and it represents a permanent shift, sort of like television or radio if they were invented by a few people in one company. That it’s a consumer-facing company makes it very interesting to people. People can relate to it. People have ideas of what it should do different or better. It’s somewhat of a unique thing. There’s a lot of intensity surrounding it.”


Facebook owes its status to its increasing ubiquity. It has become the place people go to find their friends, sort of like a modern-day phone book. While Facebook quickly has captured the attention — surpassing Google as the most visited website in 2010, according to Internet analytics firm Experian Hitwise — it has been slower to tap revenue streams such as advertising, payment systems and e-commerce. But some advertisers are bullish on its prospects.

“It’s the real deal,” Michael Lynton, chairman and chief executive of Sony Pictures Entertainment, said in an interview late last year.

Many analysts agreed.

“Facebook has won the scale game,” BGC Partners analyst Colin Gillis said. “Now it has to monetize that scale. Historically, monetizing is not that difficult.”

That’s the bet that Goldman Sachs is making. Facebook, which had been looking for a benchmark valuation from a major investment bank ahead of an IPO, closed a deal in the last few weeks with Goldman and Digital Sky Technologies. Goldman has chipped in $450 million but is expected to sell $75 million of that stake to Digital Sky, which now owns a little less than 10% of Facebook. It’s widely speculated that Goldman is the leading candidate to take Facebook public.

News of the investment from such a prominent Wall Street player triggered hopes that Facebook would finally proceed with an IPO. “It seems like there is a fair amount of momentum for Facebook to go public now,” Standard & Poor’s equity analyst Scott Kessler said.

The blockbuster deal will give Facebook more money to develop new products, pursue acquisitions and pick off employees from other top Silicon Valley companies. A Facebook spokesman declined to comment.


Facebook’s skyrocketing valuation already had tongues wagging, with the surge of private trading on the secondary market. At the time Google’s IPO was likened to that of Netscape Communications, the once-highflying company that created the Web browser and went public with a value of $2.6 billion in August 1995, sparking the dot-com boom of the late 1990s.

Unlike Netscape, Facebook has dragged its feet about going public. Asked onstage about an IPO at the Web 2.0 Summit in November, Zuckerberg said, “Don’t hold your breath.” Companies often go public to cash out early investors and employees and to raise money to expand, but Facebook has achieved both without taking on the added burdens and expenses of becoming a public company. But the rising popularity of its shares on private stock exchanges coupled with this latest financing could heighten pressure on the company.

Facebook is just one of a handful of hot young venture-backed technology companies putting off an IPO. These companies are raising more private money and taking longer to go public than ever before. According to Dow Jones, the medium amount of venture capital raised before an IPO soared 60% to $69 million in 2010, and the median amount of time it took a company to go public increased to more than eight years.

Zuckerberg has developed his own philosophy of how to run a successful technology company. He is not eager to relinquish that tight control over Facebook. So investors — including hedge funds and private equity firms that want the bragging rights to tell their limited partners that they own Facebook stock — have been snapping up the shares, sometimes at prices that imply valuations even higher than $50 billion. The sharp rise in demand for the limited supply of shares available has caused Facebook’s worth to surge in recent months.

“The implied valuation from the Goldman deal should give some comfort to those investors who have been buying shares in the secondary market with little visibility into the company’s actual financials,” TCW Group media analyst Anthony Valencia said. “The Goldman investment will definitely give the current valuation an implied stamp of approval from a sophisticated investor.”

That flurry of activity has drawn scrutiny from the Securities and Exchange Commission into private trading of shares in Silicon Valley start-ups. Regulators are concerned the trading has allowed these companies to skirt public-disclosure requirements. Shares of privately held companies can be traded on private stock exchanges such as SecondMarket Inc. in New York and SharesPost Inc. in San Bruno. Only institutional or wealthy investors (those worth more than $1 million) can buy the shares.


Goldman is reportedly setting up a special purpose vehicle to allow wealthy clients to trade in Facebook shares. Its wealth management unit, which is managing the investments, typically requires that its clients have a net worth of $10 million. The SEC may take a close look at whether this move amounts to a workaround of securities laws, which require companies with 500 or more investors to disclose financial results to the public. Goldman may argue it’s just one investor even though it would be pooling investments from potentially thousands of clients.