Wallen's

$10bn - Is Facebook overvalued?

RWW’s article on FB’s new financing round shows a valuation of USD 10bn for Facebook. This puts it at a multiple of USD 50 per user (assuming 200m active users, the last figure I heard off). This figure compares to recent (and not so recent) multiples:

• Twitter (February 2009 series C) :  ~40$ per user (or ~75$ per active user with a different number crunching but not comparable to the other figures below)
• Xing (March 2009 market capitalization) : ~25$ per user
• LinkedIn (June 2008 series D): $ ~40 per user
• Beboo (March 2008 trade sale to AOL-TW): $ ~40 per user
• YouTube (2006 trade sale to Google): $ ~30 per user
• My Space (2005 trade sale to Newscorp): $ ~35 per user

These multiples are pretty stable across transactions and over time in the range of $30 to $40 per user. Demographics and geographics user mix differences should translate into multiple's differences as pointed out in TechCrunch’s post on the topic. In this light, Facebook’s valuation seems on the high range but not completely out of order compared to those benchmark multiples, especially knowing that it’s the market leader and the past months impressive growth.

 The question is whether these multiples make sense or not from an “operational ” perspective. Mark MacLeod had made some back of the envelop calculation here on Twitter and triggered an interesting discussion. On the other hand as long as there is a market for it…

Facebook and control

While reading the Techcrunch article on Facebook refusing a $8 bn termsheet, I was telling myself that in Mark Zuckerberg's shoes I would probably do the same: board control is really just as important (if not more) than valuation for an entrepreneur that wants to build a lasting company ! Then I saw Mark's post (MacLeod not Zuckerberg but he's almost as talented) making a similar point...  and the need for a longer post disappeared: go here to read it.

Overview and tips on due diligence

After my posts on VC funding overall approach and termsheets, I thought I would close up with a post on due diligence. Again instead of repeating what others have said, I have built a map on the topic. Just click on the pearl below and then the play button and the arrows.

A map on advertising business model

After my last post on freemium, here is a map on the advertising business model. There are so many angles and views on the topic that it's impossible to cover everything. I don't know if it's a "good" revenue model but here is the way I look at it (simplified): ads brings benefits to their buyers so it must be a recurring source of revenues... though only sufficiently high under certain conditions, the most important of which today being "massive scale"... The web is not very different in that sense than most other media sectors, e.g. the most successful TV channels are free and live mainly of advertising - size is king with ad, small niche is difficult.

Why do I think this ? Just click on the pearl below then on the play button and the arrows.

NB: if you have some relevant posts to complement this map, don't hesitate to post them in the comments.

A map on freemium business model

There is a continuous discussion about business models in the web. I’ve put together overtime a few maps on each major business model. Here is the map on freemium that gives a comprehensive view on this business model. There are 3 sections in this map.

1. The first branch gives a general perspective on the freemium business model. For those really motivated they are 2 academic papers on the value of a free customers at the end of this branch.

2. The second branch goes into the key success factors such as scale, pricing, metrics, etc.
3. The third branch focuses on benchmarking real life numbers on conversion, price points, average rates, etc. Non-EU people, may find interesting to have a look at the annual reports of Xing, a local competitor of LinkedIn that is publicly traded.

Just click on the pearl below then on the play button and the arrows to be guided through this map.

NB: if you have some relevant posts to complement the map, don't hesitate to post them in the comments, especially posts on real life numbers or experience (vs. "conceptual" posts).

 

"Share of voice" revenue model: the solution for social networks?

This tweet from Patrice Lamothe, this post from Scobleizer and the discussion around Exec Tweet got me thinking. What if, instead of pushing commercial companies’ ads, social networks helped commercial users to increase their share of voice on their platform? Could this “share of voice” revenue model be the way forward to monetize social networks’ audiences?

What do I mean by “share of voice”? Social networks in the broad sense of the term are, in a way or another, tools to promote oneself. Users write on Facebook or Twitter so that other people hear about them. They want these people to hear about them because, directly or indirectly, they want to promote themselves. In other words, it is personal PR in a given media. This is the very basic social rule of these social products. On the other hand, commercial companies also enter into traditional PR activities to increase their share of voice to get a message across.

With this context in mind, the “share of voice” revenue model is about providing functionalities and services that help your users increase their share of voice on your social network.

Let’s take Twitter as an example. Commercial companies can have an account for free on Twitter. They are users like any others. They have followers, they sometimes follow people and they send tweets.  Twitter could sell services or functionalities to help these companies get more followers and hence increase the share of voice of their tweets. These services or functionalities can take numerous forms, e.g., “sponsored suggested users to follow” (as is already the case now when opening an account but I think it’s free). The pricing could be either a flat fee for the service (as in freemium models) or a cost per follower type (as in advertising).  

On the other hand of the service, a Twitter user has the choice to follow or not the commercial user tweets: he decides whether he sees these tweets or no. In this sense, it is very different from advertising since the latter is “forced” onto the user. The format of the company’s “voice” is still the tweet hence it is naturally integrated in the platform. Of course, as always, the social property needs to strike the right balance to make sure that these "promoted voices" do not overwhelm the product. It should also notify what is promoted or not.

This approach of “share of voice” can be applied to all sorts of social products since the basic premise of most social products is personal PR in a way or another.

In an old post, I said “media channels successful with advertising have a common characteristic: an excellent fit between content format, advertising format and user’s purpose/values”. Just replace, in the previous sentence, the word “advertising” by “monetization tool” and you’ll see that the “share of voice” revenue model fulfills all these conditions. This means that it should be more productive than ads on social networks and hence command higher revenue per user. This also means that the traditional strategic trade-off between user growth and revenue generation is less stringent because the revenue model fits with the user experience. However, it probably still means that you need a big audience for this model to generate significant revenues.

Some will argue that at the end of the day, it is just another form of advertising model. Not really: instead of asking “how can I put advertising on my product?”, the question for the entrepreneur becomes “how can I help some of my users gain share of voice?”. It’s a very different framing… And, as we all know, the framing of a problem changes radically the specific solutions that come out.

The “share of voice” revenue model has a lot of potential for social networks.Time will tell.

What are your thoughts ?

Google-Twitter deal: good or bad ?

Techcrunch annouced that Google is in talks to acquire Twitter. While usually these "early stage talks" don't end up into a deal, would this be good or bad news. Obviously it depends from which perspective:

Twitter as a company: very bad
There is really a strong case for Twitter being able to make it very very very big: not only is Twitter the market leader in a new kind of fast growing web usage but also Twitter has the potential to perform a paradigm shift in terms of business model (more on this in another post later). Wouldn't it be a pity not to pursue this adventure. Under Google, Twitter will be just another service among others and will not have all management attention. This will hinder it's development vs. a standalone option (provided they have enough funding until it becomes profitable).

Twitter's founders: ???
It depends on what they want to achieve, on what is their objective: make big money now for sure or building maybe a major company in the web sector ?

Twitter's VC investors: very good
They'll make a hell of a lot of money with this sale... and in those days where VCs are craving for big exits (see Q1 09 numbers here) to show nice numbers to their LP's, it must be one of their only major exit opportunity.
I don't know if Twitter's VC can get a deal through without management approval but this could be (and I say "could be") a good example on how VCs may destroy a company's future due to misalignment of interests and timeframes.  

Google: good
Even if the price tag is very high or even way above Twitter "fair" valuation, they are basically killing a serious prospective competitor in search and thus keeping their quasi monopoly... this has unlimited value for them.

MSFT/Yahoo: bad
Twitter could be a shot for those 2 to come back into the search fight they lost. I wouldn't be surprised if they started an acquisition battle.

Facebook: neutral to good
With it's new design becoming more Twitter-like, Facebook is clearly trying to get onto Twitter. If they can't buy it and that Google hinders Twitter development, they should be happy with this deal

The web sector: very bad
Google again maintaining its predominance in the sector... and the less competition in a sector, the less performance/service/quality/innovation/etc. for all users...

Personnaly, I vote against that deal...for the web sector and for Twitter itself.

Those were my first thoughts. What are yours?

UPDATE: here is an answer by Twitter that doesn't say much except for one sentence "Our goal is to build a profitable, independent company and we're just getting started".

A map on termsheets and its negotiation

My last post on "a map of VC funding overall approach and process" focused mainly on the process and how to get going in a funding round. Once you've started pitching to some VCs, eventually you'll receive a termsheet. I tought it would be interesting to do a deep dive on this key milestone of the funding process: the termsheet and its negotiation.

Again instead of writing yet another post on this topic, I've build a map of blog posts that I organized along 2 buckets:

• Key points to keep in mind during the negotiation of the termsheet: overview followed by some specific points
• Termsheet items: overview followed by a deep dive on 3 important ones - liquidation preference, valuation and ratchets

I've also included an "appendix" with all the detailed definitions and some technical stuff... for those that are really motivated or those that want more details on one specific item.

Here is the map on termsheets and its negotiation : just click on the play button and the arrows to go back/forward.

A map of VC funding overall approach and process

There's been a lot of blog posts by VCs and entrepreneurs on how to approach VC funding, what the process looks like, explanation of termsheet items, etc. There are obviously different different views and opinions as well as various advices out there. Instead of writing yet other posts on these topics, I've done a map of blog posts on the topic and included the various perspectives out there.

I've started by a map on the overall approach and process of VC funding and organized it around 4 themes:

• An overview of the overall process
• The first question an entrepreneur should ask himself: how much money to raise and to achieve what ?
• Best practices on pitch documents (executive summary and first presentation)
• Some practical tips (e.g., on the first meeting, VC objections and the overall process)

Here is the map on "VC funding overall approach and process" (just click on the play button and the arrows to go back/forward). I'll build another map on termsheet and due dilligence in the coming days.

PS: If you have other posts to add to this map, don't hesitate to reach out.

Can governments create sector hubs?

Taylor Davidson has a good post on "Can governments create entrepreneurial and innovation hubs?". Interesting discussion out there. More broadly the question is can government economic policies help create sector hubs - be it innovative or not. Here was my comment on Taylor's post:

" [...] To broaden your question, a government action to put in place a given industry ecosystem (innovative or not) has been done numerous times in the past decades. Actually it was a standard policy in Europe after WWII (e.g., Airbus in France). It's also the strategy that successful developing countries have put in place (e.g., IT offshoring in India, manufacturing in China, but also smaller countries like Morocco). But there has been a lot of failures too (e.g., Latin America in the 60's and 70's). The success cases have in common to align (lots of) money, political will, education system, infrastructure investments, tax breaks, etc. In other words, there is no silver bullet. Moreover, the "new ecosystem" tends to build on an "adjacent" pre-existing ecosystem and culture. In any case, it's really a long term investment.

For "fixed cost" industries, you also need a critical element: "natural market" with large scale. The latter explains why, for example, the US software industry was more successful than in any European countries. Building on this software industry, the web sector came very naturally as an extension.
Based on this logic and considering that the web industry is slowly becoming a "variable cost" industry, I would argue that it is today less difficult to build web start-up ecosystems in new locations (though it will be difficult to reach Silicon Valley scale)."

The pre-dominant view in the past decades has been that of total "lassez-faire" but recent events has catch-up on this view. Just as entrepreneurs take actions to make "things happen", governments can also to a certain degree. History, culture, economic envrionment vary by country so the levers to use vary by country. My point is not to push for complete government intervention but like in everything there are various shades of grey...