4 ms·

Cash-Burning Facebook Borrows $100mm...Because It Couldn't Sell Stock?

22 points by rockstar9 18y ago

johnrob 18y ago
Facebook is unique because, unlike other 'giant' silicon valley startups, they don't really offer anything new in terms of revenue. They are a sophisticated billboard. Google, on the other hand, built something new - targeting ads by keyword/content analysis. Here is a thought experiment: If all of facebook's users came to your website tomorrow, chances are you could monetize them just as well as facebook. However, if you took all of google's users, you would not do as well because you lack their technology. Facebook is like any other site on the net, just with more pageviews.
- timr 18y ago
  Google flailed around for a long time before finding a route to profitability. Before adwords, they didn't offer anything new in terms of revenue, either. I'm not saying that it's a given that facebook will find a profitable business model...but with their user base, it's a much better bet than for most other sites. (That said, $15Bn does seem a bit nuts.)
- maximilian 18y ago
  not any other site. Google can target better than anyone because they know what you are looking for and can provide advertisements for that thing. If I'm trying to find a track bike, and if I search google for track bikes, I get ads for places that sell track bike. However, If I have in my profile that I ride bikes, bike companies can target me very specifically. Or if I say what bands I like and have listed where I live or go to school, advertisements for concerts for those bands (or bands I might like) can come up. Obviously a lot of sites online can do similar target style advertising, but IMO not as targeted as what facebook can pull of. And they can go horizontally with the company types that advertise, as profiles on facebook are very general. I can put a lot of my info up - for facebook, the more the better. Most sites don't have this broad ability. They are much more niche oriented.
  - nickb 18y ago
    >However, If I have in my profile that I ride bikes, bike companies can target me very specifically. Sure, but does you having that item in your profile tell me, as an advertiser, anything about your intent to buy a bike? Buy it today? Are you buying it in the next two weeks while I have the money to run a campaign? The answer is of course a big no. Just knowing something about someone doesn't tell you about their current intent. Now, would showing someone like that bike ads over the course of a year help him decide on the make and model of the next bike he purchases? Probably it would. But that's a very expensive proposition and not very profitable. This is why Facebook has such low CPMs. Now, suppose I had a way of saying "I'm looking to buy a bike"... a person like that would be much more valuable to an advertiser than someone who already rides bikes and has preferences set already for the type of bike/model that she likes. A customer that is new to bikes is A LOT easier to persuade to try out your brand than someone who's been riding bikes for years. In the end, Google's intent-based advertising is so much more amazing since it caters to everyone's whims so perfectly and displays things to you that you really might want to buy and buy it now.
    - dcurtis 18y ago
      That logic may be true about bikes. But what if my Facebook profile says I like the movies Godzilla, Jurassic Park, and The Bourne Identity? It's very easy to extrapolate a common movie "typeness" that someone likes from a list. Then you can target new movies in that genre very specifically to users who would be most likely to watch them. For movies, books, tv shows, etc, and repeatable purchases, the cache of information at Facebook is far, far more valuable than two words at Google.
      - natrius 18y ago
        "For movies, books, tv shows, etc, and repeatable purchases, the cache of information at Facebook is far, far more valuable than two words at Google." That data is valuable, but not more valuable than Google's data. It's not just two words. Google knows every movie you've searched for since the last time you cleared your cookies. Assuming Google links the cookie from AdSense with your general Google cookie, they know what sites you visit. They know tons of things about you, and that data is similar in value in isolation to Facebook's data. When you combine that data with intent, which you know from a given search query, you can display more valuable ads than Facebook could ever hope to. If Facebook Chat gets traction and Facebook pushes its messaging as more of an email replacement, they'll have useful data they can use to determine intent, which they can use to better target ads and get more money per click.
- deleted 18y ago
  [deleted]
- yariv 18y ago
  I don't see the point of comparing Facebook to Google. Even if Facebook's advertising is less targeted than Google's, so what? Facebook's revenues = pageviews / 1000 * cpm. Nothing about the effectiveness of Adsense says Facebook can't be a thriving business.
carterschonwald 18y ago
the question I have it how much of the new server farms are to accommodate growth and how much of it is them just struggling to have the current setup be resilient to the normal usage patterns that they see?
RyanGWU82 18y ago
The title is a bit aggressive. It's likely that Facebook it couldn't sell stock at last fall's $15 billion valuation. Rather than do a "down round" of financing -- a round with a lower valuation -- they likely found it easier or cheaper to use debt.
- KirinDave 18y ago
  Right. Debt financing is a much more common strategy for start-ups now. Sometimes the difference between a huge round of funding and a lesser one is just timing, and debt financing is a good way to give a buffer to time things perfectly. In Facebook's case, who knows. It does suck to burn equity to buy servers. If Facebook is going to persist and continue to grow, paying off this loan shouldn't be difficult for them.
- slapshot 18y ago
  Debt financing isn't just about avoiding a "down round." It's also about maximizing the upside value for current stockholders. There is some maximum possible business value of Facebook, no matter how much capital they take in. The founders hope to reach that value. If they issue more stock, even if they take in the same valuation for that stock, that final maximum value is being divided among more shares. Each shareholder's upside is limited as a result. The lesson: -- equity is dilutive for growth companies, even if it's priced appropriately --
  - nostrademons 18y ago
    Debt also makes a lot of sense for variable costs like servers, where you know roughly how much revenue you'll get per additional dollar investment. Akamai financed most of their infrastructure with debt, which was a huge drag on the stock price in 2002-2004 when people thought they were going to go out of business, but since has paid off very nicely for stockholders.
vlad 18y ago
In the Startup Junkies series on iTunes, EarthClassMail borrowed the money to buy servers from a special bank made up of former venture capitalists who specialize in loaning money strictly for the purchase of physical hardware, also used as collateral. If Facebook already has almost half a billion dollars in investments, and feels this expansion will make them money, then they could pay off the loan without having to lower their valuation.
- slapshot 18y ago
  I don't know if Silicon Valley Bank is made up of former VCs, but they will lend to startups. If you have real assets to back the loan (here, the physical servers they are buying), debt is a far better way to get money than equity. Sure, Facebook _could_ issue stock, but investors would expect a 20%+ return. Instead, Facebook issues some IOUs to a bank that expects a 10% return. The current investors don't get diluted and everyone goes home happy. Buying physical assets with equity usually unnecessarily dilutive. Save your stockholders; issue debt instead.
mynameishere 18y ago
But the real reason you don't often see emerging private companies take on big debt-loads is that borrowing money is riskier than selling stock, and it also subordinates the existing equity holders. I can't get my head around this sentence. I remember Henry Ford bought out all his original investors (when Ford Motor was "emerging") because he didn't want to lose control. (And the family still hasn't). Creditors only have power when you're in bankrupcy court. Shareholders have power until judgement day. EDIT: Holy beans! When you buy one dollar of Ford Motor stock, you are buying 10 dollars of Ford Motor debt: http://finance.yahoo.com/q/ks?s=F http://finance.yahoo.com/q/ks?s=F Market Cap (intraday)5: 16.20B Total Debt (mrq): 168.53B
- Maascamp 18y ago
  Debt gets paid before equity. Meaning if they don't sell out or aren't able to pay off all their debt. The shareholders get screwed. That's it.
matthewking 18y ago
So how many servers does $100 million buy exactly? A bespoke built data center full of them I would have thought!
- reggplant 18y ago
  They're looking to buy 50,000 apparently
paul 18y ago
It's impossible to know if this was a good deal for them without knowing the terms. Also, Google actually did lease machines early on, which is essentially debt (done for accounting reasons, as I understand it).

22 points by rockstar9 18y ago

Facebook is unique because, unlike other 'giant' silicon valley startups, they don't really offer anything new in terms of revenue. They are a sophisticated billboard. Google, on the other hand, built something new - targeting ads by keyword/content analysis. Here is a thought experiment: If all of facebook's users came to your website tomorrow, chances are you could monetize them just as well as facebook. However, if you took all of google's users, you would not do as well because you lack their technology. Facebook is like any other site on the net, just with more pageviews.

timr 18y ago
Google flailed around for a long time before finding a route to profitability. Before adwords, they didn't offer anything new in terms of revenue, either. I'm not saying that it's a given that facebook will find a profitable business model...but with their user base, it's a much better bet than for most other sites. (That said, $15Bn does seem a bit nuts.)
maximilian 18y ago
not any other site. Google can target better than anyone because they know what you are looking for and can provide advertisements for that thing. If I'm trying to find a track bike, and if I search google for track bikes, I get ads for places that sell track bike. However, If I have in my profile that I ride bikes, bike companies can target me very specifically. Or if I say what bands I like and have listed where I live or go to school, advertisements for concerts for those bands (or bands I might like) can come up. Obviously a lot of sites online can do similar target style advertising, but IMO not as targeted as what facebook can pull of. And they can go horizontally with the company types that advertise, as profiles on facebook are very general. I can put a lot of my info up - for facebook, the more the better. Most sites don't have this broad ability. They are much more niche oriented.
- nickb 18y ago
  >However, If I have in my profile that I ride bikes, bike companies can target me very specifically. Sure, but does you having that item in your profile tell me, as an advertiser, anything about your intent to buy a bike? Buy it today? Are you buying it in the next two weeks while I have the money to run a campaign? The answer is of course a big no. Just knowing something about someone doesn't tell you about their current intent. Now, would showing someone like that bike ads over the course of a year help him decide on the make and model of the next bike he purchases? Probably it would. But that's a very expensive proposition and not very profitable. This is why Facebook has such low CPMs. Now, suppose I had a way of saying "I'm looking to buy a bike"... a person like that would be much more valuable to an advertiser than someone who already rides bikes and has preferences set already for the type of bike/model that she likes. A customer that is new to bikes is A LOT easier to persuade to try out your brand than someone who's been riding bikes for years. In the end, Google's intent-based advertising is so much more amazing since it caters to everyone's whims so perfectly and displays things to you that you really might want to buy and buy it now.
  - dcurtis 18y ago
    That logic may be true about bikes. But what if my Facebook profile says I like the movies Godzilla, Jurassic Park, and The Bourne Identity? It's very easy to extrapolate a common movie "typeness" that someone likes from a list. Then you can target new movies in that genre very specifically to users who would be most likely to watch them. For movies, books, tv shows, etc, and repeatable purchases, the cache of information at Facebook is far, far more valuable than two words at Google.
    - natrius 18y ago
      "For movies, books, tv shows, etc, and repeatable purchases, the cache of information at Facebook is far, far more valuable than two words at Google." That data is valuable, but not more valuable than Google's data. It's not just two words. Google knows every movie you've searched for since the last time you cleared your cookies. Assuming Google links the cookie from AdSense with your general Google cookie, they know what sites you visit. They know tons of things about you, and that data is similar in value in isolation to Facebook's data. When you combine that data with intent, which you know from a given search query, you can display more valuable ads than Facebook could ever hope to. If Facebook Chat gets traction and Facebook pushes its messaging as more of an email replacement, they'll have useful data they can use to determine intent, which they can use to better target ads and get more money per click.
deleted 18y ago
[deleted]
yariv 18y ago
I don't see the point of comparing Facebook to Google. Even if Facebook's advertising is less targeted than Google's, so what? Facebook's revenues = pageviews / 1000 * cpm. Nothing about the effectiveness of Adsense says Facebook can't be a thriving business.

carterschonwald 18y ago

the question I have it how much of the new server farms are to accommodate growth and how much of it is them just struggling to have the current setup be resilient to the normal usage patterns that they see?

RyanGWU82 18y ago

The title is a bit aggressive. It's likely that Facebook it couldn't sell stock at last fall's $15 billion valuation. Rather than do a "down round" of financing -- a round with a lower valuation -- they likely found it easier or cheaper to use debt.

KirinDave 18y ago
Right. Debt financing is a much more common strategy for start-ups now. Sometimes the difference between a huge round of funding and a lesser one is just timing, and debt financing is a good way to give a buffer to time things perfectly. In Facebook's case, who knows. It does suck to burn equity to buy servers. If Facebook is going to persist and continue to grow, paying off this loan shouldn't be difficult for them.
slapshot 18y ago
Debt financing isn't just about avoiding a "down round." It's also about maximizing the upside value for current stockholders. There is some maximum possible business value of Facebook, no matter how much capital they take in. The founders hope to reach that value. If they issue more stock, even if they take in the same valuation for that stock, that final maximum value is being divided among more shares. Each shareholder's upside is limited as a result. The lesson: -- equity is dilutive for growth companies, even if it's priced appropriately --
- nostrademons 18y ago
  Debt also makes a lot of sense for variable costs like servers, where you know roughly how much revenue you'll get per additional dollar investment. Akamai financed most of their infrastructure with debt, which was a huge drag on the stock price in 2002-2004 when people thought they were going to go out of business, but since has paid off very nicely for stockholders.

vlad 18y ago

In the Startup Junkies series on iTunes, EarthClassMail borrowed the money to buy servers from a special bank made up of former venture capitalists who specialize in loaning money strictly for the purchase of physical hardware, also used as collateral. If Facebook already has almost half a billion dollars in investments, and feels this expansion will make them money, then they could pay off the loan without having to lower their valuation.

slapshot 18y ago
I don't know if Silicon Valley Bank is made up of former VCs, but they will lend to startups. If you have real assets to back the loan (here, the physical servers they are buying), debt is a far better way to get money than equity. Sure, Facebook _could_ issue stock, but investors would expect a 20%+ return. Instead, Facebook issues some IOUs to a bank that expects a 10% return. The current investors don't get diluted and everyone goes home happy. Buying physical assets with equity usually unnecessarily dilutive. Save your stockholders; issue debt instead.

mynameishere 18y ago

But the real reason you don't often see emerging private companies take on big debt-loads is that borrowing money is riskier than selling stock, and it also subordinates the existing equity holders. I can't get my head around this sentence. I remember Henry Ford bought out all his original investors (when Ford Motor was "emerging") because he didn't want to lose control. (And the family still hasn't). Creditors only have power when you're in bankrupcy court. Shareholders have power until judgement day. EDIT: Holy beans! When you buy one dollar of Ford Motor stock, you are buying 10 dollars of Ford Motor debt: http://finance.yahoo.com/q/ks?s=F http://finance.yahoo.com/q/ks?s=F Market Cap (intraday)5: 16.20B Total Debt (mrq): 168.53B

Maascamp 18y ago
Debt gets paid before equity. Meaning if they don't sell out or aren't able to pay off all their debt. The shareholders get screwed. That's it.

matthewking 18y ago

So how many servers does $100 million buy exactly? A bespoke built data center full of them I would have thought!

reggplant 18y ago
They're looking to buy 50,000 apparently

paul 18y ago

It's impossible to know if this was a good deal for them without knowing the terms. Also, Google actually did lease machines early on, which is essentially debt (done for accounting reasons, as I understand it).