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Fred Wilson's response to "Paul Graham's Letter to YC Companies"

214 points by hendler 14y ago

rmATinnovafy 14y ago
Could somebody tell me what is Facebook's intrinsic value?
- iand 14y ago
  Several hundred million people are willing to invest a portion of their finite time every day visiting and interacting with content only available via Facebook. Winning people's attention is a zero sum game (if you gain it your competitors lose it) and attention is a scarce resource. The strong network effects of having all your friends in one place makes facebook's position very defensible. All that adds up to high intrinsic value.
- netcan 14y ago
  The sum of all its future earning discounted to reflect how far off in the future they are.
georgespencer 14y ago
Investors will become more conservative and seek better deals for themselves. I don't think it's anything to do with Facebook. Facebook might just be the excuse they're looking for. My unsolicited advice to all startups is to put your energy into the things which matter. Debating 3-6% more/less dilution with investors is not a good place to be investing your time and energy. I suspect the companies who go into this bubble focusing on convertible notes and caps will be the companies who suffer most.
- Retric 14y ago
  Negotiating with investors is somewhat like negotiating your salary after a job offer. The per hour ROI can be insane, but you need alternatives before you have real leverage and you want some deal to go though even if it's not with them.
eykanal 14y ago
From what I understand, Facebook's main problem is a lack of a stable income source. It's becoming more and more apparent that advertising is not going to be the panacea that it was thought to be, what with numerous studies showing poor facebook ad performance and companies like GM pulling their facebook ad campaigns altogether. Sure, they booked $1B last quarter, but annualizing that number requires some confidence that they can pull that off regularly, and I don't think people have that confidence. As an investor, I'd be worried.
- arturadib 14y ago
  As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...
  - jopt 14y ago
    I doubt the product itself (UX etc.) is why users are on facebook; rather, the user-base is their competitive advantage.
    - bilbo0s 14y ago
      You're both right. I think arturadib was talking about the user-base BEING Facebook's product. You are correct as well, when you say that the user-base is their competitive advantage. It is a competitive advantage in the production of their product... a centralized pool of users. You are mistaken, however, to categorize the UX as the product. The UX is simply a clever widget used to build the product... again, a centralized pool of users.
  - dchuk 14y ago
    Facebook's product is ultimately their users via their ad platform. Their users don't really make them any money, it's the advertisers who are paying FB. In terms of having a Product That People Really Want (ads), it appears there's mixed emotions about that currently.
ealexhudson 14y ago
I don't disagree with Fred Wilson, but I'm closer to pg's perspective on this. The bubble, to the extent that there was one, burst while we weren't looking. Facebook's IPO is not really a huge issue in and of itself, and as Wilson points out the numbers they have are staggering. Other IPOs, like GroupOn's, have had similar issues and FB will probably look pretty awful by the time they reach the end of their lock-up period too. But this stuff is largely all indicative of market sentiment, and that's the issue. People aren't necessarily disappointed with the performance of any of these companies, but they are getting very twitchy as investors. When people stop investing, and sentiment becomes increasingly bearish, it's like the tide going out and inevitably some boats will end up getting beached. I know from companies attempting to raise capital in London right now that things have been difficult for a while now, and look set to get even more difficult (not that London is necessarily the greatest place for doing this, or a good barometer) - so those companies that have done decent rounds recently (HailO, BagThat, etc) will probably need to baton down the hatches somewhat, and those who were expecting to raise later this year / early next are probably in for a shock - a nasty one, if they can't operate without a raise (I know at least a couple of companies in that exact position).
dm8 14y ago
What if the stock now bounces back? Nobody can deny that the company is generating some solid revenues with lots of potential. Investors might think this is really low valuation and we might see surge in buying. (Disclaimer: I do not own FB stock and this is just my speculation)
- debacle 14y ago
  I will deny that the company is generating solid revenues with lots of potential. I don't see a lot of potential in Facebook. They're just another rung on the ladder of social network churn, and luck may have played strongly into that. Facebook is generating revenue, but nothing I would consider 'solid' for a company with a ~85 billion market cap. The company is incredibly overvalued, and time will show that to be the case.
mtkd 14y ago
"In its last quarter Facebook had $1bn of revenue and 40% pre-tax operating margins" The key execs and advisors involved in IPO were not conservative with the valuation. Do not be surprised if those same biases influenced some of the pre-float numbers. A cautious CFO may not always tell people what they want to hear short-term - but they will deliver a much stronger performance over the long.
tocomment 14y ago
What is "enterprise value" and how does he come up with 43B?
- wpietri 14y ago
  He's looking at market price (number of shares times share price) and subtracting cash on hand. That would be the implied value of the operating business.
- deleted 14y ago
  [deleted]
- Strom 14y ago
  Take a look at the numbers he mentions: valuation $57.5bn cash on the books $14bn enterprise value $43bn If you look real closely, you will see that 57-14=43.
- iand 14y ago
  It's the valuation of the company based on number of shares and share price less actual assets (cash in this case). What is left is the value investors see in the company simply by executing its business.
- aurelianito 14y ago
  Enterprise value "is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others." (source: http://en.wikipedia.org/wiki/Enterprise_value http://en.wikipedia.org/wiki/Enterprise_value)
- chrisaycock 14y ago
  Enterprise value is market cap + debt - cash It reflects how much it would cost to buy a company out.
- arihant 14y ago
  It's basically market cap plus the debt, minus the cash. So $57 billion minus $14 billion in cash. Try to think of it as the actual amount somebody would loose from pocket while buying Facebook. While they will pay $57 billion, they will get $14 billion cash from Facebook, effectively spending $43 billion.
sylvinus 14y ago
I'm wondering about the "even at half those numbers" bit, if Fred actually thinks it will go that low.
aurelianito 14y ago
I needed to google what EBITDA is in order to understand the artice. EBITDA means "earnings before interest, taxes depreciation and amortization" (http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation_and_amortization http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes...). Id est, AFAIK, the money they get, without taking into account the money they spend because their "thigs" age. I hope it helps fellow hackers who don't know finance (like me) to understand the article a little better. Edit: Better explanation of what I mean by spend.
- chrisaycock 14y ago
  >> the money they get, without taking into account the money they spend. That would be revenue. EBITDA is a way of only accounting for operational expenses a company faces. There's also EBIT, which subtracts the depreciation and amortization.
- dcaranda 14y ago
  EBITDA is a form of profit. Whenever someone says they made X in profit - you should immediately ask what kind - net income, operating profit, etc. Depending on the business, different definitions of profit can produce wildly different numbers. It's a generally accepted proxy for cash earnings since it looks at profit and takes out: - non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product. - non-cash costs such depreciation and amortization. It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.
- crazycanuck 14y ago
  Further to this and dcaranda, EBITDA is used for valuations because it describes the cash flow the business has available to pay various stakeholders before any financial structures are taken into account. There are three people who have a claim on the cash a company generates after paying operating expenses: debt holders, the government, and shareholders. Their claims on the money go roughly in that order, so in other words the shareholders get what's left (directly via dividends or stock buybacks or indirectly via an increase in the equity value) after the debt holders and the man are paid. The thing is, however, how much you owe the government is affected by how much debt you have (i.e. your financial structure), because the debt interest is deductible. It's largely because of this that EBITDA is the preferred thing to use, as opposed to say earnings or cash flow, because it enables you to compare companies at a fundamental level unaffected by whatever financial structure they might currently have. One of the things PE guys like to do is fiddle with the financial structure (aka load it up with debt ;-), so it's important to understand the value ex whatever impact the current structure might have. But even if that's not your motive, it's a useful measure for the same underlying reasons. It's also true that EBITDA is a useful number for PE because it tells you the amount of money available to service debt, as dcaranda points out.
mipapage 14y ago
It seems to me this whole thing is more about sentiment than numbers. How it is perceived and the effects of that perception, rather than "does it add up"...
rjsamson 14y ago
My personal thoughts are that the greatest near term impact we'll see is in angel investment $$ in seed rounds. At least here on the East Coast there has been a boom of relatively unsophisticated Angels driven by hype. It is these individuals that, in my mind, will react more emotionally to a poorly performing Facebook IPO. Not that one shouldn't be concerned about the broader venture market, but I'm a little less worried about the institutional money than I am about the Angels disappearing.
veyron 14y ago
This is deceptive. The entire reason the late stage guys invested in higher valuations is because the early stage guys convinced them it was worth more. You can't say before the IPO that the company is worth 75 B or 100B and then after the fact say it's their fault for investing at those valuations. That destroys the integrity of the silicon valley investment environment.
- mtkd 14y ago
  The secondary market valuations were also predicated on the assumption that there was nothing very special to what Google were doing in online advertising and similar models could be applied to other high-visitor brands. There is now some rethinking of that assumption as more financial information from these brands is made public.
- fredwilson 14y ago
  i am an early stage "guy" and I can assure you i never "convinced" a later stage investor of anything. they did all the convincing to themselves. it was like feeding pigs at a trough.
  - veyron 14y ago
    I don't think you directly told anyone that Facebook would be a $100B company. There are plenty of wall street analysts (like Lou Kerner from Wedbush, who called for $200B facebook) to do that dirty work. But if some analysts are pumping Facebook and no one from the silicon valley is trying to temper expectations, people assume that the valley believes the same valuation numbers. The result is long-term damage to the credibility of SV and a contraction of the investment supply. After all, if someone comes up next year and describes DuckDuckGo as a $100B company, why would anyone believe the valuation? Everyone would point to Facebook and give it a much lower valuation even if it probably deserves a much higher one. To make it clear, I think that this type of chicanery from wall street is scorned yet expected in the eyes of most people. We have all accepted the fact that they will pump stocks, especially at the top (http://www.scribd.com/doc/86194691/Long-Good-Buy http://www.scribd.com/doc/86194691/Long-Good-Buy was Goldman's paper which essentially gave a bullish case for equities at the top). But there is still some credibility lent to silicon valley, which people should not squander in the interest of one investment.
AznHisoka 14y ago
Build something people want and will pay for. Stop worrying about Facebook and IPO's. Waste of time.
- dxbydt 14y ago
  I see this attitude all the time in SV techies - lets just ignore the finance because its all chatter anyway. Frankly, this line of thinking is counter-productive and quite dangerous. Macro matters much more than slapping together some code to build widgets people will want & will pay for. For one thing, most of those people who want & will pay are getting their dough from boring non-tech ventures affected entirely by macro. When things head south, people will batten down the hatches. They will neither want nor pay for, because they simply can't afford to. All of this wanting and paying for is mostly discretionary spending driven by a upbeat macro signalled by IPO markets & especially FB. Once those signals flash red, the wallet stays shut. No more app store purchases, cloud drive subscriptions, ipads, servers, what-have-you. Huge giants ( Sun, SGI, Cray...) fell by the wayside because they collectively put their head down & built what they thought people would want & would pay for. People did want those things initially, but once the economy went into a tailspin, the dot in dotcom became the dot in dot-bomb. I still have those Sun tshirts proudly proclaiming our red hot dotness. I wear them on the weekends when I take out the trash. The kids snigger and say "dot in dot com...wtf ?" and I realize...yeah, wtf were we thinking.
  - rexreed 14y ago
    What's wrong with building stuff people want and selling it for a price they want to pay? That seems to work in all non-tech industries, especially ones that are not used to raising any money or going public. Indeed, isn't that how most business works?
  - AznHisoka 14y ago
    Well our country and economy is already over inflated with debt, so it wouldn't be such a bad thing if discretionary spending halted. really, would that be such a bad thing to the overall economy? People tightening their spending, instead of recklessly borrowing debt, and buying nice things that ultimately aren't necessary? I guess if you're a company that targets discretionary spenders, you're doomed.
smnl 14y ago
From the article: "That means that Facebook's enterprise value is greater than 10x current revenue run rate and greater than 25x EBITDA. These are big multiples folks. I am happy to take those numbers for any company out there." The bigger those multiples are, the more "overpriced" a company is, so it should actually be less attractive of an investment.
- jtbigwoo 14y ago
  The bigger those multiples are, the more "overpriced" a company is, so it should actually be less attractive of an investment. Right. The OP is considering the situation as a seller, not a buyer. He would be overjoyed if everything he sells is overpriced similarly.
startupfounder 14y ago
"...the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle." - PG [1] "I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening." - AVC [2] We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up. AVC referenced PG's letter, but didn't address the letter. Now that we are in a post-frothy market and the froth is drying up, where does this leave early stage startups that are feeding the late stage startups with talent? It would be nice for AVC to address PG's letter directly and not just provide financial analysis to the Facebook valuation. [1] http://news.ycombinator.com/item?id=4067297 http://news.ycombinator.com/item?id=4067297 [2] http://www.avc.com/a_vc/2012/06/some-perspective.html http://www.avc.com/a_vc/2012/06/some-perspective.html
- rgrieselhuber 14y ago
  > We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up. Have some data for that assertion? PG's letter never said that. He just identified sentiment and provided warning advice. I think it's still too early to see if there is a material impact.
  - startupfounder 14y ago
    "Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups." - PG What part of this is unclear? PG was sure enough to write a letter to the startups warning of the oncoming contraction. I am guessing the VC was someone of the caliber of Ron Conway. I do not have data as data is a historical record (in this context), not a prediction of the future. This is why it is a warning of thing will come, but the question is HOW MUCH will the market contract, not IF if will contract. "I think it's still too early to see if there is a material impact." I believe this should read, "I think it's still too early to know the extent of the impact." EDIT: I don't have any hard data, I am using PG and AVC to assert that what they say is true based on the information they know.
DennisP 14y ago
I don't see why FB's IPO should be considered a failure, from the perspective of earlier investors. They sold stock at an IPO price even higher than the market could support. What's not to like? Of course institutional IPO investors don't like it, because they want to buy stock at a discount and sell it with a big bump the next day. But the early investors are the losers in that scenario. I guess you could argue that the IPO investors just won't play ball if they can't get their free money, but I think more likely they'll just be more careful about pricing next time.
- EternalLight 14y ago
  I agree completely with your view, can someone explain to me why this is a bad thing?
dcaranda 14y ago
Despite market fluctuations, pundits and haters - there is an objective truth that Facebook's financial performance is exceptional. Facebook full year 2011 EBITDA was roughly 55%, demolishing google's 37% and apple's 42%. Wilson approximates a 40% margin in Q1, but ad businesses tend to be Q4 heavy due to holiday shopping. Facebook has demonstrated exceptional leverage in its model. Facebook has growing pains for sure, but that is likely a result of being the first to scale in its market. Who knows what the market will do, the general sentiment here and in other places seems to be largely emotional and indicate that it will go down further. But even if you strip away Facebook's brand name and sexy market, the numbers are impressive and the business performs very very well.
- bad_user 14y ago
  The problem isn't that Facebook doesn't have earnings, but rather their incredible P/E ratio. Also, the profit margin doesn't say much about a company that doesn't do much other than its core product, while Google and Apple have their hands in other products as well. If anything the chances for long-term survival look better for companies that diversify successfully and Facebook hasn't demonstrated an ability for that.
mrshoe 14y ago
Personally I love to see Facebook's stock languish. Not because I dislike Facebook, but because it's great to see the market react rationally to an over-hyped tech stock. FB is arguably the most hyped IPO in history. There was a blockbuster movie made about it. If ever there was a positive sign that we are not in a bubble, the poor performance of FB on the open market is it. It's great to not be in a bubble. That means we won't wake up one day to discover it has popped. But to see the lack of a bubble on display so publicly has more important benefits. All the sub-par investors and entrepreneurs who flood the valley just to cash in on bubbles will be repelled.
- heretohelp 14y ago
  I said the exact same thing to a friend of mine yesterday, when we were discussing the news surrounding their IPO. So as long as the market punishes this kind of hubris and rationally prices companies relative to real revenue and potential, I feel better about us not having a bubble.
- larrys 14y ago
  "If ever there was a positive sign that we are not in a bubble, the poor performance of FB on the open market is it." The poor performance on the open market is in comparison to the offering price. If the offering price had been considerably different (for whatever reason) the performance would be in comparison to a much lower number potentially. Since the pricing decision was made by people (who have all sorts of motives) not sure that this is (although it maybe of course) representative of a positive sign of a bubble.
  - brandall10 14y ago
    True, but it's a good sign that irrational exuberance is not taking hold of the open market, which was a cornerstone of the .com bubble. I find it somewhat refreshing that with the number of people who use Facebook and feel it has significantly impacted their lives, that there wasn't a upwards pop on this.
- taligent 14y ago
  Wait so were we in a bubble or weren't we ? And what about now has the bubble burst or not ? All of this bubble talk has been shown for what it is. Complete nonsense. One or two companies != Bubble.
georgemcbay 14y ago
"But even at half those numbers there are fantastic returns for investors and entreprenuers to be had." What about at 0.1% of those numbers? Facebook (while it obviously has a ways to go on direct customer monetization), is an extreme outlier whose numbers across virtually any metric are far more extreme than most startups will ever come close to. IMO it is their outlier status combined with the lackluster performance relative to that status that is the killer. Trying to anchor other startups to Facebook's numbers at something like "half" or even a "quarter" is kind of handwavey because a startup would have to be improbably, insanely successful just to get a small fraction of the userbase Facebook enjoys.
patmccarthy 14y ago
Like many things, it's not so black and white. Fred Wilson and Paul Graham are probably both right. Paul Graham is right that the Facebook IPO being seen as negative (whether that's correct or not) could reduce larger startup valuations which trickles down to early-stage startups as well. The advice in his email is sound regardless of whether the IPO does trigger any type of "downturn" in startup investing. Fred Wilson also makes great points that Facebook still has an insane multiple while providing a huge win for all its investors and employees, which will bring more money and hope into the startup ecosystem. Not to mention more acquisitions made by Facebook, etc. Chances are both are partially right and partially wrong, and a number of other factors from macroeconomics to small things in startup world could prove one of them to be "more right" over time.
badusername 14y ago
Did he just say, in very nice terms, that Facebook stock is still overvalued?
lifeisstillgood 14y ago
The Articles argument seems to be that FB got 10x revenues and if new startups got just half that it would be great sadly that's a common fallacy on any business plan - the Market is x million and we could get 10% of that then ... So what's a better argument?
FredBrach 14y ago
I don't really see the relation with the pg's letter unless facebook' ipo and valuation. It's interresting anyway.
mathattack 14y ago
Great perspective on price. It is still a success, but perhaps also still overpriced.
salimmadjd 14y ago
I'm glad to see FB come down, just so I can invest on FB at reasonable price. As for FW he is right. FB used the hype to raise money at great valuation. If anything, there is now a lot of liquidity among potential investors.

214 points by hendler 14y ago

rmATinnovafy 14y ago

Could somebody tell me what is Facebook's intrinsic value?

iand 14y ago
Several hundred million people are willing to invest a portion of their finite time every day visiting and interacting with content only available via Facebook. Winning people's attention is a zero sum game (if you gain it your competitors lose it) and attention is a scarce resource. The strong network effects of having all your friends in one place makes facebook's position very defensible. All that adds up to high intrinsic value.
netcan 14y ago
The sum of all its future earning discounted to reflect how far off in the future they are.

georgespencer 14y ago

Investors will become more conservative and seek better deals for themselves. I don't think it's anything to do with Facebook. Facebook might just be the excuse they're looking for. My unsolicited advice to all startups is to put your energy into the things which matter. Debating 3-6% more/less dilution with investors is not a good place to be investing your time and energy. I suspect the companies who go into this bubble focusing on convertible notes and caps will be the companies who suffer most.

Retric 14y ago
Negotiating with investors is somewhat like negotiating your salary after a job offer. The per hour ROI can be insane, but you need alternatives before you have real leverage and you want some deal to go though even if it's not with them.

eykanal 14y ago

From what I understand, Facebook's main problem is a lack of a stable income source. It's becoming more and more apparent that advertising is not going to be the panacea that it was thought to be, what with numerous studies showing poor facebook ad performance and companies like GM pulling their facebook ad campaigns altogether. Sure, they booked $1B last quarter, but annualizing that number requires some confidence that they can pull that off regularly, and I don't think people have that confidence. As an investor, I'd be worried.

arturadib 14y ago
As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...
- jopt 14y ago
  I doubt the product itself (UX etc.) is why users are on facebook; rather, the user-base is their competitive advantage.
  - bilbo0s 14y ago
    You're both right. I think arturadib was talking about the user-base BEING Facebook's product. You are correct as well, when you say that the user-base is their competitive advantage. It is a competitive advantage in the production of their product... a centralized pool of users. You are mistaken, however, to categorize the UX as the product. The UX is simply a clever widget used to build the product... again, a centralized pool of users.
- dchuk 14y ago
  Facebook's product is ultimately their users via their ad platform. Their users don't really make them any money, it's the advertisers who are paying FB. In terms of having a Product That People Really Want (ads), it appears there's mixed emotions about that currently.

ealexhudson 14y ago

I don't disagree with Fred Wilson, but I'm closer to pg's perspective on this. The bubble, to the extent that there was one, burst while we weren't looking. Facebook's IPO is not really a huge issue in and of itself, and as Wilson points out the numbers they have are staggering. Other IPOs, like GroupOn's, have had similar issues and FB will probably look pretty awful by the time they reach the end of their lock-up period too. But this stuff is largely all indicative of market sentiment, and that's the issue. People aren't necessarily disappointed with the performance of any of these companies, but they are getting very twitchy as investors. When people stop investing, and sentiment becomes increasingly bearish, it's like the tide going out and inevitably some boats will end up getting beached. I know from companies attempting to raise capital in London right now that things have been difficult for a while now, and look set to get even more difficult (not that London is necessarily the greatest place for doing this, or a good barometer) - so those companies that have done decent rounds recently (HailO, BagThat, etc) will probably need to baton down the hatches somewhat, and those who were expecting to raise later this year / early next are probably in for a shock - a nasty one, if they can't operate without a raise (I know at least a couple of companies in that exact position).

dm8 14y ago

What if the stock now bounces back? Nobody can deny that the company is generating some solid revenues with lots of potential. Investors might think this is really low valuation and we might see surge in buying. (Disclaimer: I do not own FB stock and this is just my speculation)

debacle 14y ago
I will deny that the company is generating solid revenues with lots of potential. I don't see a lot of potential in Facebook. They're just another rung on the ladder of social network churn, and luck may have played strongly into that. Facebook is generating revenue, but nothing I would consider 'solid' for a company with a ~85 billion market cap. The company is incredibly overvalued, and time will show that to be the case.

mtkd 14y ago

"In its last quarter Facebook had $1bn of revenue and 40% pre-tax operating margins" The key execs and advisors involved in IPO were not conservative with the valuation. Do not be surprised if those same biases influenced some of the pre-float numbers. A cautious CFO may not always tell people what they want to hear short-term - but they will deliver a much stronger performance over the long.

tocomment 14y ago

What is "enterprise value" and how does he come up with 43B?

wpietri 14y ago
He's looking at market price (number of shares times share price) and subtracting cash on hand. That would be the implied value of the operating business.
deleted 14y ago
[deleted]
Strom 14y ago
Take a look at the numbers he mentions: valuation $57.5bn cash on the books $14bn enterprise value $43bn If you look real closely, you will see that 57-14=43.
iand 14y ago
It's the valuation of the company based on number of shares and share price less actual assets (cash in this case). What is left is the value investors see in the company simply by executing its business.
aurelianito 14y ago
Enterprise value "is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others." (source: http://en.wikipedia.org/wiki/Enterprise_value http://en.wikipedia.org/wiki/Enterprise_value)
chrisaycock 14y ago
Enterprise value is market cap + debt - cash It reflects how much it would cost to buy a company out.
arihant 14y ago
It's basically market cap plus the debt, minus the cash. So $57 billion minus $14 billion in cash. Try to think of it as the actual amount somebody would loose from pocket while buying Facebook. While they will pay $57 billion, they will get $14 billion cash from Facebook, effectively spending $43 billion.

sylvinus 14y ago

I'm wondering about the "even at half those numbers" bit, if Fred actually thinks it will go that low.

aurelianito 14y ago

I needed to google what EBITDA is in order to understand the artice. EBITDA means "earnings before interest, taxes depreciation and amortization" (http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation_and_amortization http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes...). Id est, AFAIK, the money they get, without taking into account the money they spend because their "thigs" age. I hope it helps fellow hackers who don't know finance (like me) to understand the article a little better. Edit: Better explanation of what I mean by spend.

chrisaycock 14y ago
>> the money they get, without taking into account the money they spend. That would be revenue. EBITDA is a way of only accounting for operational expenses a company faces. There's also EBIT, which subtracts the depreciation and amortization.
dcaranda 14y ago
EBITDA is a form of profit. Whenever someone says they made X in profit - you should immediately ask what kind - net income, operating profit, etc. Depending on the business, different definitions of profit can produce wildly different numbers. It's a generally accepted proxy for cash earnings since it looks at profit and takes out: - non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product. - non-cash costs such depreciation and amortization. It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.
crazycanuck 14y ago
Further to this and dcaranda, EBITDA is used for valuations because it describes the cash flow the business has available to pay various stakeholders before any financial structures are taken into account. There are three people who have a claim on the cash a company generates after paying operating expenses: debt holders, the government, and shareholders. Their claims on the money go roughly in that order, so in other words the shareholders get what's left (directly via dividends or stock buybacks or indirectly via an increase in the equity value) after the debt holders and the man are paid. The thing is, however, how much you owe the government is affected by how much debt you have (i.e. your financial structure), because the debt interest is deductible. It's largely because of this that EBITDA is the preferred thing to use, as opposed to say earnings or cash flow, because it enables you to compare companies at a fundamental level unaffected by whatever financial structure they might currently have. One of the things PE guys like to do is fiddle with the financial structure (aka load it up with debt ;-), so it's important to understand the value ex whatever impact the current structure might have. But even if that's not your motive, it's a useful measure for the same underlying reasons. It's also true that EBITDA is a useful number for PE because it tells you the amount of money available to service debt, as dcaranda points out.

mipapage 14y ago

It seems to me this whole thing is more about sentiment than numbers. How it is perceived and the effects of that perception, rather than "does it add up"...

rjsamson 14y ago

My personal thoughts are that the greatest near term impact we'll see is in angel investment $$ in seed rounds. At least here on the East Coast there has been a boom of relatively unsophisticated Angels driven by hype. It is these individuals that, in my mind, will react more emotionally to a poorly performing Facebook IPO. Not that one shouldn't be concerned about the broader venture market, but I'm a little less worried about the institutional money than I am about the Angels disappearing.

veyron 14y ago

This is deceptive. The entire reason the late stage guys invested in higher valuations is because the early stage guys convinced them it was worth more. You can't say before the IPO that the company is worth 75 B or 100B and then after the fact say it's their fault for investing at those valuations. That destroys the integrity of the silicon valley investment environment.

mtkd 14y ago
The secondary market valuations were also predicated on the assumption that there was nothing very special to what Google were doing in online advertising and similar models could be applied to other high-visitor brands. There is now some rethinking of that assumption as more financial information from these brands is made public.
fredwilson 14y ago
i am an early stage "guy" and I can assure you i never "convinced" a later stage investor of anything. they did all the convincing to themselves. it was like feeding pigs at a trough.
- veyron 14y ago
  I don't think you directly told anyone that Facebook would be a $100B company. There are plenty of wall street analysts (like Lou Kerner from Wedbush, who called for $200B facebook) to do that dirty work. But if some analysts are pumping Facebook and no one from the silicon valley is trying to temper expectations, people assume that the valley believes the same valuation numbers. The result is long-term damage to the credibility of SV and a contraction of the investment supply. After all, if someone comes up next year and describes DuckDuckGo as a $100B company, why would anyone believe the valuation? Everyone would point to Facebook and give it a much lower valuation even if it probably deserves a much higher one. To make it clear, I think that this type of chicanery from wall street is scorned yet expected in the eyes of most people. We have all accepted the fact that they will pump stocks, especially at the top (http://www.scribd.com/doc/86194691/Long-Good-Buy http://www.scribd.com/doc/86194691/Long-Good-Buy was Goldman's paper which essentially gave a bullish case for equities at the top). But there is still some credibility lent to silicon valley, which people should not squander in the interest of one investment.

AznHisoka 14y ago

Build something people want and will pay for. Stop worrying about Facebook and IPO's. Waste of time.

dxbydt 14y ago
I see this attitude all the time in SV techies - lets just ignore the finance because its all chatter anyway. Frankly, this line of thinking is counter-productive and quite dangerous. Macro matters much more than slapping together some code to build widgets people will want & will pay for. For one thing, most of those people who want & will pay are getting their dough from boring non-tech ventures affected entirely by macro. When things head south, people will batten down the hatches. They will neither want nor pay for, because they simply can't afford to. All of this wanting and paying for is mostly discretionary spending driven by a upbeat macro signalled by IPO markets & especially FB. Once those signals flash red, the wallet stays shut. No more app store purchases, cloud drive subscriptions, ipads, servers, what-have-you. Huge giants ( Sun, SGI, Cray...) fell by the wayside because they collectively put their head down & built what they thought people would want & would pay for. People did want those things initially, but once the economy went into a tailspin, the dot in dotcom became the dot in dot-bomb. I still have those Sun tshirts proudly proclaiming our red hot dotness. I wear them on the weekends when I take out the trash. The kids snigger and say "dot in dot com...wtf ?" and I realize...yeah, wtf were we thinking.
- rexreed 14y ago
  What's wrong with building stuff people want and selling it for a price they want to pay? That seems to work in all non-tech industries, especially ones that are not used to raising any money or going public. Indeed, isn't that how most business works?
- AznHisoka 14y ago
  Well our country and economy is already over inflated with debt, so it wouldn't be such a bad thing if discretionary spending halted. really, would that be such a bad thing to the overall economy? People tightening their spending, instead of recklessly borrowing debt, and buying nice things that ultimately aren't necessary? I guess if you're a company that targets discretionary spenders, you're doomed.

smnl 14y ago

From the article: "That means that Facebook's enterprise value is greater than 10x current revenue run rate and greater than 25x EBITDA. These are big multiples folks. I am happy to take those numbers for any company out there." The bigger those multiples are, the more "overpriced" a company is, so it should actually be less attractive of an investment.

jtbigwoo 14y ago
The bigger those multiples are, the more "overpriced" a company is, so it should actually be less attractive of an investment. Right. The OP is considering the situation as a seller, not a buyer. He would be overjoyed if everything he sells is overpriced similarly.

startupfounder 14y ago

"...the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle." - PG [1] "I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening." - AVC [2] We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up. AVC referenced PG's letter, but didn't address the letter. Now that we are in a post-frothy market and the froth is drying up, where does this leave early stage startups that are feeding the late stage startups with talent? It would be nice for AVC to address PG's letter directly and not just provide financial analysis to the Facebook valuation. [1] http://news.ycombinator.com/item?id=4067297 http://news.ycombinator.com/item?id=4067297 [2] http://www.avc.com/a_vc/2012/06/some-perspective.html http://www.avc.com/a_vc/2012/06/some-perspective.html

rgrieselhuber 14y ago
> We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up. Have some data for that assertion? PG's letter never said that. He just identified sentiment and provided warning advice. I think it's still too early to see if there is a material impact.
- startupfounder 14y ago
  "Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups." - PG What part of this is unclear? PG was sure enough to write a letter to the startups warning of the oncoming contraction. I am guessing the VC was someone of the caliber of Ron Conway. I do not have data as data is a historical record (in this context), not a prediction of the future. This is why it is a warning of thing will come, but the question is HOW MUCH will the market contract, not IF if will contract. "I think it's still too early to see if there is a material impact." I believe this should read, "I think it's still too early to know the extent of the impact." EDIT: I don't have any hard data, I am using PG and AVC to assert that what they say is true based on the information they know.

DennisP 14y ago

I don't see why FB's IPO should be considered a failure, from the perspective of earlier investors. They sold stock at an IPO price even higher than the market could support. What's not to like? Of course institutional IPO investors don't like it, because they want to buy stock at a discount and sell it with a big bump the next day. But the early investors are the losers in that scenario. I guess you could argue that the IPO investors just won't play ball if they can't get their free money, but I think more likely they'll just be more careful about pricing next time.

EternalLight 14y ago
I agree completely with your view, can someone explain to me why this is a bad thing?

dcaranda 14y ago

Despite market fluctuations, pundits and haters - there is an objective truth that Facebook's financial performance is exceptional. Facebook full year 2011 EBITDA was roughly 55%, demolishing google's 37% and apple's 42%. Wilson approximates a 40% margin in Q1, but ad businesses tend to be Q4 heavy due to holiday shopping. Facebook has demonstrated exceptional leverage in its model. Facebook has growing pains for sure, but that is likely a result of being the first to scale in its market. Who knows what the market will do, the general sentiment here and in other places seems to be largely emotional and indicate that it will go down further. But even if you strip away Facebook's brand name and sexy market, the numbers are impressive and the business performs very very well.

bad_user 14y ago
The problem isn't that Facebook doesn't have earnings, but rather their incredible P/E ratio. Also, the profit margin doesn't say much about a company that doesn't do much other than its core product, while Google and Apple have their hands in other products as well. If anything the chances for long-term survival look better for companies that diversify successfully and Facebook hasn't demonstrated an ability for that.

mrshoe 14y ago

Personally I love to see Facebook's stock languish. Not because I dislike Facebook, but because it's great to see the market react rationally to an over-hyped tech stock. FB is arguably the most hyped IPO in history. There was a blockbuster movie made about it. If ever there was a positive sign that we are not in a bubble, the poor performance of FB on the open market is it. It's great to not be in a bubble. That means we won't wake up one day to discover it has popped. But to see the lack of a bubble on display so publicly has more important benefits. All the sub-par investors and entrepreneurs who flood the valley just to cash in on bubbles will be repelled.

heretohelp 14y ago
I said the exact same thing to a friend of mine yesterday, when we were discussing the news surrounding their IPO. So as long as the market punishes this kind of hubris and rationally prices companies relative to real revenue and potential, I feel better about us not having a bubble.
larrys 14y ago
"If ever there was a positive sign that we are not in a bubble, the poor performance of FB on the open market is it." The poor performance on the open market is in comparison to the offering price. If the offering price had been considerably different (for whatever reason) the performance would be in comparison to a much lower number potentially. Since the pricing decision was made by people (who have all sorts of motives) not sure that this is (although it maybe of course) representative of a positive sign of a bubble.
- brandall10 14y ago
  True, but it's a good sign that irrational exuberance is not taking hold of the open market, which was a cornerstone of the .com bubble. I find it somewhat refreshing that with the number of people who use Facebook and feel it has significantly impacted their lives, that there wasn't a upwards pop on this.
taligent 14y ago
Wait so were we in a bubble or weren't we ? And what about now has the bubble burst or not ? All of this bubble talk has been shown for what it is. Complete nonsense. One or two companies != Bubble.

georgemcbay 14y ago

"But even at half those numbers there are fantastic returns for investors and entreprenuers to be had." What about at 0.1% of those numbers? Facebook (while it obviously has a ways to go on direct customer monetization), is an extreme outlier whose numbers across virtually any metric are far more extreme than most startups will ever come close to. IMO it is their outlier status combined with the lackluster performance relative to that status that is the killer. Trying to anchor other startups to Facebook's numbers at something like "half" or even a "quarter" is kind of handwavey because a startup would have to be improbably, insanely successful just to get a small fraction of the userbase Facebook enjoys.

patmccarthy 14y ago

Like many things, it's not so black and white. Fred Wilson and Paul Graham are probably both right. Paul Graham is right that the Facebook IPO being seen as negative (whether that's correct or not) could reduce larger startup valuations which trickles down to early-stage startups as well. The advice in his email is sound regardless of whether the IPO does trigger any type of "downturn" in startup investing. Fred Wilson also makes great points that Facebook still has an insane multiple while providing a huge win for all its investors and employees, which will bring more money and hope into the startup ecosystem. Not to mention more acquisitions made by Facebook, etc. Chances are both are partially right and partially wrong, and a number of other factors from macroeconomics to small things in startup world could prove one of them to be "more right" over time.

badusername 14y ago

Did he just say, in very nice terms, that Facebook stock is still overvalued?

lifeisstillgood 14y ago

The Articles argument seems to be that FB got 10x revenues and if new startups got just half that it would be great sadly that's a common fallacy on any business plan - the Market is x million and we could get 10% of that then ... So what's a better argument?

FredBrach 14y ago

I don't really see the relation with the pg's letter unless facebook' ipo and valuation. It's interresting anyway.

mathattack 14y ago

Great perspective on price. It is still a success, but perhaps also still overpriced.

salimmadjd 14y ago

I'm glad to see FB come down, just so I can invest on FB at reasonable price. As for FW he is right. FB used the hype to raise money at great valuation. If anything, there is now a lot of liquidity among potential investors.