Facebook Was Losing Money?
I just read in BW that Facebook hit a milestone - it made more money than it spent during the last quarter. Zuckerberg's exact quote is "cash-flow positive" for Facebook. I infer from this that during its five years of dominating social networking online it hasn't been profitable? How is that possible?
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I found this doubly shocking in light of the quote at the bottom of that article - a Russian investor put $200 million into Facebook for only a TWO percent stake, valuing the company at $10 billion. A company that didn't even have positive cash-flow was valued at $10 billion?! Am I dumb for being surprised by this?
ReplyDeleteNot dumb necessarily, but it shows a very limited understanding of business models and microeconomics.
ReplyDeleteLet's say in the first 11 months of a random fiscal year they bring in $100 million and spend $90 million in expenses, debts, taxes, etc. They decide to spend that last $10 million hiring lots of new people and new technologies. Now, they have no profit for the year, but they are growing. And theoretically if they're profiting by about 10%, then the next year they could have an extra $11 million that they could spend on growing even further.
This is actually very characteristic of new companies in a start-up, venture capitalist/ raising money from investors, pre-IPO phase. It is very common for companies to take several years to be profitable, but there is still an inherent value in the company (and therefore value in percentages of the company).
Hey eff you pal, "not dumb necessarily"
ReplyDeleteIn the article it specifically says that what Zuckerberg means is not net profits:
"This does not mean that Facebook necessarily is profitable by the measurements that most companies use, though. Cash remaining after expenses could be swallowed by other costs like taxes, debt payments or accounting charges."
I take this to mean they are cash-flow positive in terms of operating revenues vs. expenses, but not necessarily in terms of "re-investment costs" as you describe. Does this sound reasonable?
Here is a follow up analysis from BW which answers a lot of our questions
ReplyDeleteWe were both right
I'm sure you understand that was a light-hearted jab, but my basic point is that it is possible for a company to go multiple years before showing profitability without failing, and in fact growing.
ReplyDeleteBased on your points and the follow-up article, it seems that these people are guessing (because Facebook hasn't released details, no one actually knows) that Facebook still is not profitable in a traditional sense, but is still holds a grows a very high value.
Based on the information you've read in the two posted articles, would you invest in Facebook if it made an IPO? Why or why not?
ReplyDeleteDude, they built a ROCK STAR room at their new Palo Alto offices - of COURSE they weren't making money. What they were doing was making FB one of the most dynamic, desirable places to work (we'll call this the Google Model), which means they will continue to be on the cutting edge of the social-networking industry. Which means, a few years from now, they'll be able to print their own money.
ReplyDeleteThey built a Rock Star room? What? Please elaborate
ReplyDeletePoint taken though, I can buy the whole "FB trying to be the next Google" angle. Mik what about you - would you invest in Facebook if they made an initial public offering?
And if this whole conversation only resulted in Aaron calling me dumb and me taking false offense to it in order to confuse him, then it was worth it. It's on, Aagte!
How much elaboration is needed? They moved into new Palo Alto digs and built an office solely dedicated to the purpose of playing Rock Star. From the pictures (http://superblog.crazyengineers.com/2009/06/16/facebooks-new-office-im-jealous-yes-jealous-i-am/), it looks like the new office is open-plan, thus facilitating the use of skateboards and the presence of pets. Bastards.
ReplyDeleteIf I had spare cash to spend, you bet your Status Update I'd put some $$$ on a FB IPO. They obliterated MySpace, they're using the Google Model, and they have a collection multi-demographic users who have become completely dependent on the services Facebook offers.
My favorite part was about a year ago when Mark Zuckerburg tried to convince the press that he slept on a mattress on the ground and never bought anything. Ummmm... if by "mattress on the ground" he means "I sometimes pass out in the Rock Star Room" then ok.
ReplyDeleteSure buddy.
Do you mean Rock Band? As in the game that competes with Guitar Hero in which you and friends play a guitar, bass, drums, and sing? My confusion was partially that I'm a video game player so I know these things, and partially I just wanted to you to put in a link to it.
ReplyDeleteHaha I think passing out on a mattress on the ground of the Rock (Band) room still counts? He then pulled a pure mink blanket over himself for warmth, after bathing a tub of money like Scrooge McDuck.
I'd like to swim in Scrooge McZuckerberg's silo of money. And, yes, sorry, I did very much mean Rock BAND. A Rock Star Room would be gross; I've never tasted it, but I imagine that stuff would be n-a-s-t-y. I couldn't find the article I first read; that's the one that had a picture of the Rock Band Room, ne Rock Star Room.
ReplyDeleteWell it could be a Rockstar energy drink room, which would be nasty even when combined with vodka in a vodka-Red Bull style drink room, or it could be a Rockstar Games room, keeping in the video game theme (you may know Rockstar as the makers of Grand Theft Auto), which would be freaking awesome.
ReplyDeleteHey - that berry Rockstar with vodka is pretty good; not quite as good as a vodka-Red Bull, but pretty darn close...
ReplyDeleteA quick little follow-up on this topic:
ReplyDeleteTwitter is receiving another round of financing valuing the company at $1B without showing a single cent of revenue, nor a solid business model.
Go figure!
No Scott, YOU go figure - care to speculate as to how Twitter is ultimately going to make its money? Ad revenues? Preferential search results?
ReplyDeleteI think they'll go with a business model that:
ReplyDelete1) follows the traditional ad revenue model of Google,
2) provides premium account services to those who wish to pay for such services (these could be business "licenses" - if you want to advertise your business via Tweets, you have to pay), and
3) offers some sort of market place for e-commerce in which Twitter takes some portion of the $ transferring hands.
I haven't thought too much about this, but these concepts seem like an decent launching pad for further concepts. Also, a quick look on the web shows that TechCrunch received a number of internal Twitter documents from an anonymous hacker; I haven't had time to read through them, but it looks like there's some good reading material for later on.
I agree with you and think that #3 holds the biggest overall potential, kind of like how Facebook has opened up to become a sort of platform for all kinds of online interaction. Social interaction games like FarmTown are generating revenue off microtransactions from people buying new farm accessories, for goodness' sakes.
ReplyDeleteBusiness Week has a reaction to the Twitter valuation up on its site which basically argues that Twitter has a lot of value due to its ability to capture all kinds of real-time data about a ton of users. That seems pretty valuable too.
Features like Twitpay could ultimately be game-changers too. I like your notion that Twitpay transactions could ultimately dominate the online marketplace... it certainly seems possible, no?
I don't have time to read through the internal documents, so feel free to give a summary if you do