Worth pointing out:
a) Facebook used the same 'fat' strategy and is winning big.
b) Swinging for the fences increases the odds of striking out.
c) Marc Andreessen is not interested in creating 37 signals.
a) Facebook used the same 'fat' strategy and is winning big.
b) Swinging for the fences increases the odds of striking out.
c) Marc Andreessen is not interested in creating 37 signals.
b) Facebook isn't winning shit for their investors YET. They've allegedly just turned cash flow positive, but they're still $750MM in the hole from VC infusions over the past SIX YEARS. Add interest and risk premium and Facebook has to make a TRUCK load of money to pay back their investors. Not just break even.
c) Fashions change. Remember when Myspace was the golden goose? Friendster? It is far from a guarantee that Facebook will remain hot shit for long enough to pay back $750MM with interest and premium.
VCs are not private equity. I'm sure they didn't mind quick cashouts during the late 90s, but expecting to get major money from an up and comer in a short timespan is delusional.
Equity is not debt.
By your dichotomy MySpace is simply amazing for paying investors (interest?) and facebook is a drain on the preciously scarce resources of wealthy individuals and institutions.
The score card for Facebook currently says minus $750M. Breaking even or a small profit is not going to change that.
Facebook totally COULD be a successful, but they'll need to get some serious PROFITS (not revenues!) going to make that happen. Certainly within the realm of possibilities, but it hasn't happened yet.
I have a hard time with someone trying to assert facebook isn't a success. However, if you think success is 'profitable in 2010' then far out they are a failure.
This obsession with equity as debt is very strange to me. By this metric Apple is a hugely indebted company.
When you break down a company you look at assets and liabilities. Facebook has few liabilities in the form of debt because so many wealth individuals and institutions think having a stake in its future is a desirable proposition. I would call most of their assets the intangible ones of being of the most visited, used, and widely-known websites in the world. If you think this is worthless, okay. But I think its a little bizarre to assert they are $750M in the hole.
Equity is different from debit, yes, but when you talk about how much money you are making, it really only makes sense to talk about how much money you are making based on how much money was invested. If you have 1mil invested, and you are making 1 mil a year, that's pretty goddamn impressive. If you have 750 million invested, and you are making 1 million a year profit, well, gee, I could do better than that buying bonds.
Now, Both AAPL and facebook have the P/E ratios they have because people expect them to make more money in the future than they are making now. For instance, if I was to sell my company (and I've had a few offers) it looks like I'd get about a year worth of revenue. This is pretty typical when buying ISPs, because nobody expects exponential growth to go on for any period of time.
Just sayin; It is a reasonable and well-established idea to look at how much equity is invested when looking at a company's profit margins. It's also reasonable and well-established to look forward at how much profit the company is expected to make in the future, too, which is why facebook is valued as it is by some people.
(there is, however, a great degree of uncertainty in projecting what profits a company may make in the future, which is why there is a great deal more controversy over the value of twitter than over the value of AAPL. Personally, if there was a convenient way to buy a long-term 'put' on twitter, I'd do it. Just my opinion,)
It is interesting to theorize what a stock price for a firm that cannot be purchased by another firm (at least extraordinarily unlikely to be purchased) and that doesn't pay dividends means.
People about all sorts of measures of return. However, very few talk about equity being debt.
Regarding "Fashions change," I agree that that's the risky part, and from the amount of Farmville bullshit I see on my wall these days, it's a significant risk.
Funny way to put it, but it kind of is, except that it isn't previous investors duping new investors, it's just an investor mentality. People are still buying into Facebook at a $15B valuation with no real precedent for a company like them being worth that much. It will be really interesting 5-10 years from now after they've IPO'd/been-acquired/fallen-out-of-favor where their revenue and market cap really settle.
Most of us would rather increase the likelihood; but most of us are also not Marc Andreessen. It's important to recognize this. There's nothing wrong with rolling the dice and going big, if that's what you want. [EDIT] It's foolish, however, if you think playing that way will increase the likelihood of success.
So the question is not necessarily one of magnitude, it's that internet companies looking for eyeballs tend to be running on faulty logic counter-intuitive to lasting - forget about making money, or changing the world ; you can't do that if you aren't here tomorrow.
Off topic: I am half way through your new book "REWORK" and and I find it useful since it addresses so many of my own bad habits. Unfortunately, I need to constantly fight the temptation to explore new tech instead of getting things done.
a) Facebook only recently became cash flow positive after years of burning cash like it was the end of days.
b) Their revenue per user is miserably low
c) If the advertising market ever tanks, they're screwed.
Holding Facebook up as an example of a worthy business model to follow is horribly naive.
You know that has happened recently right?
People at facebook, and prominent investors like Andreessen, have pointed out repeatedly that they could raise a lot more revenue. However, most of these methods would simply destroy the site by making the user experience much less bearable.
>b) Their revenue per user is miserably low
This might be a problem if they didn't have an enormous number of users and a very impressive amount of active users.
>Holding Facebook up as an example of a worthy business model to follow is horribly naive.
Is an incredibly nasty statement that reeks of jealousy. Sort of silly too. I think you could say a similar thing about Microsoft, since there will really only be one PC OS monopolist.
This might be a problem if they didn't have an enormous number of users and a very impressive amount of active users.
Somehow this reminds me of the old joke about the guy who lost money on every sale but made it up in volume. Yes, Facebook might make money enough to recover the investment of the first investors someday (I can remember when Amazon looked like it would never do that), but that all depends on the overall net earnings per user being positive. To date, even Facebook's own press releases don't report a situation that makes it clear the initial investors will ever be able to recover their investments. I like Facebook well enough, but unlike my early interaction with Amazon I have never made a payment to Facebook for anything.
It would be nice if facebook were public. Then we would know how much/if they are losing money on each user today.
That would be quite an achievement.
>> "I like Facebook well enough, but unlike my early interaction with Amazon I have never made a payment to Facebook for anything."
Many advertisers have.
Their army of world-class engineers would beg to differ no? And they must cost quite a penny to support?
It's called investment and building.
I don't see that as a meaningful statement. If it would destroy the site, you cannot use this method to raise a lot more revenue.
I think they will be able to raise revenue in a lot of creative ways. People underestimate how much the data that they have is worth.
To me at least, swinging for the fences seems to be something you should do after you've already made some sexy cash on other stuff or at least made a name for yourself, if you REALLY want to go that route.
You mean like cofounding Netscape?
http://www.tracked.com/company/opsware/financials/income/?t=...
OpsWare was very deliberately spending money to make sure they were the market leader.
Read the link I posted - it's a perfect example of why 37Signals is both wrong and right at the same time.
OpsWare was a typical Silicon Valley start-up (per the Steve Blank definition: Total available market > 500M, Company can grow > 100M/year etc - see slides 10-12 in http://steveblank.com/2010/04/15/why-accountants-dont-run-st...)
OpsWare quite deliberately took a high risk strategy in order to aim for high rewards.
37Signals is a small business. Profitable, comfortable, but no prospects of explosive growth.
To quote from the link above:
What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.
37Signals seem to be quite fine with their business. However, they appear not to understand that many others are quite deliberate in choosing riskier strategies because the rewards can be higher.
Not a law. Good entrepreneurs are game changers and it's easier to just play a different game where there is not a high reward/high risk correlation rather than play this losing game that assumes that high reward must mean high risk.
In my opinion good entrepreneurs are not risk takers, they are risk managers. The best ones are money takers.