In January, 2011 Goldman Sachs Group Inc. led a $1.5 billion financing round of Palo Alto, California-based Facebook that placed a $50 billion valuation on the almost seven-year old company. Facebook as a corporation had its seven-year-old anniversary celebration on February 4, 2011.
The Goldman Sachs financing round in Facebook sparked a tremendous surge of worldwide investor interest. On secondary exchange SharesPost Inc, Facebook is now already valued at $82.9 billion and has jumped by more than 40 percent since mid-December. Those investors in the Goldman Sachs financing round must be mighty pleased.
As the largest social networking website by far, with a membership base now at approximately 550,000,000 members, Facebook has advertisers drooling over the prospect of delivering targeted advertisements to such a large database of members. According to researcher EMarketer Inc., ad spending on Facebook will more than double to $4.05 billion this year.
I doubt that Facebook founder Mark Zuckerberg had any idea while writing computer code and drinking beer in his Harvard University dorm room only seven years ago as to the smashing success Facebook would become. To go from being a 19-year-old college kid and soon-to-be dropout (Zuckerberg left Harvard early in his sophomore year to concentrate on developing Facebook) to being one of the richest men on Earth in seven years is an amazing achievement. What a wild ride it must have been and probably still is. I wonder if Mark still drinks the same brand of beer that he drank at Harvard?
One of the keys to Zuckerberg’s fantastic success is that for quite a long time, he declined to accept ads or any other means of monetizing Facebook. Being extremely Internet savvy, Mark knew that excessive ads, or even any advertisements at all, on websites risked turning off many users. Zuckerberg realized that the growth of his membership base must come first and that income from advertisements could be added after Facebook had achieved a critical mass of members.
Facebook is a prime example of how developing an idea based upon an understanding of basic human psychology can be a successful long-term business model. Understanding human nature and the apparent universal need of almost all humans to seek social contact and to be connected with others in a social network positioned Facebook for its current success.
For many Facebook members, the experience of being able to connect and to socialize with fellow members from around the world who then become “friends” becomes an addiction. This only underscores how powerful the need for social contact and acceptance truly is for most humans.
Facebook offers to advertisers rather precise targeting of their ads. For example, members freely furnish personal data to Facebook that can be used to deliver ads designed to appeal to their status, likes and preferences. Advertisers on Facebook can deliver ads based upon gender, marital status, relationship status, age, geographic location, time of day, movie and book preferences, hobbies, and other defining criteria. Never in the history of advertising have targeted advertisements been delivered with such precision. It’s a dream for data-mining advertisers.
The ability to highly target ads is one of the keys to Facebook’s surge in valuation. Investors are now catching on as to what makes Facebook unique and how it can generate significant revenues from advertising. Of course, advertisers and investors are also interested in the huge number of Facebook members that seem to just keep on growing at an accelerating rate.
Still, there are investment analyst skeptics who think that Goldman Sachs may have overvalued Facebook, even at $50 billion. Now that just a few weeks later SharesPost Inc. is valuating Facebook at $89.2 billion, there are those who think that things have gotten a bit overdone and crazy.
Facebook will probably have an IPO within a year or two. At that time, it will be extremely interesting to see the value placed upon Facebook. As fast as technology changes, especially on the Internet, Mark Zuckerberg will have to remain alert and resourceful to keep Facebook at the forefront of social networking websites. My own inclination is to be a seller when the rest of the world thinks that it absolutely has to be a buyer.
But what do I really know? If Mark Zuckerberg had called me to his Harvard dorm room seven short years ago and shown me his plans for Facebook, I probably would have been highly skeptical that for many people having virtual friends and virtual social contact is more important and satisfying than face-to-face encounters. However, after becoming a Facebook member, I better understand the addictive nature of the website and therefore the attraction of the business model.
Facebook has become a cash cow. As long as its membership base keeps growing, it will likely retain a rich valuation.