Another 200 million down the Facebook drain?
In a recent articled titled From Russia With Love: Facebook Lands $200 Million, Businssweek revealed that Facebook raised $200 Million by selling 1.96% of preferred stock to Digital Sky Technologies (DST), valuing the social network at $10 billion.
While other private investors have offered to buy Facebook shares for valuations in the range of $4 billion to $6 billion, DST co-founder Yuri Milner expressed confidence in the company’s ability to make money on its Facebook stake. Although Facebook and other U.S.-based social networks have had a hard time making money from their growing number of users, Milner said the social networks he has invested in are making much more money per user than Facebook is now. Milner said Facebook would be able to generate more money from advertising and forms of e-commerce, such as micropayments for virtual gifts given to a person’s friends. “We see monetization patterns that will be very applicable to Facebook going forward,” he said. “For us it was almost a no-brainer.” Milner says he does not need to use only traditional metrics, such as price-to-earnings multiples, in valuing his Internet investments. “That’s not how we look at it,” said Milner. “We see things that others don’t see.”
This raises some very important questions in my mind:
- Why did FB get twice the valuation from DST than from any other investors?
- Why is Linkedin valued at 1 Billion when it has a much better defined business model and a clear value proposition?
- What were the metrics that Milner used to find value in FB that no one else seems to see?
- Finally, why was Facebook drawn by DST’s expertise in developing business models that help social networks make money - considering DST is a 4 year old investment firm?
In my humble opinion, rather than trying to hold on to their exaggerated valuation, Zuckerberg and Co might be better served solving the problem of making advertising relevant in social settings. Until they do that, the odds of DST’s investment paying off look pretty bleak.