Monday, November 10, 2008

The Facebook Effect

David Kirkpatrick is writing a new book about Facebook.

FB is much in the news as one of the market leading social applications; privately held so it does not report its financials, only spurs more comments/speculation. It seems there is a growing, age old debate, between growth and profitability in a time of scarce (expensive) capital.

Healthy debate....

My posted comment is below:

Facebook, similar to many now public Internet companies is in a race. Sprinting towards the market leadership cliff while hoping to cross the profitability threshold before cash gives out, or the public markets support the growth. Scores of companies navigated this course in the time of cheap and plentiful capital 10 years ago. It's a road well worn by entrepreneurs and investors.

With hundreds of millions of dollars still in the bank, even with a net burn rate of $15mm per month (assume that at least 50% of that is variable costs), 'going for it' seems like a reasonable course of action, and one that should not put the Company's survival at risk. Albeit, if they don't initially succeed, the downside will be huge dilution, but not survivability. At their size, I suspect, with a downsizing, FB can always be forced into profitability. But why now?

In venture backed companies, management and investors are paid to try to create market leading disruptive companies, then strive for an exit when this goal is accomplished, or on the way to being met. Seems to me that folk are acting rationally here when rational ('forgiving'?) markets will accord successful, growing, market leaders a 10x on the last private round.

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