September 2011
MidasLP MIDASLP Preliminary Primer
MidasLP Preliminary Primer on Facebook –
Important Disclaimer – MidasLP (including its employees, officers, directors and affiliates) does not provide any warranty whatsoever as to the accuracy, completeness, suitability for any purpose or timeliness of any information whatsoever or data contained herein. © MidasLP, all rights reserved.
Excerpts from a draft memo prepared by MidasGP for presentation to MidasLP investment committee
Overview
Founded in February 2004, Facebook is a privately owned social networking platform that helps people and companies communicate, understand, engage and/or transact more efficiently and effectively with friends, family, coworkers, employees, customers and targets. Users may create a personal profile, integrate with third-party technology applications, develop business and consumer technology solutions, add other users as “friends”, exchange messages and engage in certain “social” activities. According to Facebook, as of July 2011 there are over 750 million active users and an estimated 138.9 million monthly unique U.S. visitors.
Business Model(s)
Facebook has a powerful business model and has executed a solid but fluid monetization plan in an environment that requires a deeply analytical understanding of customers and their changing behavior across global cultures. Facebook is a leader in our “Alternative Tax Authority” investment theme. Under this theme we like companies that have platforms that provide third parties with the ability to build and sustain profitable business models. For this, Facebook, can charge a percentage of revenues – 30% in many instances. Facebook is one of the largest companies in our investment theme under the “Alternative Tax Authority” thesis.
Other methods of producing revenue:
- Developer fees
- Brand advertising
- Credits – online currency for Facebook users to purchase. Users can then purchase online goods or play games
- Performance advertising – Lets marketers target their potential customers through keywords, age, location and pages other friends “liked”
“Super-cannibal” – A super-cannibal is a cannibal that does or has the potential to gobble up other cannibals. Monster.com and similar sites cannibalized the executive recruiting industry but could themselves become victims of more social, higher yielding job search platforms. A marketing dollar spent on the FB platform is generally amplified through word of mouth. This strategic advantage gives Facebook the ability to cannibalize markets that have already been cannibalized including markets like job search, paid advertising and others since FB can clearly show the superior value of marketing dollars invested in its platform.
Facebook’s acquisitions clearly show enormous room for the growth of and addition of further revenues models.
Scale
There are over 900 million objects that people interact with (pages, groups, events and community pages). Average user is connected to 80 community pages, groups and events. Average user creates 90 pieces of content each month. More than 30 billion pieces of content (web links, news stories, blog posts, notes, photo albums, etc.) shared each month. Entrepreneurs and developers from more than 190 countries build with Facebook Platform. People on Facebook install 20 million applications every day. Every month, more than 250 million people engage with Facebook on external websites. Since social plugins launched in April 2010, an average of 10,000 new websites integrate with Facebook every day. More than 2.5 million websites have integrated with Facebook, including over 80 of comScore’s U.S. Top 100 websites and over half of comScore’s Global Top 100 websites. There are more than 250 million active users currently accessing Facebook through their mobile devices. There are more than 200 mobile operators in 60 countries working to deploy and promote Facebook mobile products.
Management Team
Mark Zuckerberg | Founder and CEO
Sheryl Sandberg | Chief Operating Officer
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Sheryl oversees the company’s business operations including sales, marketing, business development, human resources, public policy and communications. Before Facebook, Sheryl was VP of Global Online Sales and Operations at Google. Before Google, Sheryl served as Chief of Staff for the U.S. Treasury Department under President Bill Clinton. Additionally, Sheryl was a management consultant at McKinsey & Company and an economist at the World Bank.
David Ebersman | Chief Financial Officer
- David is responsible for the finance, facilities and information technology teams at Facebook. Before Facebook, David was CFO and Executive VP at Genentech Inc., a leading biotechnology company. He started working at Genentech in 1994, serving in multiple roles including SVP, Product Operations, Product Development and Business Development.
Bret Taylor | Chief Technology Officer
- As Facebook’s CTO, Bret is responsible for the long-term technical direction of foundational products such as News Feed, Search and Facebook Platform. Before Facebook, Bret was the co-founder and CEO of FriendFeed, which was acquired by Facebook in August 2009. Before FriendFeed, Bret worked at Google, where he co-created Google Maps, the Google Maps API, and started Google’s developer product group.
David Fischer | VP Advertising And Global Ops
- David Fischer is the Vice President of Advertising and Global Operations at Facebook and oversees sales, advertiser marketing and customer operations throughout the world. He joined Facebook after over seven years at Google, where he was Vice President of Global Online Sales and Operations and was responsible for Google’s online sales channel, which represents the majority of Google’s customers worldwide. In that role, he helped build Google’s online advertising network into the largest in the world. Prior to that, David served as Deputy Chief of Staff at the United States Treasury Department during the Clinton Administration. Earlier, David was an Associate Editor at U.S. News & World Report, where he covered economics, business and politics from Washington DC. David holds a bachelor’s degree in Government from Cornell University and an MBA from Stanford University. He serves on the board of the SEEP Network, a global non-profit dedicated to microfinance and enterprise development.
Christopher Cox | VP Product
- Christopher Cox is the Vice President of Product at Facebook, where he is responsible for organizing Facebook’s product strategy and overseeing the product management and design functions. Christopher joined Facebook in 2005 as a Software Engineer and was instrumental in implementing first versions of key Facebook features, including News Feed and Inbox. He then became Director of Human Resources where he drove the development of Facebook’s mission, values and people strategy. Christopher holds a bachelor’s degree in Symbolic Systems with a concentration in Artificial Intelligence from Stanford University.
Dan Rose | VP Partnerships And Platform Marketing
- Dan Rose is the Vice President of Partnerships and Platform Marketing at Facebook. Dan is responsible for Facebook’s worldwide business development and M&A activities, and he leads product marketing and partnerships for Facebook Platform and Credits. Dan joined Facebook in 2006 after seven years at Amazon.com where he held various positions in business development and general management, including his last role where he helped incubate and develop the Amazon Kindle. Dan earned a bachelor’s degree at Harvard University and attended the University of Michigan Business School for one year before joining Amazon. Dan currently sits on the board of Borders Group, Inc.
Investors And Valuation
| Firm |
Board Member |
Investment Amount |
Valuation Est. |
Date |
Notes |
|
Peter Thiel |
$500,000 Angel Investment |
|
Summer 2004 |
First major investor/ board member |
|
Marc Andreessen |
|
|
|
Board member |
|
Don Graham |
|
|
|
Board member |
|
Reed Hastings |
|
|
|
Board member |
 |
Jim Breyer |
$12.7 Million in Series A Financing |
$100 million |
May 2005 |
Have sold some of their Facebook stake. Understand how to leverage FB platform better than any other major investor |
 
 |
|
$27.5 Million in Series B Financing |
|
Apr 2006 |
David Sze of Greylock is board observer |
 |
|
$240 Million in Series C Financing |
$15 billion |
Oct 2007 |
No board seat. Advertising strategic partnership |
| Li Ka-Shing |
|
$120 Million in two financing rounds |
$15 billion |
Oct 2007, Mar 2008 |
No board seat |
 |
|
$15 Million in Series C Financing |
|
|
Sold Facebook stake in February 2011 |
 |
|
$200 Million in Series D Financing |
$10 billion |
May 2009 |
No board or observer rights but preferred stock |
 |
|
$120 Million Unattributed (Secondary) |
$23 billion |
|
$120m for 5 million shares. Secondary (No board etc.) |
Goldman Clients |
|
$1.5 Billion |
$50 billion |
Jan
2011 |
Class A stock (US investors excluded/ GS clients minimum purchase $2 million) |
 |
|
$6.59 million (Secondary) |
$70 billion |
June 2011 |
Secondary (No board etc.) |
 |
 |
Intel. suggests turned down investment |
|
|
Intel. suggests inability to negotiate board seats, downside protection and valuation concerns led to Providence and/or General Atlantic not moving forward. |
Board Of Directors
Mark Zuckerberg – Facebook founder and CEO
Marc Andreessen – Andreessen Horowitz (Netscape founder)
Jim Breyer – Accel Partners (Midas list investor and core Accel face)
Donald Graham – Chairman Of Washington Post
Pete Thiel – Paypal founder turned VC
Observer – David Sze – Greylock
Additional –
Management Equity / Commitment
Mark Zuckerburg owns an estimated 25% of the company. Most of his net worth is tied to the value of Facebook. It is unclear how much cash he has “taken off the table” but we do believe that he is firmly committed to the success of Facebook. Mark is the guy that “turned down $1 billion” when he refused to sell Facebook to Yahoo for $1 billion in 2006 – we clearly belive that he “enjoys what he does.”
Selected Acquisitions And Acquisition Risk Assessment
Reasonably sized low risk acquisitions often aimed at hiring a key exec. Facebook has indicated that it will seek to expand its acquisitions effort (perhaps acquiring 15 companies by year-end 2011) but we believe that Facebook is likely to acquire niche, low risk targets. Facebook (or its advisers) leverage big market hunches and statistical analysis (Cohort etc.) to assess the impact on its own growth of acquisitions. Facebook will generally acquire or assess acquiring first class companies and star-ups that are developing social versions of “non-social”, big market internet plays. Probability goes up if the founders are stars.
Selected acquisitions include:
August 2011 – Push Pop Press – Tablet (eg iPad) publishing
June 2011 – Snap – Hit mac and e-commerce applications
April 2011 – Daytum – Data collection and analytics
March 2011 – Beluga – Group messaging
March 2011 – Snaptu – Mobile apps for phones
February 2011 – GroupOn – Groups for mobile phones
Feb 2011 – Pursuit – Job Search
January 2011 – Rel8tion – Local mobile advertising
August 2010 – Chai Labs – Publishing platform
July 2010 – Next Stop – Social travel
July 2010 – Hot Potato – Social activity updates, checkins etc.
May 2010 – Sharegroove – Media rich online conversations
April 2010 – Divvy Shot – Social photo sharing
February 2010 – Drop.io – Filesharing
August 2009 – FriendFeed – Discuss stuff your friends find on web.
July 2007 – Parakey – First acquisition. Founders were founders of Mozilla Firefox. We feel this was a strategic headhunting acquisition.
Acquisition/Partnership/Investment Opportunities
Facebook’s strategy has focused primarily on adding social technology features based on big-market, non social , internet verticals. The size of Facebook (three times the size of the United States) means that Facebook should also consider partnerships/acquisitions/investments with online versions of services that are traditionally the domain of government e.g. healthcare tools and services (a social WebMD?), education (Blackboard?)etc. We believe that a national economics team can add value to Facebook’s monetization efforts.
Machine to machine socialization is an important them to ultimately look out for. The inevitable ability to connect appliances to platforms like Facebook, leveraging data analytics as a tool in intelligent recommendations and decision making will be a big theme in coming years.
Product/Technology/Platform
Facebook, the product, is made up of core site functions and applications. Fundamental features to the experience on Facebook are a person’s Home page and Profile. The Home page includes News Feed, a personalized feed of his or her friend’s updates. The Profile displays information about the individual he or she has chosen to share, including interests, education and work background and contact information. Facebook also includes core applications – Photos, Events, Videos, Groups, and Pages – that let people connect and share in rich and engaging ways. Additionally, people can communicate with one another through Chat, personal messages, Wall posts, Pokes, or Status Updates.
Facebook is one of the most-trafficked sites in the world and has had to build infrastructure to support this rapid growth. The company is the largest user in the world of memcached, an open source caching system, and has one of the largest MySQL database clusters anywhere. The site is largely written in PHP though the engineering team developed a way to programmatically transform PHP source code into C++ to gain performance benefits. Facebook has built a lightweight but powerful multi-language RPC framework that seamlessly and easily ties together infrastructure services written in any language, running on any platform. The company has created a custom-built search engine serving millions of queries a day, completely distributed and entirely in-memory, with real-time updates. Facebook relies heavily on open source software and releases large pieces of its own software infrastructure as open source.
Facebook Platform is a development platform that enables companies and engineers to deeply integrate with the Facebook website and gain access to millions of users through the social graph. Facebook is a part of millions of people’s lives all around the world providing unparalleled distribution potential for applications and the opportunity to build a business that is highly relevant to people’s lives.
SWOT Analysis
- Monstrous critical mass – One of the largest social networking sites in the world
- Platform responsible for significant revenues generation at many companies globally
- Solid third-party developer platform and community
- Strong international user base
- Sophisticated management team with depth of knowledge of the market
- Solid advertising revenue generator
- Customer loyalty
- Strong financials
Weaknesses
- China efforts have not been as dominant as other parts of the world.
- Reactive vs. proactive product development vs. Google.
Opportunities
- Emerging markets and expansion abroad (China)
- Machine to machine socialization
-
Additional features:
- Email platform
- Search engine
- Movie subscription service
- Professional networking/job postings
Threats
- Competition from Google +
- Chinese competitors – Qzone, RenRen etc.
- MySpace
- Smaller companies specializing in Facebook micro theme verticals.
The China Threat
Source: Resonance/Sina Weibo
Competitive Analysis
Regulatory, anti-competitive government agencies may pose an inevitable real, long term problem for Facebook, given its scale and dominance.
Industry Growth
According to several analyst estimates the social networking market has seen strong growth due to growing interest among users across all demographics and the advancements in technology. Social networking accounts totaled over 2.1 billion in 2010 and will grow to 3.6 billion by 2014. Niche social networking services helped drive up the number of users in the consumer social networking market. Examples of niche social networking sites include photography, sports, videos, blogging and more. Additionally, the mobile social networking market has seen strong growth due to the rapid growth of the smartphone market, and advancements in mobile hardware and high speed mobile internet.
The enterprise social networking market has begun to pick up momentum. Many vendors are focusing on developing platforms that are capable of integrating with other popular enterprise platforms. “Enterprise social networking vendors are also providing external facing solutions that enable a business to offer their customers an online outlet to discuss and interact with other customers through the web.”
Competitors
Friendster is a social networking site that launched in 2002. Friendster allows users to communicate with other members, and share online content and media. Friendster was acquired by MOL Global in December 2009 for $26.4 million and as of May 2011 repositioned itself into a social gaming site.
MySpace is one of the world’s largest social networks with an estimated 125 million users. MySpace lets users customize their pages and supports integration with widgets such as Slide or YouTube.
Based in San Francisco, California Bebo launched in 2005 and has steadily risen to become one of the world’s most popular social networking sites. Bebo is officially the largest social networking site in the UK, Ireland, and New Zealand and has over 117 million registered users and 7 billion monthly page views. Bebo was acquired by AOL in March 2008 for $850 million before being purchased by Criterion Capital Partners in June 2010. 
RenRen Inc. (RenRen), formerly Oak Pacific Interative, is a social networking Internet platform in China. RenRen generates revenues from online advertising and Internet value-added services (IVAS). The Company’s platform enables its users to connect and communicate with each other, share information and user-generated content, play online games, listen to music, shop for deals and a range of other services. Its platform includes: Renren.com, Game.renren.com, Nuomi.com and Jingwei.com. The Company is also a developer and operator of Web-based games and offers the games through game.renren.com. Renren.com is the Company’s primary social networking Website in China. Game.renren.com is its online games center. Nuomi.com is Renren’s social commerce sites in China. Nuomi.com is a independent new business of Oak Pacific Interactive Co. (OPI) that offers a daily deal on the local services and cultural events
Long Term Valuation Thoughts
We feel Facebook’s long-term valuation growth will be similar to Google’s. Thus Midas estimates long term (10 year+) IRR to late stage (non-secondary) pre-IPO investors of 20% to 40%. Late stage Google investors saw similar returns. Google has 145M monthly U.S. users and ranks number one in the U.S. in traffic. With over 750 million active users and an estimated 140 million U.S. visitors each month, Facebook is ranked second in the U.S. in traffic.
Important Disclaimer – MidasLP (including its employees, officers, directors and affiliates) does not provide any warranty whatsoever as to the accuracy, completeness, suitability for any purpose or timeliness of any information whatsoever or data contained herein. © MidasLP, all rights reserved.
MIDASLP
MIDASLP invests in the world’s best pre-IPO companies. For us, the best companies have high gross and/or net margins, an enormous number of customers (often> 1 million customers or users), significant global growth prospects and limited competition. Some of the companies that we invest in have more customers or users than the populations of countries like the United States, United Kingdom or Switzerland. In general, we target private companies that are vastly superior to many public companies.
