Earlier this week, we learned that Facebook raised $500 million in a deal in which Goldman Sachs valued Facebook at $50 billion. According to estimates, Facebook only makes about $2 billion in annual revenues. So, how did Goldman Sachs decide that Facebook is worth $50 billion?
This big move is making people talk about whether Facebook is going to go public. What would that mean, and how would it impact the company, government rules about this kind of thing, and those embarrassing New Year’s Eve photos that our roommate tagged of us?
After this cash jolt of $500 million, Goldman Sachs will own about 0.8%, and, potentially, its clients would own a combined 3%. Meanwhile, Facebook CEO and protagonist of The Social Network Mark Zuckerberg owns roughly 24%. Given that the company is worth $50 billion, Zuckerberg now owns $12 billion of Facebook. Exact numbers aren’t published, but according to The Wall Street Journal and The Guardian, here’s how experts speculate that the company’s ownership breaks down:
Why Is Facebook Worth $50 Billion?
Determining a company’s “value” is different from simply calculating how much it makes each year, since this is the number investors use to figure out how much they are willing to pay to get in on the action. It’s determined not just by how much money the company is making now but also by how much it might make in the future. For example, a year before it went public, Google made about $2 billion in revenue. Now, it’s making about $30 billion in sales per year and has a “market capitalization” of about $200 billion (market capitalization is just a measurement of the size of a business). Obviously, investors are hoping that Facebook will be the next Google.
Goldman Sachs hasn’t announced its exact thought process behind the $50 billion valuation for Facebook, but pundits point to a few key factors:
- First, Facebook did pull in about $2 billion in revenue in 2010.
- Of the three biggest websites (Facebook, Google, and Yahoo), Facebook is growing the fastest. You heard us: Facebook is growing even faster than the infamous Google.
- More than any other site, people spend the most time on Facebook.
- Facebook is increasingly conquering the display ad market.
- There are new, growing sources of revenue for Facebook, too, such as transaction fees on games by Zynga (the makers of FarmVille). Zynga’s revenues will be about $1 billion this year, and Facebook shaves a cool 30% transaction fee off of that. If Zynga continues to grow, Facebook is golden.
When A Private Company Accepts Money From Investors.
This deal has been such big news that the U.S. Securities and Exchange Commission (SEC) is reevaluating the way companies go public. Any person can buy a share of a public company like Microsoft, Disney, or Morgan Stanley on a public stock exchange. Private companies like Facebook, on the other hand, are invite-only for investors—and can’t have more than 500 investors unless they publicly disclose their financial information. Up until now, Facebook’s “invited” investors have been employees and venture capital (VC) firms, which give start-up money to businesses as an investment in the hopes that those businesses get huge. Now, though, Goldman Sachs has caused a stir by organizing something called a “special purpose vehicle,” which some think was created in order to circumvent the rule about having more than 500 investors.
If Facebook Went Public.
If the SEC decides that this “special vehicle” is just a cheap trick to get around the 500 person rule, Facebook will have to disclose a lot of its currently under-wraps financial data. According to conventional wisdom, once it has to disclose that info, it might as well go public by offering shares to regular investors like us. Although Zuckerberg may decide not to go this route, going public would probably mean both a lot of new cash for the company—and a potential loss of power and control for Zuck himself as CEO. After all, if the company were public, he’d suddenly be accountable to a whole slew of shareholders who are mostly just concerned with the ever-climbing price of the stock.
It’s still unclear what’ll happen in the long run, but we feel sure that big things are on the horizon for Facebook.
As for those racy photos from New Year’s Eve, well, we’d rather not comment.