“It’s a lot easier to go public than to be public,” observed veteran technology investor Frank Quattrone last year. That insight might prove doubly prophetic for Facebook, which is under fresh scrutiny about when it might take - or be forced to take - the social networking company public following a fresh $500m round of investment led by Goldman Sachs. That has valued Facebook at $50bn.
Joined by the Russian tech investment firm Digital Sky, which put $50m into the deal, Goldman has structured it as a new investment product. Clients can buy a chunk of Facebook equity by investing at least $2m, and have to agree not to sell shares until 2013 and not to trade in secondary stock markets.
It is a deal that has prompted scrutiny of the rules on US initial public offerings. The securities and exchange commission (SEC) stipulates that firms with more than 499 shareholders must go public, though Facebook won an exemption from this ruling in 2008 by saying most of its shareholders were staff. Outside Facebook, though, nobody knows for sure how many investors it has.
That has not stopped analysts poring over SEC rules saying they specifically state that organisations cannot create entities - or “special purpose vehicles” - to circumvent the 499-shareholder threshold. This prompted speculation that the SEC will eventually demand Facebook registers as a public company, four months after the end of its fiscal year - May 2012 - a situation similar to that forced on to Google in 2004.
Already the SEC is asking questions about hyperactive Facebook activity on secondary markets, which facilitate trading in shares of unlisted companies. These markets had already seen the use of special purpose vehicles, allowing smaller investors to club together to buy Facebook stock. Trading accelerated in November after Facebook’s largest venture capital investor, Accel Partners, sold about a fifth of its 10% stake to give Facebook a reported valuation of $35bn.
One secondary stock exchange, SecondMarket, confirmed this week that it had received a letter of enquiry from the SEC. The 500-shareholder rule was introduced in the 1930s to ensure that the public had access to crucial financial information before investing.
“These investors won’t be throwing their money in on trust alone,” said Anthony Miller, of analysts Tech Market View, who said the Goldman investment had echoes of the dotcom boom.
“Though we haven’t heard numbers for profitability or cashflow, we know the animal works, and that it’s a market-defining proposition. For an implied valuation to reach one fifth of the value of Microsoft shows how much the investors believe in it, and no one puts money in unless there’s a good chance of making that back many times over.” Facebook’s founder, Mark Zuckerberg, has repeatedly said he is in no rush to take the company public. “A lot of people building start-ups or companies think that selling the company or going public is this end-point - that you win when you go public,” he told CBS last month. “That’s just not how I see it.” David Kirkpatrick, a Fortune writer and author of The Facebook Effect, the definitive work on the company, said Goldman Sachs’s investment may actually delay Facebook’s IPO. “Why do companies go public?” he blogged this week. “Generally for two reasons: to raise capital to expand operations and to offer liquidity to hardworking employees who have been compensated in part with stock options. Yet both of those goals will be achieved for the time being, with the deal Goldman has arranged for Facebook.” Facebook does not disclose any financial information but Mr. Kirkpatrick used unrivalled access while writing The Facebook Effect to detail the company’s shareholders. Last summer, it still had only 200, he insisted.
The company’s principal shareholders are names familiar from the film The Social Network. Founder and chief executive Zuckerberg holds about 24%. The implied valuation of $50bn gives him a fortune of $12bn. Co-founder Dustin Moskovitz holds 6%, Sean Parker - played in the film by Justin Timberlake - 4%, and Eduardo Saverin 5%.
Accel Partners held 10% until late last year when it is understood to have sold some of that share to private equity firms on secondary markets. Accel originally paid $12.7m for about 10% of Facebook and was the largest venture partner but sold its stock at a valuation of about $35bn.
Digital Sky Technologies holds 10%, Greylock Partners 1.5% and Meritech Capital Ventures about 1.5%. Peter Thiel - Facebook’s first corporate investor - holds 3%. Microsoft, which has tried unsuccessfully to buy Facebook, secured a 1.6% stake in 2007 that valued the site at $15bn. Advertising group Interpublic has a 0.5% stake and the Hong Kong billionaire Li Ka-Shing has just under 1%, invested through his civic investment foundation.
Healthy About 30% of stock is owned by staff of Facebook, and individual investors that include LinkedIn founder Reid Hoffman and U.S. senator Barbara Boxer. But Mr. Kirkpatrick missed Facebook’s highest-profile investor: U2 frontman Bono. His investment firm Elevation Partners bought 1.5% of the firm for $210m - that has now quadrupled in value.
Privately, investors feel that a more realistic valuation is around $30bn. Nic Brisbourne of DFJ Esprit warned that a $50bn valuation would rely on huge growth and healthy margins. “That’s a bit of a stretch, though it’s clearly a fantastic business,” he said. “There’s no moral obligation on a company to go public - the obligation is to deliver the best value to the shareholders.” Mr. Brisbourne suggests Facebook will use its investment to build out its infrastructure - a key part of its plan to dominate the web through social navigation. “There’s a truth in social navigation - it will be a very important layer of the web. It is unimaginable how different the web will be in five years.”
Copyright: Guardian News & Media 2011
