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Facebook’s Finances

Facebook’s capital situation is again the topic du jour.  Techcrunch is reporting that the company received term sheets at a $2B valuation, SAI has it at $4B and the blogs are of course having a field day.  My take:

Notwithstanding their race to cash flow positive, Facebook will need more capital to build it’s business.  The key choice for them is whether they raise private capital now, figure out monetization and then go public or prepare earlier for a public offering.

Monetization is of course the fundamental issue, and I suspect Facebook is working on grand plans for a digital economy of sorts.  Which makes complete sense to me…at least in theory.  If you support a ‘people economy’ the size of Facebook (on and now offsite with Connect), payment infrastructure is a very natural evolution of the platform.  More so than advertising given the utilitarian nature of the service.

As for the terms of the deal if FB does raise now, valuation will certainly be closer to $5B than $2B.  And investors will swallow an expensive equity conversion in exchange for a piece of paper that sits at the top of the capital stack (first money out) and carries a preferred rate of return likely in the 14% - 16% range.  This gives them little downside risk, a decent return in that instance and a chance for a big win should Facebook fulfill it’s promise.  See the recent HomeAway financing as an example.

While I’m not sure that a deal gets done — FB may just swing for the IPO — I for one think it would be smart if they took the time to figure out the monetization path before exposing themselves to the brutal scrutiny of the quarter-to-quarter public markets.