Op-Ed: Facebook worth $50 billion, Goldman sets up $1.5 billion fund

Posted Jan 3, 2011 by Paul Wallis
Goldman Sachs and Russian Sky Digital have invested $500 million in Facebook. Goldman Sachs has additionally established a $1.5 billion investment vehicle for private investors, to be managed by the investment giant.
Facebook CEO Mark Zuckerberg speaks at a press conference from the company s headquarters
Facebook CEO Mark Zuckerberg speaks at a press conference from the company's headquarters
Screen grab from Facebook livestream
The situation has raised more questions than answers. Rumors have now been rattling around for some time that Facebook is intending to make a public offering of stock. Facebook founder Mark Zuckerberg’s last comment on the subject was "Don't hold your breath", but the rumors have been that 2012 will be the time of a public float.
All of which is pure speculation, and in the meantime, Goldman Sachs has obviously come up with a much more practical method of investing in Facebook. The $1.5 billion investment vehicle is specifically for private investors, and is to operate as a fund managed by Goldman.
The question which is quite noticeably not being asked is what is all this money for, and does Facebook have a capital raising agenda? The business logic of the situation is actually pretty simple, and Goldman have come up with a good, streamlined approach. The "single entity" investment vehicle is actually very good practice, creating a "same page" for management and investors alike.
This is also an excellent way of raising capital without going through the hoops of a public float, and may indicate that Facebook is about to evolve beyond its current adolescent state, which still strongly resembles its original format and is now obviously inadequate. Facebook does have one major issue as a business entity – It's a huge site, and any type of expansion and development is going to cost a lot of money.
Facebook is also in need of a makeover in several technological areas, and the onset of cloud computing and other major platforms will definitely affect Facebook in multiple ways. The cost of retooling alone could be horrendous unless the capital situation is properly managed. Redesign would also be expensive relative to Facebook's current revenue.
Zuckerberg’s in a better position than the markets seem to realize. Facebook is one of the most credible corporate entities on Earth at the moment, baseline revenue is good, and by investment market standards likely development costs aren't exorbitant. A few billion here or there wouldn't be considered excessive.
The other big question is exactly what direction Facebook is going to take. There are multiple options for such a huge site, among which will be inevitable turkeys, but very likely also some good cash flow options. Facebook is in the enviable position of being pretty much the only show in town, a virtual monopoly without being a declared monopoly.
It is quite possible the Goldman move relates to a simple, "let's check it out" scenario in which the market is both being tested for interest in Facebook, and actual capital is being raised as well. For those interested, this is actually the strictly textbook approach to investment management on a large scale, and in the present economic climate it’s a belt and suspenders approach.
A major float may or may not be beyond the tolerance of the current market. Exactly how much money would be put into an initial public offering is a very big deal in this case, because the failure of an initial float would mean a large number of investors taking a very cold bath in terms of losses. Even if the stock picked up later, it would be a costly exercise.
Goldman has positioned itself very well in this situation. If the initial private investment offerings work well, Goldman would be the logical choice to manage any public float. If the private investment approach doesn't work, damage is minimal and a potentially hideous experience with a public float is avoided.
There is no doubt that there would be very strong interest in a Facebook public offering, but at what price, and whether or not the market accepts the valuation of $50 billion, which is Facebook’s 2010 revenue x 25, remains to be seen.
Facebook currently has the biggest market reach on the planet in terms of direct participation, and it's extremely unlikely that there are no commercial opportunities under consideration. The market will need to see working propositions and good capital management. This may be the biggest thing since Google, so keep an eye on this issue, because it definitely won't get dull.