Web 2.0 has Internet money flowing again
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KAI RYSSDAL: Congratulations, everybody — you can now say you were present at the creation of what could prove to be the next wave of Internet insanity. Microsoft announced today it’s going to buy a percent-and-a-half of the social networking site Facebook for $240 million.
It beat out Google for the prize. I’ll tell you right out, the deal values Facebook — which a couple of years ago was just a gleam in the eye of 24-year-old founder Mark Zuckerberg — at $15 billion.
Todd Dagres runs the venture fund Spark Capital. Mr. Dagres, good to have you with us.
Todd Dagres: Thank you.
RYSSDAL: What do you think of this $15 billion number, and where did it come from?
Dagres: Well, where it came from was… I think the Facebook guys, I think Zuckerberg’s a smart guy, and he said: “What is the most absolute, wild-assed valuation I can think of justifying?” And he came up with $15 billion. And I think he got two guys in the room that needed to have the asset, that would find that to be a very small percentage of their market caps. I don’t think you can justify it based on future cash flows, but I guarantee you there’s a model floating out there someplace that justifies it based on future cash flow.
RYSSDAL: We see all these reports of all these people registering for Facebook — I in fact did it myself last night, just to see what it’s like. What am I worth, in this calculation?
Dagres: You’re worth $300 — you’re worth 300 bucks. If you look at the current people who are on Facebook and you imply value based on a $15-billion valuation, you’re worth about 300 bucks to them. Now, you’re currently not be monetized to that level, but obviously they feel they will be able to monetize you each year. You’ll basically send them a virtual check for 300 bucks.
RYSSDAL: But what if I leave tomorrow? I mean, I’m not exactly in the prime Facebook demographic, you know…
Dagres: Then you’re gone. I think that’s the big question — the value is really based on how many people go there, and how long they spend, based on how much time a month and how many months they stay on. I mean, that’s kind of the value of a subscriber, it’s based on, you know, how much time you have to monetize them. You’re going to have to do some real gymnastics to get customers to stick around. Because I would argue that there isn’t necessarily a lot of loyalty on these sites, and there isn’t necessarily a lock-in. If something cooler comes along tomorrow, they’re gone. I mean, look at MySpace — MySpace, at one moment, looked like it was the place to go. And I think it’s reasonable to assume that a year or two from now, there will be a cooler place to be that Facebook.
RYSSDAL: You know, the word that comes to mind when you start seeing the number $15 billion for a company like Facebook is bubble — dot-com bubble, right? But we’ve been down this road before… You’re not really telling me we’re going to do now the exact same thing we did less than 10 years ago?
Dagres: Not exactly the same thing — last time, companies were going public, and public shareholders were getting pummeled because they were investing in the bubble. This time, the companies that are acquiring them are public, and they’ll suffer if the valuations of those companies turn out to be way too high. But they won’t suffer as much, and the individual investor won’t suffer as much, because those companies obviously — you know, Google and Microsoft — have other businesses besides this.
RYSSDAL: But in a way, though, it’s worse, because Google and Microsoft are supposed to know better than the average guy who just wants to get his share of, say, Yahoo! in 1999.
Dagres: I think this a combination of buying an expensive insurance policy and investing in the future for those guys — it’s very expensive outsourced R&D, and it’s also a realization that you can’t necessarily build these kinds of properties internally. You need entrepreneurs who have big ideas, and who have passionate teams. It’s a realization that those kinds of things don’t come from big companies.
RYSSDAL: What do you think might happen to cause this bubble to burst, or to at least calm down in some fashion?
Dagres: There’s two factors that could lead to the bubble bursting. One is the broader economy — if the broad economy takes a big hit, then there’s going to be a trickle-down effect to companies like Facebook. The second thing that could harm them is if all of a sudden, people felt that online advertising wasn’t what it’s cracked up to be. If people feel that the value of having somebody look at a Web page is going to drop a lot, then the valuations on all of these companies will plummet.
RYSSDAL: Todd Dagres is a partner and co-founder of Spark Capital — we reached him up in San Francisco. Mr. Dagres, thanks a lot for your time.
Dagres: You’re welcome.
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