Saturday, January 08, 2011

Of Facebook and Goldman Sachs - Both Too Big To Fail?

"Size, we are told, is not a crime. But size may, at least, become noxious by reason of the means through which it was attained or the uses to which it is put."
                                            -Louis Brandeis, quoted in Tool Big Too Fail.

I just got back from a long nice vacation in India and read the book - Too Big Too Fail - by Andrew Ross Sorkin, one of the best books I have read in a long time. The book talks about the greater than life leadership of men with ordinary human-ness thrust into extra-ordinary crises to play roles too big for even their giant shoes. When men that, as executives at companies like Goldman Sachs and JP Morgan Chase, used to earning Millions of Dollars and dealing in budgets and balance sheets that ran into Billions of Dollars were pushed as CEOs of private institutions or as Treasury Secretary into solving a national crisis requiring over a Trillion Dollars. As you read the book, eventually you become immune to the bigness of the numbers.

In that sense, the $50 Billion number for Facebook while shocking to those that haven't kept up with the recent valuations of companies like GroupOn and Twitter may seem shocking - to other silicon valley watchers now seeing startups getting outrageous valuations, the $50 Billion dollar number seems sane.

Here are my thoughts on the Facebook-Goldman story:

$50 Billion is Low: We already know that Facebook is a viable alternative for companies spending money on online advertising. We also know that Google's revenue was $23B+ last year and that its market cap is close to $200B. And Google is still growing revenue having doubled it in 4 years. The secular shift of advertising dollars to online channels continues. Combine this with the fact that people are spending more time on Facebook than on any other property. And, that Facebook has finally cracked the code on generating some revenue ($1B+ estimates) and you can see that in due course of time Facebook could be as big or bigger than Google. And because the pie is growing, a great outcome for Facebook is not necessarily bad for Google. If we already know that Facebook has surpassed Google in page views, and can combine this with the fact that search is no longer the sole source of most information - and social is clearly where the action is moving to. Given all this, I personally think that Facebook deserves a valuation almost close to Google's. This means there could be a 2 to 4x upside for today's investors - if not even more.

SEC Needs to Smell The Coffee: We either throw away the 500 person rule for everyone or SEC needs to make a call on this. The Goldman deal, while very clever and ingenious (and why wouldn't it be given that some of the smartest people in the world work there) - is clearly not something that's going to fly under the radar. Heck, even I got a note from some company giving me a chance to participate in an "auction" to get Facebook shares. The secondary market and Goldman deal combined are making a mockery of our rules. But rather than crack down on this rule, the government needs to rethink this rule and more broadly the impact and appropriateness of Sarbox - a lot of these kind of things are happening to avoid Sarbox. To be fair, I doubt Facebook can't afford the so called $10-50M Sarbox compliance bill. But Sarbox is still a pain for smaller companies looking to raise funds, and we should fix what we can.

You are Not that much Smarter than your Dad: Google observers, for years, made a big deal about its 20% personal project culture, its ability to attract and retain the best talent etc. And how different it was from the 'Be Evil' empire from Washington State. But just as when you become a parent and start acting like a "Dad", only to realize how all those years of you thinking your Dad was dumb for telling you to do things a certain way or being overly protective - were now coming back and manifesting through you - as you get older you realize the wisdom of your fathers. Similarly, in a twist of irony, Google - much like Microsoft several years ago - had to move from stock options as the primary way of attracting and retaining talent to cash incentives and RSUs (restricted stock units) - an admission of the reduced perceived value of the options in the eyes of the young engineers. And just as Microsoft continues to look for clever ways of competing with Google - Google, for years, shall be judged by how effectively it competes with Facebook. Let's see how it feels now that the shoe is on the other foot.

No matter how this turns out, it's clear that we have now firmly entered the Facebook era - and the Facebook Imperative requires us to think about mobile and social first. And while Facebook and Google are out there competing and innovating with products, the Empire is spending huge amounts of money on Television and Print Ads to convince us consumers that Windows and Office are the cloud. I suppose, they should at least consider moving exclusively to ads on Facebook - at least the ads can be in the real cloud.


Chris Selland said...

Terrific post Anshu. Spot on.

Unknown said...

Wonderful post

Unknown said...

Wonderful post and great analysis.