First of all, IMHO Facebook will be worth $100 billion by Dec. 2008 when they have 200+ million users and they will be valued by the public market at $500 per user based on their multiple sources of revenue. You can read my “Triumph of the Nerds — Part Deux” post at http://blog.adonomics.com for the detailed discussion as to why.

However, I do believe it would make sense for Facebook to salt away $500 million or so worth of a war chest at a valuation of around $10 billion. Microsoft would be the logical investor and should ask for the following key deal points:

1. An agreement that Facebook not to sell to Google or allow Google to invest.

2. An agreement that extends Microsoft’s existing CPM ad deal for a 10 or 20 year period.

3. An agreement that broadends Microsoft’s existing CPM ad deal into the Keyword-Driven CPC ad space that would be part of a Web Search business that Facebook could enter at any moment they choose to by simply supporting a web search option / results as part of their current People/Group/App search box.

Microsoft has a HUGE opportunity to beat Google in Advertising by playing their facebook cards carefully. Steve Ballmer made the right first move by locking up a CPM ad deal through 2011. However, it is critical that Microsoft support Facebook in Facebook’s coming battle with Google. This means providing funds to ensure smooth scaling of their infrastructure and headcount. In addition, Microsoft should be willing to buy shares from any VC’s or others who might be desirous of an early cashout.

In addition to cash, the HUGE play for Microsoft is to obtain an option for a larger stake of Facebook tied to Microsoft pushing 30 to 50 million of their 600+ million app customers into becoming facebook members. Microsoft should do this now since a large number will ultimately do it later anyway (so it is essentially a wasting asset for Microsoft). The methodology would be to leverage facebook membership and groups as the best way to get support on Microsoft products and to have Microsoft developers create killer versions / extensions of their desktop apps that have natural groupware components (e.g., Outlook’s calender, Microsoft project, etc.)

This would accelerate Facebook’s already building momentum in the over 25 crowd, bring in more business users who advertisers will pay more to reach and be invaluable in stopping an attempts by Google to establish a beachhead in the social operating system domain.

Google makes money pushing anonymous people off their web properties whereas Facebook makes money keeping people with real identities inside their web properties. This fundamental difference means that Facebook’s Social Operating System and Application play is ultimately worth more than Google’s search and advertising play. Microsoft realizes this and the trick is to ensure that Facebook succeeds and to invest Microsoft’s resources (money, users, office suite, browser clout, etc.) in a way that gives Microsoft a big share of the facebook cash flow without necessarily owning the company (which would probably demotivate the facebook employees and some users).

It will be a test of Bill and Steve’s poker playing skills to see if they can let another Harvard drop-out at the table take on the chip leader. My bet is that Bill and Steve are happy to have Mark be in the limelight so long as Microsoft shareholders benefit.

Thanks,
Lee Lorenzen
CEO, Altura Ventures — the First Facebook-Only VC Firm