Facebook rejects funding at $4 billion valuation, may not raise more

April 15, 2009 | Eric Eldon | Comments | |

Facebook chief executive Mark Zuckerberg just had a board-level conversation about possibly accepting money at a $4 billion valuation, but decided against doing so.

Facebook isn’t commenting directly, but sources close to the company say it rejected the funding because it doesn’t need it, despite reports by BusinessWeek, Techcrunch and others that the company might need more funds to cover a “high burn rate.”

Speculation has been that Facebook won’t be able to pay its infrastructure bills if the site continues to grow. It now has more than 200 million monthly active users, although third-party estimates put the number over 250 million. But the assessment that the company’s in need of cash to pay for all these users “is totally wrong,” one source close to the company said. As others and myself have reported in recent weeks, the company has made a number of moves to reduce these costs.

Also, the company has more than $200 million in the bank, which is enough to cover its costs for up to two years.

But funding offers are nonetheless coming its way. TechCrunch says it hears Facebook also received investment offers from two private equity firms that value the company at $2 billion. However, Facebook internally is valuing itself at $4 billion. And if Zuckerberg rejected the $4 billion offer, he’s certainly not going to be interested in a $2 billion offer.

Facebook, perhaps in part to quell the ongoing rumors about its costs, is also planning to have its engineers publish detailed information about how it manages its infrastructure (and saves money as a result, apparently).

So there’s a good chance costs aren’t seriously outpacing revenue. Facebook made under $300 million last year, was a little shy of breaking even, and at first expected to make towards $400 million in revenue this year. But the company said in late March — incidentally at the time that chief financial officer Gideon Yu left the company — that it was beating projections by 70 percent. I’ve confirmed that this run rate has the company possibly breaking half a billion in revenue by the end of the year.

Of course, it’s possible revenue won’t grow, while costs do. But carefully managing costs versus revenue is part of running an established business, which Facebook increasingly is. So maybe the point of not raising the funding is because the company is focusing on making itself profitable — and that’s what it said it is going to be next year.

[Photo via The Search Principle blog.]

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About the Author, Eric Eldon

Eric currently covers digital media technology and business news, especially what's happening on social networks and their platforms. He also writes and edits stories about venture capital, and lots of other stuff, too. He started at VentureBeat in the spring of 2007, half a year or so after Matt Marshall left his reporting job at the San Jose Mercury News to found the site. Eric previously cofounded a startup called Writewith, that was building editorial software for newspapers and other groups of writers. The startup didn't work out, but he learned a lot.

  • Facebook is doing just fine. There seems to be this underlying human need to point to the looming failure of a company that has such lightening fast acceleration to success. The companies that are outpacing their DM efforts with an outlandish burn rate are those that aren't offering any value to the end user, not Facebook. Think - toolbars, etc. Anyone that would pay a $1 on search key words to dupe a person into downloading something to their computer to make $1.20. The consumer will most likely uninstall anyway. The missing link here is that Facebook, unlike these other companies- adds value, and consumers stick around. Facebook's costs will certainly increase, but with $200million in the bank, the sky is certainly not falling for Mr. Zuckerburg et al. These are unchartered waters, and I think Facebook has (under these unusual circumstances) done phenomenally well.
  • Sarah
    Storage of all those pictures is not cheap, no matter how they've architected it. $200 million doesn't last long. And FB has a good-sized staff, expensive downtown PA offices etc. Dont get me wrong, I hope they do well since I like the site generally. But I suspect this is posturing.
  • Chetan
    @Sarah - i think you've got it right. This seems to be a tactical move to deflect attention from the recent exit of the CFO and tighter market conditions. Timing is very suspicious.
  • tom
    Storage costs are really low. Costs are around $100 per Terabyte this makes for 100$ for 2048000 photos. But Traffic isn't that cheap. If we assume that from 200 Mill Users 1/3 uses 100 Mb day per day and we assume that traffic costs are at 1.5 cent per Gigabyte Traffic (=200000000*0,33*0,0976563*0,015) this makes for 96679,737
    $ traffic costs day per day. So 200 Mill on the Bank account ist 5 years of stable traffic (but it increases rapidly) without costs of labor and hardware.

    FB has to find a way to earn money without annoying users to much. Thats not easy but i hope they will find a way.
  • Snoopster
    Tom,
    Is $100 per TB the cost to own or rent? ~66 million users generating 100 Mb per day - both figures seem high. According to compete FB has ~90 million monthly uniques so your assumptions imply 2/3 of monthly uniques visit daily which seems unlikely. I'm assuming the majority of the traffic bandwidth is due to loading the default profile pictures and incrementally other photo album pictures (I don't have a sense for how much bandwidth is used by games/apps). FB pictures are JPEG and if you save down a few you'll notice most are under 50KB so let's assume 100KB on average to be safe. 100 Mb in daily traffic per user implies each user is looking at 1,000 pictures a day on average - doesn't jibe with personal experience and I am one of the few that use FB nearly daily
  • Eric -- this is truly interesting math -- ignoring any pretense of this being anything but a swag, seems that if they "net" burn $100MM with top line of $500MM and (average over the year) of 300MM users, then all costs of service, offices, lunches, humans, benefits, servers, bandwidth, hosting, parties, etc. still only amounts to maybe $1.25 per active user per year. 10 cents a month to monetize and cover all operating and SG&A costs per user? and it can only get better over time at monetization per user and scale costs. or, i could be off by several orders of magnitude. dunno. :)
  • Facebook needs to be more like twitter in its ability to allow great apps to build bigger social networks faster. But stay clean at the same time. But come 4B not a chance boys. If you start charging people will leave.
  • Chris
    Nice article. Eric, you seem to have the best "sources" from Facebook.

    >> "Facebook ... is also planning to have its engineers publish detailed
    >> information about how it manages its infrastructure
    >> (and saves money as a result, apparently)"

    I saw the video below which talks about their Memcache usage.
    For backend engineers, the talk is interesting. For others, it's probably really boring.
    But it does talk about tweaks that save them millions in infrastructure costs.
    http://www.facebook.com/video/video.php?v=63182...
  • cadi9122
    I read this too. Good read!!!
  • I think aebook is doing fne, they innovate and give their users a lot of new stuff which makes their users wants mor, unlike friendster that is stuck in a ditch and relying on copying others now and adsense for revenue.
  • Larry
    Interesting....Is the $4 BB value based on the preferred or the common?
  • I didn't go into that but preferred. I don't think Facebook would be selling common stock to investors.
  • Great article. And Interesting thoughts... and even more interesting math. I dont know much money things cost and how much space pictures take up so I won't try to dispute the math. That said, $200 million is a lot of money, but I can't imagine it would last more than a year or two at most, especially given FB's size and the number of users it has. FB has a very appealing UI and offers features that keep its users coming back, but I am not sure if its revenue model is all that much different from when it first started. No doubt, FB has become a darling in the eyes of those on Sand Hill Road, but I can't bank on a business that has yet to breakeven. Sooner or later people are going to get tired of FB (sorry, it's just how things work. We are a generation of ADHDs) so it needs some other way to monetize its larger user base if it's going to become profitable and stay profitable.
  • Ryan
    Sorry to FB, but their story doesn't jive with recent events (CFO ouster). They can wave their arms all they want about not needing cash. Of course, claiming to not need cash is exactly what a company who does need cash at an inflated valuation would say.
  • Haggie
    "The lady doth protest too much, methinks."

    -Shakespeare, Hamlet Act 3, scene 2
  • If zuckerberg thinks this company is worth more then $4B he has lost his mind.
  • edsion007
    Hmmm.. why it has to do with twitter so much?
  • FB has a very appealing UI and offers features that keep its users coming back, but I am not sure if its revenue model is all that much different from when it first started.
  • wuwei19871118
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