Financial Management: A Case Study of Facebook

Facebook started like every other Silicon Valley start-up. Having learnt from other start-ups, Mark Zuckerberg took keen focus on venture capital funding in the pursuit of giving Facebook the most optimal financial footing necessary for its success. The rationale behind the various rounds of financing for Facebook was to expand the company, not only locally but internationally, to places with higher population densities such as China and Russia. Ideally, the more the cash at hand, the faster it is for a start-up to achieve speedy establishment.

All the investments happened for a reason. In a recap, the major funding and the reason behind them happened as follows. Between June and July 2004, the president of Clarium Capital, Peter Thiel invested $500 000. With the above funding, Facebook was able to expand to over 1 million users spanning between Harvard, Columbia, Stanford, and Yale. In May 2005, a further investment of $12.7 million by Accel Partners enabled Facebook’s value to rise to $87.5 million and its global reach to 5.5 million users. In April 2006, more investors pumped in $27.5 million helping to raise the valuation of the company to half a billion. With the above investment, the global users of Facebook rose to 12 million while its estimated value increased to $8 billion. The first huge investment came from Microsoft’s $240 million investment which raised the value to Facebook to $15 billion and enabled the company to spread its reach to over 50 million global users (Mangalindan, 2011). The essence every investment round was ideally the same, that is, provision of monetary resources required for establishing Facebook in the United States and beyond.

Type of Financing by Facebook’s Management

Financing is overly important for the purpose of ramping up the profitability of a start-up. Ideally, there are two types of financing: equity financing and debt financing. Equity financing refers to the investment by an individual or a company, aimed getting a portion of ownership in a given business in exchange. On the other hand, debt financing involves the borrowing of funds from various creditors, aiming at repaying back the debts at an interest at a particular time in the future (Ehrenberg, 2015). From the above, it is clear that Facebook focused on depending on equity financing.

There are various forms of equity financing. However, in all the above scenarios, Zuckerberg chose to use venture capital investment. Venture capital investment refers to the kind of financing where individuals or companies invest in young private companies. In a venture capital deal, as all the above cases of Facebook, the individuals or companies provide the young businesses with capital in exchange for some share in the ownership of the company. Most of the above-mentioned investors have not disclosed their share of ownership, but the case of Microsoft in 2007 clearly indicated that the $240 million gave Microsoft a 1.6 stake in Facebook (Mangalindan, 2011). Ideally, all venture capital investors mostly take an approach that requires substantial returns on their investment, although some of their objectives may vary with the objectives of the start-ups.

Facebook had a lot of projects that required all the above funds. Primarily, the company required a lot of funds for marketing purposes across the entire globe. A lot of money was required for the purpose of establishing liaisons between Facebook and various communities across the world. Additionally, Facebook used the funds to make a couple of acquisitions. For instance, in 2007, the company acquired Parakey for an undisclosed sum. Parakey was a small web start-up developed to improve the transfer of media between the internet and computers. In the year 2009, Facebook acquired FriendFeed for $47.5 million as well. The company purchased the domain FB.com for $8.5, Chai Labs for $10 million, Hot Potato for $10 million, and all patents by Friendster for $40 million. Other acquisitions whose prices were undisclosed include that of Octazen Solutions from Malaysia, Divvyshot and Beluga (Basich, 2015). All the above acquisitions happened before year 2011 with funds received from the funds received at that moment.

Corporate Valuation

The popularity of Facebook started in the year 2005 and since then, the company experienced the bubbliest growth ever. Unlike other start-ups, Facebook’s corporate valuation came as a result of the huge amount of funds venture capitalists were already pumping in Facebook starting from the moment it was launched. As a result of Facebook accepting much of the venture capital investments from some of the individuals and companies, the company bubbly corporate valuation found justification. Specifically, for the period between mid-year 2004 and mid-year 2011, Facebook had received over $1billion in various rounds of funding, thus justifying its $65 billion at that time.

In light of the above, it is clear that external investors had very positive mentalities with respect to the valuation of Facebook. It was relatively easy for them to estimate the company’s valuation with respect to industrial and market penetration analysis. At the time of Facebook’s inception, there were other social networks such as MySpace already established in the market. However, the functionality and speed at which Facebook acquired new users was exceptional. It is from the above that external investors valued the company.

The major financial numbers for Facebook at that time include the additional investments by various individuals and companies, alongside their respective percentage in stake. The increase in overall valuation of the company also features in economic importance. The most important figures include the $12.7 million (15% stake) investment by Accel Partners in April 2005 raising the company’s valuation to $100 million. There is also the $27.5 million (1.5% stake) investment by Greylock Partners a year later. In October 2007, Microsoft invested $240 million for a 1.6% stake, raising the company’s valuation to $15 billion. Individual investor Li Ka-Shing invested $120 million in March 2008 for 0.8% stake. 15 months later, Digital Sky Technologies helped to push the value of Facebook to $10 billion by investing $200 million at 2% stake. Finally, in the last and first quarters of 2014 and 2015 respectively, Elevation Partners invested $120 for a 1.5% stake, and Goldman Sachs invested $500 million for a 1% stake. The above helped bring the value of Facebook to $50 billion (New York Times, 2012).

References

Basich, Z. (2015). A Trip Down Memory Lane: Facebook’s Private Years, 2004-2012WSJ. Retrieved 11 May 2015, from http://blogs.wsj.com/digits/2012/05/17/a-trip-down-memory-lane-facebooks-private-years-2004-2012/

New York Times. (2012). Tracking Facebook’s Valuation. Retrieved 11 May 2015, from http://dealbook.nytimes.com/2012/02/01/tracking-facebooks-valuation/?_r=0

Ehrenberg, D. (2015). The Most Common Funding Types for Young Startups, ExplainedYahoo Small Business. Retrieved 11 May 2015, from https://smallbusiness.yahoo.com/advisor/blogs/young-entrepreneurs/most-common-funding-types-young-startups-explained-180127980.html

Mangalindan, J. (2011). Timeline: Where Facebook got it’s fundingFortune. Retrieved 11 May 2015, from http://fortune.com/2011/01/11/timeline-where-facebook-got-its-funding/

 

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