How will Facebook and the Global Economy Interact in the Future?

Guest Post by Venessa Miemis, The Future of Facebook Project, excerpts from full blog post at EmergentByDesign.com

 

 

 

 

 

Credits as Currency

Facebook Credits are a virtual currency used within Facebook for the purchase of virtual goods related to applications managed on the Facebook platform. They’re like tokens you’d use to play games at Chuck E. Cheese’s — great for casual entertainment, but not particularly threatening to the real world economy. Yet.

 

“Increasingly, as we move later into the decade, physical currency will be harder to differentiate from virtual currencies like Facebook Credits,” said Brett King, author of Bank 2.0. “We’ll start to see a new economy emerging through social media where virtual currencies will be a very real part of the way people trade and sell information, collaborate on ideas and value various products and services.”

 

“We may see a kind of gamification of the real world take place through Facebook Credits, where a variety of outside vendors, businesses, and service providers can give us Facebook Credits, enable us to pay with Facebook Credits, and reward us with Facebook Credits for taking actions that they want us to take,” explained Nova Spivack, a technology entrepreneur and founder of Lucid Ventures.

Identity as Currency

Every time you upload a photo, make a comment, add a friend, click a link, or make a purchase, that data is being harvested to create a map of you.  By analyzing slices of this data, a wealth of information can be extracted and predicted about you. As a related example, Google vice-president Marissa Meyer claimed at this year’s SXSW festival, credit card companies can look at spending habits and predict with 98% accuracy, two years in advance, when a couple is going to divorce.  “[Identity] will become the battleground within which this entire learning will take place, because today all the artifacts of a human being belong to physical and logical governments, and not to social networks. But the ability to move any form of asset between the virtual world and the physical world needs a commonality of understanding of identity,” said JP Rangaswami, Chief Scientist for salesforce.com.

 

Reputation as Currency

Just as a positive score in your eBay account matters if you plan to continue doing business there, we’re on the verge of having robust social scoring metrics that will become increasingly important for businesses and individuals to consider.

 

When the opinions about a brand can be displayed more robustly, we’ll know not only that you “like” a brand, but why. This gives information on both sides — the reputation of the brand, and the values of the individual. As Brett King pointed out, “Social metrics, and the use of platforms like Facebook will have very real feedback in respect to the valuation of a brand economically, and obviously that will have an effect directly on revenues that are possible for providers in that space. So unless you’re playing in the social brand space, unless you’re engaged in the conversation, your social metrics are going to be affected in a negative way, and that will have an effect on revenue, profitability, and the value of your brand.”

 

Conclusion

As technology writer Kevin Kelly said, “What we know from our very short history of living online is that community precedes commerce; there’s no commerce without community. What Facebook is doing is sort of blowing up the community to be 500 million or even a billion very soon. When we have a community of a billion, it means that the potential for commerce is enormous, is immense, and we’ve never seen that before.”

 

Facebook will continue to grow and face new challenges as it threatens the control that traditional institutional structures have had over currency and personal identity. The implications of one entity owning this amount of information is beyond the scope of this article, but it certainly deserves a critical assessment. That huge privacy breach and wake up call hasn’t happened yet, so it’s not too late to ask what’s at stake when your data is contained in someone else’s silo.

 

THIS WEEK IN PRIVATE SHARES TRADING

Facebook Value Stays Steady at $77.8B

 

The market for trading private shares is still in its infancy, and while there are hundreds of private companies with shares available for trading, Facebook continues to dominate trading actively, with Twitter, Groupon, Linkedin, Zynga & Yelp also getting investor attention, but with limited trading activity to date.

 

For the fourth straight week, this week’s Facebook auction took place on Wednesday and cleared at a price of $31.50 implying a value of $77.8 billion.

 

 

 

 

Other Private Company Trading Activity:

  • Twitter (230 million shares issued):
    • 70k shares traded $32 on 3/28/2011 implying a $7.4 billion valuation.
    • 27k shares traded $31 on 3/16/2011 implying a $7.1 billion valuation.
    • 35k shares traded $34.50 on 3/4/2011 implying a $7.9 billion valuation.

 

  • Groupon (300 million shares issued):
    • 25k shares were traded at a pre split price of $47.67 or a $7.2 billion valuation on 3/10/2011 (Groupon shares have split 2:1 resulting in 300 million shares issued)

 

  • Zynga (310 millions shares issued):
    • $9.3 billion valuation implied by trade on 2/26/2011

 

  • LinkedIn (91 million shares issued):
    • $2.8 billion valuation implied by trade on 3/21/2011

 

General Questions & Considerations of a Secondary Market Transaction

Guest Post by Mitchell C. Littman, Esq.

 

 

So, what is a Secondary Market Transaction?

A Secondary Market Transaction is a negotiated private sale of restricted securities of an Issuer whose securities are not publicly traded. Some transactions are effected directly from Seller to Buyer and in some instances one or both parties may be represented by a broker-dealer who may earn a commission on the transaction.

Who are the Issuers?

The Issuers that have attracted the most market attention have been social networking and technology firms that have chosen to remain private but that have (i) used equity and equity-linked reward systems in attracting and incentivizing employees and (ii) received private equity or venture capital investments from some combination of angels and institutional investors.

Who are the Sellers?

The overwhelming majority of Sellers have been founders or early-stage employees that have left the employ of the Issuer, though there has been some selling by early stage investors (primarily angels, rather than VCs who have tended to participate in follow-on rounds). Ex-employees have typically obtained their Shares through the exercise of stock options or by receipt of restricted stock grants.

What securities are they selling?

Most sales are of Common Stock, though there have been some sales of Preferred Stock. Some Issuers have two classes of Common Stock – a class with super-voting rights and a plain vanilla class of Common Stock. In such cases, the vanilla class is invariably the security being sold. All such shares are typically deemed to be ‘restricted securities’ under applicable Federal and state securities laws.

Additional Hurdles to Effecting a Purchase and Sale: ROFR’s and Co-Sale Rights

In addition to the outright prohibition on Transfers, most Restricted Stock Purchase Agreements or Option Exercise Agreements include provisions granting a “Right of First Refusal” (a “ROFR”) under which the Issuer (or its designee), within a prescribed period of time after receipt of a Transfer Notice, may elect to purchase the Shares on substantially the same terms as those proposed in the Transfer Notice.

In some instances, particularly where the Shares to be transferred consist of Preferred Stock, other early stage investors in the Issuer may also have ROFR’s and/or Co-Sale rights entitling them to also sell Shares along with the Seller.

The exercise of any of these rights by the Issuer or another stockholder effectively derails the purchase by the Buyer.

Virtually all ROFR and Co-Sale provisions provide that, in the event the rights are NOT exercised, the Seller has a fixed number of days in which to complete the Transfer to the Buyer. In the event the transaction is not completed within the allotted time, any subsequent attempt at Transfer must once again pass through the ROFR and/or Co-Sale process.

Effecting the Purchase and Sale: The Stock Transfer Agreement

The core document for effecting the purchase and sale of the Shares is the “Stock Transfer Agreement” (also sometimes called a “Stock Purchase Agreement”) (the “STA”).

The typical STA contains:
• The principal terms of the sale, i.e., number of Shares to be sold, price and the like
• Representations and warranties of the Seller include Title to Shares; Absence of any lien or encumbrance; Power and authority to sell.
• Representations, warranties and covenants of Buyer include Power and authority; Sale was not effected through any public advertising or general solicitation; Buyer is taking for investment intent; Buyer is sophisticated and has sufficient access to information
• Buyer absolves Seller for any liability due to the fact that Seller may have superior information regarding the Issuer Buyer agrees to be bound by same restrictions as were applicable to the Shares in the hands of the Seller

Closing Mechanics

Assuming the ROFR is not exercised, the parties may proceed to a closing. Generally speaking, the Seller and Buyer execute and deliver the STA to the Issuer for its approval.

Seller delivers Stock Certificates to the Issuer or its Transfer Agent.
(Some Issuers actually require that all Stock Certificates be held in escrow by Issuer’s counsel to facilitate transfer in the event of a ROFR exercise. In that case, the other parties will only receive photocopies of the certificates.)

Once approved, a virtual closing is conducted, with the Purchase Price being wired by the Buyer to the Seller and the STA signatures and the opinion of Seller’s counsel being released to the parties. Subsequently, the Issuer issues a new Stock Certificate in the name of the Buyer.

About Mitchell C. Littman, Esq.

Mitchell Littman is a founding partner of Littman Krooks LLP and heads the firm’s corporate and securities department. His practice includes public and private offerings, broker-dealer and investment banking matters, secondary market transactions, venture and private equity capital investments and mergers and acquisitions

About Wedbush Securities Private Shares Group
The Private Shares Group of Wedbush Securities covers the growing base of privately traded securities, with an emphasis on those in the social media space. The mandate of the group is to build our trading network in all private shares, source deal flow in the space (including “initial private offerings”), and to build funds and create other alternative investment opportunities across private shares for our institutional and accredited retail clients.

THIS WEEK IN TWITTER

Jack Dorsey Returns to Twitter, Ev Williams Focusing On His Next Big Thing

 

 

 

 

 

 

Six months after turning over the Twitter CEO reigns to Dick Costolo, Ev Williams is becoming a part-time executive at the company that he co-founded five years ago.

 

Jack Dorsey, who co-founded Twitter with Ev is stepping in to take over product.  Dorsey is tasked with making the user experience more intuitive and useful for average users.  For users that have crossed the initial chasm and been able to figure out Twitter, the experience becomes incredibly powerful and sticky, however as we have previously mentioned, the company has a tremendous opportunity to drive value by improving the on-boarding experience, such that a higher percentage of visitors/initial site registrations turn into active users.  As Twitter converts a higher percentage of registered users into active users, the platform will become increasingly more valuable to its users, and more pricey to advertisers.

 

To accomplish this task, Dorsey indicates that he will refocus the product on providing value to the majority of the user base that utilize Twitter to consume, rather than to create content by tweeting.  Dorsey believes that the best aspect of Twitter is that it allows users to follow events in real-time, saying, ”That’s the value, not the brand ‘Twitter’… We need to refocus on that value.”

 

While we generally applaud the return of founders to their companies with their context and passion, we prefer them to return as full time employees when they take over major roles.  Dorsey will continue to also be CEO of Square, the rapidly growing smart phone credit card processor.  Twitter needs help, and the more mindshare it gets from Dorsey, the better.

 

 

 

 

Why Is Curtis Granderson Trending on Twitter?

 

One of our favorite aspects of Twitter is the persistent “Trending” module that lets you see what’s trending in the world.  That’s how a lot people now find out when someone famous passed (e.g. Elizabeth Taylor), or somebody does something special (e.g. Celtic Ray Allen surpassing Reggie Miller for most career 3-pointers).

 

So when we saw Yankee Centerfielder Curtis Granderson trending, we assumed he had hit a grand slam or achieved some other kind of epic athletic achievement.  In fact, all Curtis had done was walk to the plate for his first At Bat of the season.  But behind the scenes, Granderson’s handlers leveraged one of the hottest trends in social media to give Granderson additional social media cred.

 

With 70 million views on YouTube in the last month, 13-year old Rebecca Black became a social media phenomenon with her hit, “Friday”.  And when the song was played as Granderson’s theme music as he approached the plate, the Twitterverse went wild.

 

It didn’t take long for us to find the hilarious video on YouTube of Granderson searching for his perfect song.  At the end of the video, when Granderson finally hears “Friday”, he begins to sob, because he’s finally found his song.

The coup de grace for us was when we read in the paper the next day that Granderson had in fact never even heard of the song.  His handlers had in fact picked the song recently because of the intense global interest, and layered it in to the video far after the actual video was shot.

 

In our view, this was per social media genius.

@BronxZooCobra Has Its Charlie Sheen Moment

After escaping on Monday, the Bronx Zoo Cobra established the @BronxZoosCobra feed and amassed over 220K twitter followers in one week, attracting the massive following by tweeting gems like:

 

 

 

 

 

 

 

Hey @piersmorgan, @jack and @biz, What does a snake have to do to get this account verified?

  • Does anyone know if the Whole Foods in Columbus Circle sells organic mice?
  • “Dear @CharlieSheen, know what’s better than tiger’s blood? Cobra venom. #winning #snakeonthetown Also I’m 20 inches long. Just sayin’.”).

 

Despite being found, The Bronx Zoo Cobra continues to tweet.

 

How Google’s Investment In Zynga Helps

This post is written by Guest Author Byrne Hobart, a marketing consultant at NYC-based Blue Fountain Media. Blue Fountain Media helps clients with website design & development, online marketing, graphic & logo design and more.

A few months ago, it would have been fair to treat Zynga as a partially-owned subsidiary of Facebook. The big question for investors was how much Facebook ‘owned’. Since Facebook was Zynga’s platform—their sole source for new customers, and the only way existing customers worked with them—Facebook could theoretical “tax” Zynga, demand a change in strategy, or even shut it down. Owning shares of Zynga was a bet that Facebook would ignore them, lose to them, or buy them out (a situation analogous to Paypal before its eBay acquisition).

But in the last few months, that situation has changed completely.

It started in May: Zynga had an all-hands meeting in which they prepared to leave Facebook entirely.

Days later, they announced a settlement: Zynga will use Facebook credits, and Facebook will give them free advertising. This may have been one of the best pieces of corporate Jiu Jitsu in history: in a single deal, Zynga turned Facebook from a company that basically owned them into the company that gave them a torrent of cheap new users. That was the prior status quo.

But at the same time, Zynga was pushing those new users into interactions outside of the site:

  • FarmVille is one of the top 20 game Apps in the iTunes store.
  • Zynga’s poker app remains popular.
  • Zynga.com is the most popular game site on the Internet. According to Compete.com, it gets more traffic than gaming stalwarts like AddictingGames.com, Newgrounds.com, Miniclip.com, Pogo.com, and even games.yahoo.com (based on Alexa’s estimate of Yahoo’s subdomain traffic, and Compete’s estimate of Yahoo’s total traffic). It’s also an engaging site, with a high ratio of visits to unique visitors compared to other gaming sites (only Pogo is higher, and by a small margin).
  • Pogo.com is the second most popular game site; Farmville.com is third.
  • Farmville is marketing itself through 7-11.

And now, Google has invested at least $100mm in Zynga, and is preparing to launch “Google Games”. If there’s one company that can bring in more attention than Facebook, it’s Google (for the moment). As TechCrunch points out, that’s not the only benefit: Zynga will also have an opportunity to use Google Checkout instead of Facebook credits. Suddenly, their ultimatum from May got a lot more effective: it’s not a choice between Facebook and nothing, but a choice between two companies that can provide an almost equal amount of traffic.

The likely outcome: Zynga is too valuable a prize for either of them to risk. Zynga will be able to keep negotiating to keep an aggressive cut of the revenue their games generate, and they will be able to keep adding new online and offline partners. And of course, Zynga continues to learn more about user behavior, more quickly than their competitors.

Zynga’s competitive position has completely changed. For potential partners, they are a way to turn a large number of pageviews into 1) revenue, and 2) more pageviews. This makes them part of a tiny minority of web services that can be plugged into a wide variety of sites in order to make them more profitable. And if the other services—Amazon Associates, Google Adsense, and Paypal—are any indication, the result could be extremely profitable for Zynga.

Diapers.com Raises $20 Million Debt Round With 2009 Revenue At $182 Million

If this were 1999, Diapers.com certainly sounds like a company that should eventually be headed to the deadpool, but its 2010 and people are actually buying products online, and Diapers.com is selling a LOT of diapers. In fact, according to Diapers.com CEO Marc Lore, “this year we will sell a half a billion diapers”, which he believes is four times as many diapers as the next largest online seller, Amazon.

Lore says Diapers.com generated $182 million in revenues in 2009, up from $89 million in 2008 and Lore says they are on a run rate to bring in $275 million in revenue this year.

Lore told TechCrunch that they just raised a $20 million debt around. Last October they raised $30 million in equity from NEA, Accel and Bessemer in a series E financing. Total capital raised since 2006 is $78.5 million.

Lore says that they’re using the cash raised to increase their marketing budget from $15 in 2009 to $30 million for 2010, and are currently operating at break-even.

So the question is, will Diapers.com become the “Zappos of Diapers and baby gear”, eventually being acquired by Amazon, or will they continue their growth trajectory towards an eventual IPO? Zappos generated $1.2 billion last year and was acquired by Amazon in cash and stock, and thanks to the rising stock market, the acquisition has returned Zappos shareholders $1.2 billion. It will also be interesting to see how the secondary market reacts to Diapers.com, now that their CEO has provided their revenues and profitability for the last few years.

Groupon Raises $135MM From DST At $1.3 Billion Valuation

DST (Digital Sky Technologies) just invested $135 million into social commerce service Groupon.

Like their previous investments in Facebook and Zynga, most of the capital provided by DST will be used to buyback equity from Groupon’s 90+ employees as well as their early investors.  Interestingly, Groupon has only been in business for 18 months.  That’s some serious shareholder value in such a short period of time.

Groupon uses social tools to attract buyers for a given product and uses its collective buying power to get low prices.  If it reaches the number of buyers required for a deal, Groupon collects a fee from the business that receives the sale, and then distributes coupons to the buyers for the discount.  Groupon claims to have saved consumes over $150 million.

With investments like this, there’s no question that the secondary market continues to heat up.  In the 90′s, the horizon for an exit was about 3-4 years, while today the average exit horizon is much longer, 6-8 years.  Also, most web 1.0 companies were very speculative, whereas today these companies are building real sustainable businesses with serious revenue and profits.

This round will hopefully help Groupon stay focused on their core business, rather than having to deal with employees selling shares into the secondary market as they continue to create shareholder value.  Create a buyback program this early in their lifecycle could help them stay focused on the prize at hand.