The Dot Com Bubble Is Back – Fred Wilson and John Doerr Discuss

With 10%+ unemployment, it’s hard for most American’s to imagine, but the dot com bubble is back again. According to many, we are seeing a bubble yet again surrounding internet companies at historic proportions in early stage and late stage investing.

The reality is that there has been a lot of wealthy individuals with their cash sitting on the sidelines since the great recession began in late 2008, and they’re trying to figure out where they can yield the highest returns. With historically low interest rates, declining real estate, and the uncertainty of the public markets, they have been fleeing to invest in private companies, creating an over supply of capital to a limited number of rapidly growing startups. The result may very well have created yet another dot com bubble, so they say.

Yesterday at the Web 2.0 Summit in San Francisco, the prominent NYC based blogger and Union Square’s early stage investor Fred Wilson and the iconic venture capitalist from Kleiner Perkins Caufield & Byers, ranked 582nd richest person in the world by Forbes, John Doerr, took the stage to square off and discuss, among other things, whether we’re in a bubble (or boom) within early stage investing and the secondary markets.

Fred Wilson explained that he feels the current seed stage investing environment is “getting overheated, people are getting crazy, they’re showing up to their first meetings with term sheets.” According to Wilson, he’s seeing two to three person teams receiving $30, $40, $50 million dollar valuations on their first rounds, and as he puts it, “I think that’s not right”.

John Doerr responded by saying “I think what Fred’s describing in terms of the valuation, for sure is right.” But Doerr went on to explain that he feels the times we’re in right now as unusual and exciting, and that “entrepreneurs are better, ideas are better, and the markets are larger.” Doerr closed with “I prefer to think of these bubbles as booms, and every boom, I think booms are good, booms lead to over investment, booms lead to full employment, booms lead to lots of innovation. You know there was a boom when they started railroads, we’re in another bubble or boom and its an exciting time right now.”

Fred followed up by clarifying that although he feels we are in a bubble right now, its great or everyone other than the angel investors “because the now can’t get into deals they used to get into. There’s too much money, and it used to be when you syndicate angel deals everybody could get in cause everybody’s writing a $50k or a $100k check, if its a $1 million round they could all get in, but now there’s many of them that can’t get in.” Fred described that its not good for angels, but that its great for entrepreneurs and traditional venture capitalists because more companies are getting funded so there’s more opportunities for “us to invest”.

Considering Union Square is an early stage investor, one has to wonder if there now seeing pricing pressure on these deals, if Fred is expressing frustration from their own experiences. John Doerr on the other hand is a late stage investor, so you’d have to wonder if he’s feeling some pricing pressure with the DST’s of the world in the secondary market offering growth stage companies more favorable terms and valuations.

To that point, a person from the audience asked the two investors whether they feel the prices we’re seeing in the secondary markets for Facebook, Zynga and Twitter stocks are bubblish and overpriced, and Doerr suggested to buy more now, stating:

“I turn to Mary Meeker, a long time friend, and I think the best of how these are gonna be valued in either an acquisition or a public market, and remember what she said on stage earlier. These are MONSTER markets, she has a better track record at picking ten baggers, and I mean ten times appreciation AFTER companies are public than anybody in the world. I think, yeah, she would tell us to invest a lot of money in a Twitter or a Facebook at valuations at around ones that are in these secondary markets today.”

Fred Wilson Supports Secondary Market For Private Company Stock Liquidity

Today Fred Wilson wrote about the nearly 1,000 point “Crash of 2:45PM” yesterday, and in his post he described the public markets as a fickle thing.  He went on to say:

“I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and early stage investors is the next big thing for liquidity in the startup business and I am pleased to see that market continue to develop nicely.”

Fred has been a long time proponent of the secondary markets, he’s said on a number of occasions that he feels we need a more active secondary market for founder shares and shares purchased on early investors in venture backed companies.  We obviously agree with Fred, and we’re happy to see him continuing to speak positively about the secondary market as a liquidity option!

Zynga $5 Billion Valuation: BUY – Early Leader in Social Gaming is Printing Money

Current trading price in private market: $9    Price Target:   $15.75
(Download Full Report Here – PDF)

Investment Conclusions:

  • Zynga is the clear leader in social gaming.  It is well positioned to build on its pool of 237 million monthly players, increase monetization of its user base, and generate significant levels of free cash flow.
  • If it were public today, we believe Zynga would trade at a $5 billion market cap ($15.75/share), 75% above where it currently trades at in the illiquid private market.


  • Social gaming is huge, growing rapidly, and highly profitable: Social gaming applications currently have over one billion “monthly active users” (MAUs), with many individuals playing multiple games.  Social games are a subset of online games, which are played on multiple platforms (PCs, consoles, and Facebook being the largest platform) and generate billions of dollars in revenue through fees, advertising, and the sale of “virtual goods”.  Social gaming is rapidly taking share from other online gaming segments and could soon become the dominant segment. In China, where online gaming is well established, there are four public companies purely focused on online gaming, with aggregate revenues of 3.3B and operating margins over 50%.
  • Zynga is the dominant global social gaming company: At 237mm MAUs (according to developerAnalytics), Zynga has a 50%+ share of MAUs of the top 10 game developers on Facebook and 6 of the top 7 games. EA   (ERTS) is the second most popular social gaming company with 53mm MAUs, largely a result of its $400mm acquisition of Playfish, or about 11% of the market.  In China, the top online gaming company Tencent Holdings, has almost 400mm MAUs, but not all of them participate in social gaming (many play “massive multiplayer online role playing games” or MMORPGs).
  • We estimate that Zynga is now at a $500+mm revenue run rate and very profitable: Online gaming firms earn about $5 annually per MAU in China.  With a much less developed market in the US, we estimate Zynga is earning only about $2.25 per MAU today, which puts revenue estimates for 2009 at $300mm and for 2010 at over $500mm.  We project Zynga will generate more than $1B in revenue in 2012.
  • Zynga would be worth $5B today if it were public: Since very early in its lifecycle, Zynga has reportedly been generating positive free cash flow from operations. Due to its early stage and its marketing investment to drive growth, we estimate that Zynga’s operating margins aren’t as strong as their publicly traded Chinese comps (50%).  We estimate Zynga will generate $525mm in revenue in 2010 and $170mm in EBITDA (32% margin).  By 2015 we project revenue of $1.6B and EBITDA of $650mm (40% margin).  Putting a 15.3x EBITDA multiple on 2015 earnings (the average of our comp group) and using a 15% discount rate, we estimate Zynga would trade at a $5B valuation if it were public today. This equates to a 30x EBITDA multiple on our 2010 forecast.
  • Zynga is privately traded at a 44%+ discount to our public market price target: As with Facebook (“FB”), Twitter, and other high profile private companies, you can buy Zynga shares in the (illiquid) private market, where about $6 million worth of shares traded hands last year through marketplaces like  Only accredited investors are allowed to participate.  Currently, the ask price is about $9/share, implying a market cap for Zynga of $2.8 billion.  Relative to our price target of $15.75 ($5 billion market cap), Zynga trades at a 44%+ discount, or conversely, has 75% upside to its current trading price.

Quick Facts (according to Zynga, Facebook  and Developer Analytics):

  • Zynga has 237mm monthly and 67mm daily active users who play their games
  • 6 of the top 7 games on Facebook are Zynga games
  • Tencent, the top gaming firm in China, with $1.8B in revenue and $1B in EBITDA in ‘09, has a $40B market cap
  • Tencent’s revenues equate to ~$5 per active user per year and they are projected to double by 2015
  • Zynga was the #2 merchant for PayPal in 2009, after eBay and larger than Wal-Mart and other huge players
  • PayPal processed about $500mm in virtual goods payments in 2009 (not all of which were for Zynga)

Investment Thesis:

Social gaming is huge, growing rapidly, and highly profitable

  • According to developerAnalytics, social gaming currently has ~1 billion active players every month and there are ~200 million active players daily (some people play more than 1 game).  The active user base is growing much faster than Facebook, which grew well over 100% in 2009, as we remain early in the adoption cycle.
  • Social gaming differs from traditional online gaming in several ways: 1) players use their real identities, which engenders playing with friends and family instead of playing against anonymous strangers; and 2) play is asynchronous instead of real-time, which allows players to compete and challenge each other, or nurture each other,  within the game mechanics of feedback and point systems at different time intervals (i.e. Dad and Son play Chess and wait for their opponent to make the next move, being notified via their News Feed… or Friends/Family challenge each other to quizzes… or help their Friends/Family in Farmville at various time intervals).
  • According to research by PopCap Games, over 30% of social gamers do not play other types of online or video games, highlighting the tremendous growth engendered by this (relatively) new type of gaming.
  • Social gaming companies earn revenues from membership fees, advertising and the sale of “virtual goods”, products purchased for use in the games to expedite or enhance game play, or otherwise improve the users’ experience with the games.  Of these, virtual goods are by far the largest source of revenue, with Piper Jaffrey predicting $6 billion in virtual good sales by 2013.
  • There are multiple ways for users to pay for their virtual goods.  Cash transactions can be handled via a credit card, PayPal, or site specific payment systems like Facebook Credits.  Players can use credit with companies like, and pay for their virtual goods later by going to participating retailers like 7-11.  Zynga just announced their own pre-paid cards which will be available at various retailers.  Companies like OfferPedal pay players in gaming credits for participating in surveys or signing up for free trials of products (e.g. Netflix).  Marketers are even paying players to “fan” them, with Bing recently giving players $3 in virtual Farmville credits for the first 400,000 people that “fanned” Bing on Facebook (they got 400,000 new fans in one day!).
  • Social gaming companies like Zynga will also benefit from brands paying to be in the games, with companies like AppSavvy playing the role of bringing brands in to gaming applications.
  • There are several public Chinese companies whose primary business is online gaming, however recently these companies have focused more on the “massively multiplayer online role playing games” (MMORPGs), which are a bit more like traditional video games than social games.  The four primary comps have collective revenues of $3.3B already and average operating margins of 49.8% indicating the market is actually already quite mature and highly profitable.

Zynga is the dominant social gaming company globally

  • Zynga has 237mm active users per month and 67mm active users per day.  Below is a chart of the top 10 game developers on the Facebook platform (according to developerAnalytics):

  • In November 2009, Zynga announced that they passed 100mm unique users/month, making them the largest online game destination globally. In the four months since, Zynga has grown at a 250% annualized rate.  We note, however, that Zynga’s MAU growth will slow due to the law of large numbers, the inevitable slowing of Facebook’s growth, and the increase in competition attracted to the large profits generated by social games.
  • Zynga owns 6 of the top 7 games on Facebook, with EA being the only other developer with more than one game in the top 10.

  • Zynga has tremendous growth opportunity off of the Facebook platform. Zynga already gets about 15mm monthly uniques on, according to, and is porting games to MySpace (where Mafia Wars, Zynga Poker and YoVille remain among the most popular games), other social networks, and other gaming websites, like MSN Games.  

Zynga has several significant competitive advantages related to scale

  • Zynga’s cross-marketing advantage.  As the dominant social gaming company with 237mm MAUs, Zynga has the unique ability to market their games to a massive audience (i.e. their users) FOR FREE, a huge advantage that should not be underestimated.  New game developers often have marketing budgets of 50% of the cost of developing the game (according to John Pleasants, CEO of Playdom), but that doesn’t buy much next to Zynga’s ability to market to 237mm MAUs for free.
  • Zynga can rapidly imitate other successful games. Many of Zynga’s top games are close facsimiles of game concepts conceived by other companies.  For example, Zynga’s largest game, Farmville, is similar to Farmtown, which was launched four months earlier. (Interestingly, the Farmtown game play was similar in many ways to (Lil) Green Patch, a game about growing your garden that debuted more then a year before Farmtown).  Zynga’s second largest game, Café World, is similar to Restaurant City, which was launched seven months earlier.  The combination of its massive captive audience and its large marketing budget positions Zynga well to imitate most any new games cheaply and in a matter of weeks.  As a result, Zynga is well positioned to produce the next monster hit, even if they do not conceive the initial basic concept.
  • Numerous other advantages to having the most scale and deepest pockets. Zynga will develop the most games and, thus, even with a low hit ratio they are more likely than any company to have the next hit, all things being equal.   Zynga is the only game developed with its own game cards, which are like a prepaid debit card, available in stores like Target and Best Buy.  With such a highly valued stock, Zynga is well positioned to acquire other studios, and acquisition prices appear to be falling as competition rushes in.  There are numerous reinforcing advantages to Zynga’s scale.

Zynga is reportedly at a $500mm revenue run rate and very profitable

  • Online gaming is big business in Asia.  Traditionally the most popular online games have been MMORGPs, but recently social gaming has been gaining significant share.
  • Tencent Holdings is the largest pure play among the public Asian online gaming businesses.  Tencent generated 2009 revenues of $1.8B and EBITDA of almost $1B.  Goldman Sachs estimates that Tencent has 384mm users, implying average revenue per user of almost $5.
  • While spending per capita in China is much lower than the many countries, online gaming is more developed in China than in most countries and therefore we believe the % of players who spend money and the amount of their spend is higher in China than elsewhere.
  • In November 2009, Zynga announced that 1% of their 100mm unique users bought virtual goods on their game sites.  We estimate Zynga earned about $2.25 per MAU last year.  Given Zynga’s statement that 1mm people per month were spending money on virtual goods, we believe the average person who bought virtual goods spent $25 per month, which appears reasonable.  We expect Zynga to ramp to $3.50 per MAU by 2015, which will still only be 70% of what the Chinese gaming companies generate in revenue per user today.  This year Zynga should generate about $525mm in revenue.  In 2012, we expect Zynga will generate more than $1B in revenue.
  • According to PayPal, Zynga was their #2 merchant in 2009 in terms of Total Payment Value (TPV).  This puts them ahead of major global retailers like Wal-Mart.  The only company ahead of them is eBay.  PayPal separately reported that they transacted ~$500mm in virtual goods payments in 2009.  Given its dominant share of the U.S. virtual goods market, Zynga is likely responsible for a significant percentage of those virtual goods transactions.
  • We expect Zynga will have strong operating profit and EBITDA margins, but we expect them to be lower than the publicly traded Chinese comps, almost all of which have EBITDA margins over 50%.  Near term, this is due to Zynga’s earlier stage and its significant marketing investment to drive growth.  Longer term, we estimate 40% EBITDA margins versus 50% for the comp group because Zynga will have to share revenues with payment and platform partners (Facebook) and will need to remain aggressive on its marketing spend.  Applying a 32% EBITDA margin to our 2010 revenue forecast for Zynga, we predict Zynga will earn $170mm in EBITDA this year.

Zynga will be worth $10B in 2015 and would trade with a market cap of $5B today if it were public

  • We project Zynga will generate revenue of $1.6B in 2015 with 40% EBITDA margins. This projection is based on a 13% CAGR in active users and an increase in revenue per user to $3.50, both of which are potentially conservative.  Zynga would still be smaller in 2015 than Tencent is today in revenue and EBITDA.
  • Applying a 15.3x EBITDA multiple (the average of our comp group below, weighing the market leader 50% and the other three competitors 50%) to our 2015 EBITDA projection yields a $10B valuation.  Discounting $10B back to 2010 at 15% gives a valuation of $5B today.  This implies a 30x multiple on our forecast 2010 EBITDA, which appears reasonable given our 5-year compounded EBITDA growth rate projection of 31.2%.
  • Zynga’s present value has significant sensitivity to the projected 2015 revenue per active monthly user.  At a 40% EBITDA margin, each $1 in 2015 revenue per MAU changes the present value of the company by $1.4B.  We feel our projection of $3.50 per MAU is among our most conservative assumptions given the $5 MAU experienced by Tencent in China.

  • Zynga’s present value is also clearly a function of the multiple and discount rate we apply to 2015 earnings.  Even with its present commanding lead, there is risk that Zynga could falter and not grow its user base.  There is also the risk that it may not be able to grow average spending to the 70% of the Chinese average we predict.  Neither of these core assumptions feels like a stretch, which is why we’ve applied a 15% discount rate to the 2015 valuation.  As for the multiple, we feel that if Zynga remains the dominant social gaming company it should justify a multiple that is, at the least, the average multiple of the comparables in online gaming.  The following chart highlights the sensitivity of our valuation to changes in multiples and discount rate.

Zynga shares are available for accredited investors to buy and sell, and the current value is $2.8 billion

  • There is a secondary private market for Zynga shares on sites like and that make markets in shares of dozens of private firms, enabling current shareholders to monetize their shares.
  • The shares are only available to accredited investors.
  • Shares are currently being offered at $9, implying a market cap of $2.8 billion for Zynga


  • With only about $300 million in revenue in 2009, Zynga has yet to realize the revenue opportunity among current MAUs.  As Zynga’s revenue generating initiatives start to scale, private market values should increase.
  • When Zynga goes public, there will no longer be a liquidity discount and prices should reflect the fair value.


  • The most relevant public comparables are all Chinese. Tencent is the dominant gaming company in China, with ~400 million MAU’s, and revenue almost triple the 2nd largest Chinese gaming company. Tencent’s games are played on Tencent’s own platform, and the money used to buy virtual goods is Tencent’s currency (QQ Coins).  Due to its size, and its ownership of its platform, we believe Tencent trades at a premium to where Zynga would trade at if it were public.  The other Chinese gaming companies are much smaller, and have made little inroads in social gaming to date, so they trade at less than half Tencent’s multiple.  To arrive at our 2015 multiple for Zynga we took the average of Tencent (21.1x) and the average of other three (9.4x), which came to 15.3x. 

  • Another interesting data point was EA’s acquisition of Playfish for $400mm in November. It was estimated at the time of acquisition that Playfish was at a $50mm run rate, indicating a revenue multiple 8X 2009 revenue.  Our $5 billion value for Zynga represents 9.5X 2010 revenue, which is reasonable in comparison with the Playfish  revenue multiple, as scale generally is rewarded with a higher multiple to reflect the greater earnings power. 


  • Farmville is a significant percentage of Zynga’s revenue.  While it represents 35% of Zynga’s MAUs, we estimate Farmville represents close to 50% of Zynga’s revenue, as Farmville is played almost 50% more often on average than Zynga’s other major games.  Concentration is a particular issue as Farmville appears to have peaked in terms of its popularity.  Zynga is now deciding how to evolve Farmville.  In order to maintain its hard core audience, the game will have to create more features, and get more complex.  However, while increased complexity will interest the hard core Farmers, it will likely turn off the more casual Farmers.
  • The elimination of “notifications” in the newsfeed deleted a major source of free advertising. On March 1, Facebook eliminated notifications that games like Farmviille used to send out to a players friend list, notifying the friends of the players’ game accomplishments.  While many viewed these notifications as spam (5.9 million people joined the group “I don’t care about your farm, or your fish, or your park, or your mafia!!!”), the notifications were undoubtedly effective marketing tools for the game developers, and while the loss is only a month old, the lack of notifications appears to be negatively impacting all game developers. 
  • Four of Zynga’s six major hits appear to have peaked or be in decline. While Texas Hold ‘Em and Petville appear to still be growing their user base, the Zynga’s other four major titles appear to be in decline.  To gauge usage on a more granular level, we look at current Daily Average Users (DAUs), and compare them to peak DAUs:

The declines mark an aggregate loss of over 6mm DAUs, or almost 10% of total DAU’s for the top six titles, highlighting the need for Zynga to develop or acquire more hits to continue to engage and grow their user base.

  • Facebook growth could slow. Since Facebook is the dominant social network, it’s not surprising that Zynga’s revenue appears to come largely from Facebook.  This could have negative repercussions for Zynga if Facebook growth were to slow, as it appears to be doing in the U.S., with just 600,000 active users added in March vs. 5mm new users in February.  While Facebook growth remains strong in most Latin American and Asian countries, we note that Facebook will be facing well entrenched competitors as it fights for share in many markets like Korea, (where Cyworld is dominant). 
  • Other risks related to Zynga’s dependence on Facebook. Facebook’s recent introduction of Facebook Credits, with its 30% fee on the purchase of virtual goods made with FB Credits, is an example that what is good for Facebook may not always being good for social gaming companies.  With reported market share of 60%-70% of transactions in early trials, Facebook Credits will likely have a significant negative impact on Zynga’s margins.  The recent elimination of notifications, as discussed above, was in part driven by Facebook’s desire to have the gaming companies increase their marketing spend, as opposed to getting FB marketing for free.  While Zynga has launched on other platforms (e.g. MySpace) and even its own websites (e.g., they remain highly dependent on FB for the vast majority of revenue, and thus remain susceptible to FB’s whims. 
  • Historically, the business of gaming has been similar to the business of movies: it’s a hit driven business. Costs go up as players demand more and more functionality, just as the costs of producing movies goes up as the audience demands bigger and better stories, stunts, and special effects.  Marketing costs also go up ad infinitum. Other than Pixar, no movie studio has shown a unique ability and thus a competitive advantage in creating movies.  Similarly, no video game maker has shown a unique ability to create gaming hits. 
  • A rapidly growing list of competitors. At least in console games, the cost of games, the limited shelf space, and the high cost of marketing has kept the number of game developers generally within reason.  With the average game on Facebook estimated to cost less than $300,000 to produce, and the rapid migration of flash games to the Facebook platform, the number of competitors is going to rise geometrically. EA is further turning up the heat on Zynga with the recent launch of games on Facebook.  Microsoft is going to get in to the fight as well, as evidenced by their recent attempt to acquire CrowdStar.   In a “hits” driven world, what are the odds that Zynga is going to have the next Farmville
  • Dependence on acquisitions. To date, Zynga has made numerous acquisitions to drive growth (e.g. YoVille, MyMiniLife, Serious Business).  This highlights Zynga’s historic inability to sustain growth through internal game development/talent acquisition, as well the risk that future acquisitions may prove expensive or hard to integrate.  
  • Gaming on social networks will get more niche oriented, splintering the market and decreasing Zynga’s ability to gain share through producing facsimiles. As new game developers increasingly develop games for niches (like baseball fans or cat lovers), the audience will become more splintered.  As Zynga can only replicate a small number of games in a month, the splintering of the audience into niches decreases Zynga’s ability to grow, or even maintain share, through replicating successful games. 
  • The market for Zynga shares is highly illiquid. Shares bought in the secondary private market are not very liquid and do not entitle the owner to the information usually provided by public companies to their investors.  That said, given Zynga’s likely appetite for acquisitions an IPO may be coming sooner rather than later.

About the authors:

Lou Kerner ( 310-710-2271

Before becoming an internet exec in 2000, Lou was an equity analyst covering media and internet stocks for Goldman Sachs and Merrill Lynch.  Lou’s started his internet career as CEO of The .tv Corporation, which licensed the top level domain .tv from the island nation of Tuvalu.  .tv was acquired by Verisign in 2001.  Subsequently, Lou acquired one of the early leaders in social networking, Bolt Media, which grew to over 20 million monthly uniques under his three years of leadership.   Lou currently runs a portfolio of parked domain names, is COO of Gamers Media, an ad network for casual gaming sites, and publishes research on   Lou has a BA in Economics from UCLA and an MBA from Stanford.

Eli Halliwell ( 212-361-9515

Eli started his career in sell-side equity research for Sanford Bernstein, covering big box retailers, before transitioning to founding, running and investing in consumer and internet companies.  Eli served as the President and CEO of Jurlique International (a global skincare brand), the General Manager of Bumble and Bumble (a division of Estee Lauder), and the Co-Founder/Chief Strategy Officer of iMotors (an online retailer of used cars that raised $142mm in equity and generated $100mm in revenue).  Currently, he is the Founder of VotaVox (, a direct democracy website, and he is researching and writing investment reports for his own investments as well as for publication on  Eli has a BA from Princeton University in Public and Int’l Affairs and an MBA from Stanford University.

Jay Gould ( 800-979-1262 Ext. 115

Jay has been a pioneer in social media for the last ten years, having founded and managed some of the world’s largest websites.  He created one of the first social networks in 2003, which was acquired by MatchNet Plc, and later built the first viral video website, which he sold to Bolt Media in 2005.  He became the President of Bolt Media and lead their growth to over 20 million monthly unique visitors.  Jay is currently the CEO of Gamers Media, an ad network for online casual gaming sites.  Jay has a BA in Law & Justice from Rowan University.

Buyer Beware: SharesPost Index Under Values LinkedIn By Billions

Earlier this month SharesPost announced SharesPost Index, the industry’s first value index for venture backed companies.  After watching their valuations over the last few weeks, I’m a little concerned.

In June 2009, TechCrunch wrote that SharesPost reported LinkedIn’s valuation at $1.4 billion, which was $400MM above LinkedIn’s July 2008 $1 billion valuation from their $53MM round they had raised from Bain Capital Ventures, Sequoia Capital, Greylock Partners and Bessemer Ventures.  Below is a video taken shortly after the $53MM round, interviewing the investors that participated in that round with their justifications for the $1 billion LinkedIn valuation.

What I find odd is that SharesPost pegs a current valuation of LinkedIn at practically the same valuation that they had nearly 10 months ago.  In the same June 2009 report by SharesPost, they put a valuation of $4-6 billion on Facebook, and today, SharesPost reports Facebook’s valuation at $11.96 billion.  At least they agree that Facebook has created shareholder value in the last 24 months, that’s hard to dispute.

To be fair, SharesPost’s valuations are weighted and based on four inputs, which are transactions, research, financing and post inputs on their exchange.  But that’s the premise of this post, I’m not certain their weighted system is working properly for determining accurate valuations to potential buyers on their secondary market exchange.  Their website explains the weighting system as:

The SharesPost Venture-Backed Private Company Index is a modified market capitalization weighted index—the maximum percentage value of the index any company represents is 25%. The index value inputs for each company are an average of the four data inputs broken out above. Where data is unavailable or out of date (i.e., more than 120 days old), that input is omitted from the calculation and only the remaining inputs are used. So for example, where a company has not recently closed a venture financing, only the recent transactions, current posts and research report estimates are used as inputs into the SharesPost Index Value formula. SharesPost updates the Index Values on a weekly basis.

Their research valuation for Facebook is only $5.7 billion, whereas we recently reported a $50 billion valuation on Facebook.  I’m not quite sure how they determined their $5.7 billion valuation on Facebook when recent private transactions have been above $17 billion.

According to SharesPost, they do not use data that is over 120 days old (which is why the transactions and/or financing input is missing for several companies on their Index.).  The “post input” appears to be based on the recent posts on their secondary exchange, which is clearly not indicative of the overall market, although it seems close.

While in theory a Secondary Market Index seems like a great idea to help buyers on the secondary market understand what they’re buying, but providing incomplete and insufficient data when determining valuations is unprofessional at best, and potentially very dangerous to these potential buyers on their exchange.

SharesPost does list a disclaimer on their website about the valuations within their Index (see below), but I would think that they would want to ensure the most accurate valuations to help create investor confidence in their services.

The SharesPost Venture-Backed Index and the individual Index Values are only a reference point and should neither be construed or relied upon as an estimate of valuation of any company or group of companies nor as investment advice.

That said, we disagree with the SharesPost LinkedIn valuation and will be publishing a full report and valuation on LinkedIn very soon.  But I think its safe to say that LinkedIn has created shareholder value since their $1 billion round in 2008, in fact the SharesPost valuation is off by billions of dollars… if they’ve undervalued a company by billions, could they overvalue companies by billions in the future?  Buyer beware.

Facebook $50 Billion Valuation


Current trading price in private market: $38      Target price:     $100


  • Facebook is the most powerful website the world has known : With over 400 million reported users spending an average of 55 minutes per day on its site, Facebook is the most ubiquitous and transformative media company on the planet poised to create tremendous shareholder value as it begins to monetize its vast audience. Facebook already has ¾ the reach of Google and three times the average time spend per user, yielding Facebook double Google’s aggregate global time spent; and Facebook is on a dramatically steeper growth curve, growing its reach by 150%+ in 2009 vs. 40% growth for Google.
  • Facebook already drives more traffic to the leading portals than Google: While Google has long been the major driver of traffic to the majority of websites in the world, “friendcasting” on Facebook (when a friend uploads a link to content and someone clicks on it) is already a larger driver of traffic to sites like Yahoo and MSN than Google, according to If Facebook successfully leverages its new relationship with Microsoft’s Bing, implements more social search tools, grows its fan pages, and enables the continued natural growth of “friendcasting”, Facebook should surpass Google as the largest driver of traffic globally later this year.
  • Facebook is tracking to be a $100B company: Google has demonstrated how to monetize the time and data users give to the site daily. Facebook’s potential to monetize both time spent and data shared may be even greater than Google as it generates more time and significantly greater data on its users. Facebook also benefits from a network effect that doesn’t exist at Google. Each incremental user adds geometric value to the network. As Facebook achieves its goal of building the dominant global networked communications platform, it will begin to leverage its reach and earn its share of global advertising, ecommerce and payment revenues, possibly rivaling Google’s earnings potential. We estimate that Facebook will be worth more than $100 billion by 2015 using the same multiples on Facebook’s forecast 2015 EBITDA as Google is valued at today. More aggressive (but still reasonable) multiples and growth rates would yield values rivaling Google’s market cap of $140+ billion, ex cash.
  • Facebook is worth $50B today: If Facebook is worth $100 billion in 2015, discounting that valuation back to today with a 15% discount rate, gives the company a current value of ~$50 billion. Regardless of the discount rate you use, Facebook offers a very compelling investment opportunity at current prices.
  • Facebook is privately traded at 60%+ discount to its current value: Most investors don’t know you can buy Facebook shares today, pre-IPO. While the market for Facebook shares is not robust, there were millions of shares traded last year through private marketplace websites like Second, and others. Only accredited investors are allowed to participate. Currently, ask prices are about $38/share, implying a market cap for Facebook of ~$19 billion. Relative to the $50 billion fair market value we see in the company, this represents a 60%+ liquidity discount.
  • Facebook only has to earn $7 per user in EBITDA to justify our valuation: Dividing our $50B target by Google’s current trading multiple of 18X EBITDA implies that Facebook currently has earnings power of $2.8B in EBITDA. Dividing the $2.8B by the current base of 400 million users implies $7 of EBITDA per Facebook user. Facebook will have far more than 400 million users in 2015, so this is a conservative estimate. Even at $7/user, our projection is that Facebook would earn significantly less per user than other major internet companies. Amazon earns $15/user; Google earns $20/user; and eBay earns $34/user. While each of these companies operates with different business models, they all rely on aggregating huge volumes of users to create value for their investors. Facebook will earn ad revenue like Google, commissions on transactions like Amazon and eBay, and fees on payment processing like eBay. In presenting this metric we are demonstrating that even if Facebook’s earnings power is significantly less per user than other major internet players, it would still command a $100B market cap.

Quick Facts (according to Facebook , and

  • #2 website globally in total page views behind Google; should pass Google in first half of 2010.
  • At 30%, Facebook has the same global reach that Google had 1 year ago.
  • Both Google and Facebook should have global reach of ~50% by end of 2010.
  • 2 years ago Facebook’s global reach was just 6%.
  • Internet users spend 3x as much time on a Facebook page as they spend on a Google page.
  • Over 700mm pieces of content are uploaded on Facebook daily (eg. 100mm photos daily).
  • Average user spends 55 minutes/day (~23% of total time online) on Facebook, 50% of users log on daily.
  • 67% of US online users are on Facebook.
  • ~70% of Facebook users live outside the US.
  • Among top 36 countries: Facebook’s page view rank is #1 in 4 countries; #2 in 23 countries; #3 in 9 countries.
  • Facebook just received approval for patenting its news feed, the core functionality of its website.

Investment Thesis:

Facebook is already the world’s dominant website

  • However you measure it, Facebook’s global scale and growth are astounding. Of its reported 400+ million users, ~120 million are in the US. That’s 120 million out of ~180 million US internet users (according to Commscore); indicating that about two-thirds of all US internet users are now on Facebook. Facebook says the average user is on Facebook 55 minutes per day, out of a total average of four hours per day of total internet usage by the average US internet user. Those statistics are consistent with recent research based on statistics indicating that Facebook now accounts for 25% of total US internet page views and 15% of page views in the UK. As a result of its dramatic surge in uniques and page views, Facebook is now directing more traffic to major portals like Yahoo and MSN than Google through “friendcasting” – the name given to the process of clicking on a link your friends post in their Facebook newsfeed. In this report we want to discuss two implications of Facebook’s dramatic growth.

Facebook has blown by MySpace in social networking and is poised to pass Google in 2010 in directed traffic

  • The world of television presented us with about 10 channels in the 70’s, which grew to 500 channels as digital proliferated in the late 90’s. The internet now brings us hundreds of millions of channels (i.e. websites, Facebook profile pages, blogs, etc.), which we have only been able to navigate with search. Yahoo dominated search in the early days, but they were passed by Google when Google came up with a better algorithm presented in a simpler design. Because they are the dominant search engine, Google emerged in the early part of the last decade as the dominant source of traffic for most sites.
  • MySpace was the early dominant “social network”, but the users weren’t really networked. We had to surf MySpace or hope someone came to our MySpace page to get any real value, and significant technical improvements were glacial.
  • Facebook’s improvements were simple but monumental. They used basic newsfeed technology to enable us to know what our friends are doing, thinking, buying, playing, or posting, simply by going to our own newsfeed. They also opened up their platform to third party developers, who quickly provided the Facebook community with a wide array of incredibly popular applications like Farmville, which has over 80 million players. In fact, Facebook states that there are more then 250 applications that have more then 1 million active users. While many of us used to go to Google to find the latest news, or would surf major or minor news sites to see what was going on in our world, our news and information is increasingly brought to us by friends who post news of interest to them or about them, which appears in our newsfeed. Friendcasting on Facebook will be complimented by Facebook’s increasingly deep integration of Bing’s search tools on Facebook, as well as by other social search applications on Facebook that let us mine the behavior and opinions of our friends. We believe Facebook will pass Google in terms of traffic generation to other websites in 2010.
  • Because we tell Facebook so much about ourselves, and because we spend so much time on Facebook, Facebook knows dramatically more about us than any other website in history, and Facebook’s willingness to share this data makes them an incredibly attractive partner to websites who like user data (which is almost every website). The question now is: how will Facebook leverage its powerful position to generate revenue and profits for their shareholders?

Facebook will be worth over $100 billion

  • Facebook will generate revenue from advertising, both display ads and through increasingly integrated search tools. Microsoft’s Bing, as the search provider on Facebook worldwide, compliments Facebook’s powerful “friendcasting”. Rather than merely offering links, the Bing integration will present more of the features available on the search engine itself. For display advertising, Facebook will increasingly be presenting ad formats that feature social actions. Social integrated ads perform better and provide a better user experience since they are consistent with the context and feel of Facebook. Facebook ads will also be increasingly targeted to people based on the information they provide Facebook. This combination of targeting and social relevance will drive enhanced performance and rates for Facebook display ads.
  • Global internet advertising is poised to grow to $96 billion in 2015 (according to Magna), a 10.5% five year CAGR. Traditionally in media, companies with scale are able to grab outsize share of ad spend. Therefore, as Facebook has the most global scale, its safe to assume that Facebook will attract its fair share of the market. While Facebook is still growing rapidly, we assume in our valuation thesis that they account for only 15% of total internet traffic in 2015. According to Drake Direct, based on data, Facebook is already at 15% in the UK, and they are at ~25% in the US. We believe 15% is a conservative view of Facebook’s page view and time spend share in 2015, given its current trajectory. We estimate that Facebook’s 15% share of the global internet audience yields them a 15% share of the global internet advertising market, yielding a forecast of $14.5 billion in advertising revenue in 2015. Today this may seem like an aggressive assumption based on the fact that Facebook currently does not command a comparable CPM to many other websites for their display ads. But Facebook has just really begun to monetize their traffic and weave in targeting and social relevance, and they haven’t even begun monetizing social search. Where Google offers advertisers strong targeting for purchase intent, Facebook is the holy grail of targeted brand advertising, and is posed to make significant headway in search.
  • Facebook Connect is another powerful platform for Facebook to leverage and eventually monetize its user data. Facebook Connect is quickly becoming a de facto registration platform on the net. Currently, over 80,000 sites have already implemented Facebook Connect, including many large sites like CNN. Facebook Connect is emerging as the internet “passport” that enables people to enter any website, as well as interact with their friends who are also on that website. This will likely become another significant revenue platform, as Facebook could potentially harness Facebook Connect to create a leading ad network, leveraging their deep relationships with advertisers and their mountains of user data. For purposes of this analysis, we’ll assume they derive zero revenue from Facebook Connect in 2015. Therefore, in our analysis, investors are getting a free call on this massive business opportunity.
  • Next up, and just as interesting, is Facebook’s recently introduced payment system. Initial testing on Facebook indicates Facebook consumers prefer Facebook’s system to the other payment systems available on Facebook. Facebook is charging a whopping 30% fee to the publishers selling virtual goods (similar to Apple’s 30% take on applications sold on its iPhone platform). The system includes many other benefits for publishers (e.g. preferred placement in the gaming directory, better advertising rates) that only Facebook can provide. Analysts estimate that Facebook’s payment system will grab more then 50% share of payments on Facebook and generate $200 million this year based on projected sales well north of $1 billion in virtual goods in 2010. But payments on Facebook will be just the beginning for the payment system. Facebook Payments is well positioned to take meaningful share from PayPal all over the internet as users will increasingly be using Facebook Connect on ecommerce sites around the net. Paypal is expected to generate $3.3 billion in revenue on a base of 88mm active accounts in 2010. We believe Facebook Payments could grow to a $2 billion dollar business by 2015.
  • Given the simple analysis above, we project Facebook will drive $16.5 billion in revenue in 2015. While this is a big number, it is just over 1/3 of what Google would be projected to generate in 2015 if Google grew revenue at a 12% CAGR (about ½ it’s recent revenue CAGR of 20%). For ease, we assume Facebook achieves the same 35% EBITDA margin as Google is currently experiencing. Let’s similarly assume that Facebook, as a public company, would be valued using the same EBITDA multiple as Google is valued at today, which is 18X 2009 EBITDA. The math above implies a value of $103 billion based on 2015 projections.

Facebook is worth $50 billion today

  • If we discount $103 billion back by 15% per year, we get a price target of $51 billion today. This implies a value that is more than two-and-a-half times the $19 billion value Facebook shares are currently trading at on secondary private marketplaces. The table below looks at how our valuation would vary depending on various multiples and discount rates. Even at a 21% discount rate, Facebook would be worth more than 2x the current share price.

  • Another way to value Facebook helps put our target in to perspective. Based on current membership levels, we are valuing Facebook at $125 a member. If Facebook were valued on an 18X multiple of EBITDA today, that implies that Facebook has the power to generate $7 in EBITDA on average off its members, or $20 on average per member in revenue (assuming 35% margins). Neither number appears a stretch. Amazon earns $15/user in EBITDA, Google currently earns $20/user, and EBAY earns $34/user. We recognize these companies all have different business models, but we think it is helpful to put some context around our $7 EBITDA per Facebook user projection.
  • Is a 15% discount rate too low given that we’ve seen other social networks appear and then fade, most recently MySpace? We’ve seen other internet leaders founder – is Facebook like Yahoo? Is it possible Facebook is just a fad, as some argue? Our thesis is that Facebook is already deeply ingrained in our daily lives, and this is just the beginning. There are many reasons why the switching costs are significant, and Facebook keeps adding new ones – most recently Facebook was granted a patent on “the feed”, a core feature of Facebook’s functionality. Facebook is averaging over 100 million photos uploaded per day. People don’t like to leave those behind. With an average of 130 friends per user, almost everyone has many connections that only exist on Facebook. The average person is a member of 13 groups. As we increasingly move to mobile, we are bringing Facebook with us. The Facebook iPhone app has been downloaded by over 28 million people. In addition, every wireless operator is advertising the availability of Facebook apps on their phones.
  • Maybe our estimates are too conservative? 15% share of online ad revenue and 35% operating margins could prove too low. The data table below shows that each 1 percentage point of share of the online ad market for Facebook is worth $3 billion present value at a 35% margin. With 30% reach of global internet usage today, it is conceivable that Facebook ad share could be well over 15%.

Facebook shares are available for accredited investors to buy and sell, and the current value is $19 billion

  • There is a secondary private market for Facebook shares on sites like and that make markets in shares of dozens of private firms, enabling employees to monetize some of their options.
  • After proving you’re an accredited investor, the transaction is papered, with the seller paying transaction costs.
  • While Facebook enables employees to sell their shares, the buyers of these common shares are prohibited from subsequently trading their shares until Facebook goes public or is acquired.
  • Right now, shares are being offered at $36-$38 per share, implying a market cap of $19 billion.


  • With only $600 million in rumored revenue in 2009, Facebook has done little to monetize its vast reach. As Facebook revenue generating initiatives start to scale, private market values should increase.
  • When the company goes public, the liquidity discount will evaporate and prices will rise to fair value.


  • Shares bought in the secondary private market are not liquid and do not entitle the owner to the information usually provided by public companies to their investors.
  • Another competitor could arise and take market share from Facebook. In fact, to the degree that Facebook attracts 15%+ of all internet time, every other website on average is generating 15% less traffic. So it’s easy to imagine other sites working together to try and thwart Facebook. But like Google, other websites will increasingly see Facebook as a “frenemy”, a strong competitor for the mindshare of internet users but also a driver of massive traffic.
  • Facebook either may not be capable of or may not be concerned with generating massive revenue or going public. This is unlikely since history has shown that once eyeballs are assembled, advertising and other monetization opportunities present themselves. Some people thought no one would advertise on MySpace, and they were proven wrong. And Facebook is far more advertising friendly than MySpace as pages are much less free form. While a few companies (most notably CraigsList) appear uninterested in maximizing revenue, Facebook’s significant VC investors will help drive both monetization and an eventual liquidity event. In addition, like Google, Facebook will need to generate cash to help finance its increasing spend on R&D to drive innovation.
  • Privacy remains a significant concern of internet users globally, and with all the data Facebook aggregates and make available, they are walking a fine line. Facebook has clearly had some missteps in the past, most notably its Beacon information sharing product in 2007 that caused an outcry from privacy groups. They have also had technical glitches, one as recent as last week where messages were misrouted. As a result of these lapses, Facebook is acutely aware of the privacy issue and they appear to be thoughtful in their approach. Google also struggles with privacy, as evidenced by their recent bungling of the introduction of Google Buzz.
  • Given Facebook’s increasing stranglehold on internet usage, governments in the U.S. and elsewhere could step in and, in some way, break up the near natural monopoly on social networking that Facebook will have. Google is already starting to face serious antitrust issues in Europe.

Second Shares

We launched Second Shares to cover the secondary markets for internet businesses like Facebook, Zynga, Twitter, LinkedIn and more.  We will conduct video interviews with founders, employees, investors and relevant industry insiders.  We’ll publish research analysis of these companies our valuations compared to their current trading valuations.

Second Shares will cover the entire secondary market ecosystem for internet companies, including companies that are not currently trading within the secondary market, but drive the growth of the companies that are trading in the secondary market.