Facebook Looking for a Bailout from Sovereign Wealth Funds?
Facebook has raised over $500 million in funding over the past two years and it has been obvious that Mark Zuckerberg and friends have been spending it about as fast as Russian oligarchs have been spending their money on exotic cars, houses, yachts, jets and sports teams.
But according to TechCrunch’s Michael Arrington, Facebook is spending so much money so fast that it may need to raise more soon.
Michael Arrington throws out some estimates for Facebook’s expenses:
- $1 million per month on electricity.
- $10 million per month on payroll.
- $500,000 per month on bandwidth.
- $30 million this year on NetApp storage devices.
- $15 million this year on office and datacenter rent.
Throw in another $100 million for planned server expenditures and it doesn’t take a former Enron accountant to see that Facebook has a real problem - it’s spending more than it could possibly be taking in.
The amount of revenue it generates given its popularity is not exactly impressive. eMarketer estimates revenue of $265 million in 2008 and Arrington states that “2008 revenues are likely $100 million less than the company anticipated a year ago.”
Throw in the fact that its greatest growth in usage comes from countries whose users are not ripe for monetization and it’s clear that Facebook has some real problems.
Arrington believes that “a big chunk, probably a majority, of the roughly $500 million the company has raised is already gone.” And he states that VCs and other institutional investors in the United States aren’t interested in giving Facebook more money on the terms it expects.
So what’s a company in need of a bailout to do?
According to Arrington, Facebook CFO Gideon Yu took a trip to Dubai this past week looking to see if investors in the Gulf would be interested in providing capital.
Sovereign wealth funds have, of course, built a reputation as investors of last resort for major banks in need of assistance. Prior, of course, to the meltdown in the global finance system.
Due to the global financial crisis and their investments in banks whose conditions have only become worse, sovereign wealth funds are exercising a bit more conservatism.
Korea Investment Corp., for instance, which purchased a 5% stake in Merrill Lynch for $2 billion in January 2008, walked away from a deal with Lehman Brothers without even looking at Lehman’s books. It knew what was there.
The West, once opposed to massive foreign investment in its most prominent of companies, is increasingly encouraging investment from sovereign wealth funds in the Middle East, which have over $1.5 trillion under management. But with oil prices down over 50% from their peak, sovereign wealth funds are naturally being a bit cautious.
And as Reuters has pointed out, sovereign wealth funds in the GCC have good reason not to play savior:
Yet, rich as they are, analysts say Gulf Arab SWFs do not have unlimited income to continually come to the rescue and may only part with money if they see a benefit for their countries.
Their cash is tied up in stocks, bonds or elsewhere and cannot be easily reallocated, analysts say. The less ready cash they have, the harder Gulf states will think about investments.
“Some of these Gulf sovereign wealth funds are estimated to have over half their portfolios invested in equities which have lost 30 percent or more… so naturally they are reluctant,” said Eckart Woertz, economist at Gulf Research Center.
Reuters quotes Mohammed al-Hashimi of Dubai’s Zaabeel Investments as stating:
I think some people need to have a reality check and shouldn’t get confused. We don’t overpay for assets.
With this as the backdrop, the question becomes - why exactly would a sovereign wealth fund want to pay a premium for a stake in Facebook?
The company is already burning through hundreds of millions of dollars like a forest fire to fund its bloat, hasn’t been able to come up with a monetization strategy that works after 4 years, is significantly overvalued and won’t likely be able to access the public markets for liquidity for the foreseeable future.
Every day, Facebook starts to look more and more like Webvan.
I, ironically, wrote about this in a post on September 13, 2006 on the now defunct Dead 2.0. That post was entitled “Is Facebook the new Webvan?” and I repost part of it here for posterity:
I don’t know what Facebook’s revenue numbers are, but it appears that they have overhired and spent money like there’s no tomorrow. I guess $35+ million in VC money gives you an incentive to go on a shopping spree. As a comparison, MySpace reportedly has 300 employees. Employee/user ratio: 1:333,333. As of May 25, Bebo reportedly had 10 employees. Let’s assume that they now have 20. Employee/user ratio: 1:1.25 million. Xuqa (who?), which yesterday announced “daily profitability”, reportedly has 5 employees and 1 million users. Employee/user ratio: 1:200,000. With 140 employees (according to a recent Craigslist ad) and 9.5 million users, Facebook’s employee/user ratio is 1:68,000. Of course, a better measure would be revenues per employee, but this will have to suffice and it looks like Facebook is out of line with the other players, especially when you consider that MySpace and Bebo have a much larger number of users and significantly more features. Facebook offers all their employees:
- Medical, dental and vision plans with no premium for employees
- 401(k) plan
- 21 vacation days per year, plus 8 company holidays and 2 floating holidays
- Complimentary catered breakfast, lunch and dinner daily
- Complimentary beverages and snacks
- Dry cleaning and laundry service onsite
- Free downtown parking permit
- Subsidized gym membership
- Catered Friday Happy Hours at the office
- $600/month housing subsidy if you live within one mile of the office
- Standard-issue 24″ LCD monitors and your option of 15″ Apple MacBook or IBM ThinkPad
Not cheap and certainly not conservative. Unless they’re massively profitable (which I doubt), this looks like a company that is truly partying like it’s 1999 (have any job openings for bloggers?). Mark Zuckerberg was in the right place at the right time and did an incredible job of taking advantage of the opportunity and building Facebook into what it is today, but it appears to me that, as a business, it is being very poorly run. Given recent events and the risk of another major backlash with this new announcement, could Facebook be on the brink of becoming the first Web 2.0 darling to fall from grace? Is Facebook the new Webvan? While it’s not an apples to apples comparison, Webvan burned through $1.2 billion of investor money due to lack of cost control, was never profitable but at one point had a ridiculous market capitalization of $7.5 billion and eventually fell victim to competition and market forces. Facebook is facing the same problems: overspending, a bloated valuation and fierce competition.
A little over two years later, it appears the chickens might finally be coming home to roost. Of course, it’s quite baffling to me that Facebook’s most recent investors didn’t see the writing on the wall.
Be that as it may, I’d be very surprised if Gideon Yu comes back from Dubai with a wad of oil money. Facebook will likely learn that as you make your bed, so you must lie in it.
Not to mention that arabs are a bit reluctant to loan money to names ending with ‘berg’ these days.
Those costs seem high. Is some hosting company (or PG&E) getting rich off of them? bandwidth I can see, but storage and electricity seem awfully high (although that electric bill is tied directly in with running those servers I suppose, if they’re housing them themselves..?)
Charles: that’s probably why Gideon Yu went.
That said, don’t be fooled: there’s only one God and his name is Benjamin Franklin.
Antje: there is definitely some ambiguity with the numbers but I feel comfortable saying that if Facebook sent a C-level executive to Dubai to look for cash, things cannot be good.
There’s been a lot of funny money thrown around over the years but most of the sovereign wealth funds are run by smart people who use their enviable positions to negotiate favorable terms.
Thus, it strikes me as a bit odd that Facebook is in the Mideast looking for a “better deal” than it can get in the States.
I think it’s quite amusing how Arrington had a bit of tantram last month over this:
http://www.techcrunch.com/2008/10/12/the-prickly-prince-strikes-again/
…and you post articles abusing him just about every day =P … I’m surprised Microsoft hasn’t tried to acquire you in their personal attack strategy on TechCrunch =P
FB can actually survive- if they have at least 200M in revenue, they can cut costs. The true operational cost of running the site of this type and size is about $10m / month for the both infrastructure and salaries.
I think as long as they are making at least $150M/yr they would be OK if their popularity stays high.
The difficulty I think may be in sustainability: I think FB is still in the pyramidal expansion stage, when the main driver for usage is accumulation of friends. Once that pyramid has burnt through the whole population, I am not sure if the dynamics would be any different from the TV shows- popular for a few seasons, and then abandoned. As I mentioned before, TV producers are smarter than this: they do not incorporate a company with a dedicated stuff around one particular TV show that may just run for a few seasons.
Sutro: while I agree that a lot of costs can be cut (headcount could probably be reduced by at least 75%), I do believe the servers and infrastructure are a real bitch and I don’t think Facebook is in a position to cut costs very much in this area while maintaining a reliable service that is growing usage much faster than it is growing revenue.
As for revenue, it’s worth keeping in mind the following:
I suppose the real problem is that companies like Facebook reach a point where they don’t have anywhere to go. Investors have “dressed” them for “jobs” that they’re not in the running for.
Speaking from experience, the server costs are exagerrated- they probably have either very uncreative programmers, or orally fixated salivating sysadmins, that like good hardware a bit too much.
A site like this should be able to run 1m users on 5 servers, that cost about $2000/each (front end servers may even cost less, like $1500; DB servers cost more, perhaps $2700, and this is a bulk price). Clever sharding of users allows to scale the ration of users to the number of servers almost linearly. So if they have even 100m users, they should be able to handle it with 500 servers, or $10m. Assume it’s $50m.
The fixed MSFT revenue component has been quoted in this comment: http://www.techcrunch.com/2008/10/31/facebooks-growing-problem/#comment-2520213
I think this person knows what she is talking about. So I still stand by my statement that if they cut everything by 80%, they can still grow and operate. But that’s a big IF of course.
PS. sorry for my spelling “exagerrated etc”- I type fast, and I am not a native speaker
Sutro: I’d be interested in learning how you come to the conclusion that Facebook “should be able to run 1m users on 5 servers.”
If you’re talking about 1 million *concurrent* users (the figure that reallly matters), I think you’re off by orders of magnitude.
Consider this: when it comes to photo hosting (which is not even the most resource-intensive part of Facebook’s service in terms of processing power), Facebook hosts over 10 billion photos that require over a petabyte of storage. It adds 2-3TB of photos each day and serves over 300,000 photos per second.
I certainly wouldn’t be surprised to learn that Facebook’s architecture has some significant inefficiencies but realistically, an application like theirs that’s used by millions of people daily is not going to be 100% efficient. It’s just not realistic.
Earlier this year, GigaOm cited reports that Facebook was running 10,000 web servers. When it entered into a $100 million deal with TriplePoint Capital, BusinessWeek reported that it may be purchasing up to 50,000 more.
The bottom line is that Facebook is not getting by with 500 servers. If you think you can get them down that number, you’re talking to the wrong person.
You should be in touch with Facebook HR, although I certainly wouldn’t be too excited about the stock options.
For what it’s worth, Facebook is already using horizontal partitioning, along with the rest of the kitchen sink:
http://venublog.com/2008/04/17/notes-from-social-graph-and-the-database/
As for “Arianna’s” comment, she doesn’t know what the fuck she’s talking about. She’s pulling the revenue breakdown for MySpace out of thin air. She then goes on to assume that since Facebook’s US metrics are approximately half of MySpace’s, we can just cut in half her estimates for MySpace revenues to arrive at Facebook’s revenues. Uninformed estimates on top of uninformed estimates.
Facebook isn’t in a position to cut 80% of its expenses. At this stage of the game, that’s kind of like saying that if Henry Paulson could get rid of 80% of bad mortgage debt by next week, the global economy would start to perk up. Nice idea, not going to happen.
>Sutro: I’d be interested in learning how you come to the conclusion that Facebook “should be able to run 1m users on 5 servers.”
Empirically
I mean 5 servers for 1m signups (account creations). Assuming the site we run has similar attrition rates as FB (and it does), it’s the empirical number that you can get, if you highly optimize. We started from 1 webserver per 100,000 signups, and were forced tp optimize to this level, since we had no money. To be honest, I do not know about TBytes of photo storage: we thought we could not afford to store more than a couple downsized pictures per user from the start.
I can tell you more about the technical details if you are interested. Not really interested in talking to their HR person, since we have our own site to work with.
Regarding that comment with advertizing numbers, what she says makes a lot of sense to me, like the ecpms she quoted- home (or portal) pages versus profiles- I have some similar data here.
PS. Actually, we now have 1 webserver per 280000 signups, I just rechecked. I assumed they have 100m registered users, and I *think* they have no more than 4m concurrent users (i.e. users that have their page open at any given time, which might matter for their IM service for example).
Sutro: “registered users” is an almost meaningless metric beacuse it tells us nothing of concurrent usage and the type of requests that the web servers and database servers have to deal with. Comparing the resource usage of your application to another application is meaningless as well.
According to that link I provided (which was posted in April), Facebook was dealing with more than 50,000 database requests per second and they claim a 95% hit rate on their cache. That’s indicative of a lot of concurrent users (whether or not it’s above or below 4 million users is anyone’s guess).
Neither of us knows how many servers Facebook could cut down to but under various scenarios but even though I’m not a fan of the company, I’m sure they’ve hired some smart engineers and I doubt that they’ve missed an obvious means to scale effectively using 1/100th the number of servers and at a fraction of the cost they’ve already incurred.