Facebook founder and CEO Mark Zuckerberg’s reported pledge to donate $100 million in stock to Newark, N.J. schools has sparked a heated debate over the valuation of the company, which has been estimated at $33 billion based on private share transactions. Forbes magazine added fuel to the fire with its annual ranking of the world’s richest people, which puts Zuckerberg at number 35 with an estimated net worth of almost $7 billion, based on what Forbes says is Facebook’s overall value of $23 billion. Zuckerberg’s ranking puts him just ahead of Apple founder and CEO Steve Jobs.
So is Facebook really worth $23 billion, or $33 billion? The short answer is that it depends on what you mean by the term “worth.” David Heinemeier Hansson, co-founder of software developer 37signals, argues in a blog post that it’s absurd to say that the social network is worth that kind of money in any real sense, because it isn’t publicly traded the way that stocks such as Google are, so there’s no easy way to determine its actual value as a company. He also argues that the company’s worth is vastly inflated based on the revenue people estimate that it’s pulling in.
So the Facebook valuation based on minority investments is in my mind a complete joke in the sense that there was $33,000,000,000 dollars on the table. Irrational investor exuberance indeed.
In a heated response at Y Combinator’s Hacker News site, however, software entrepreneur Joel Spolsky takes issue with Hansson’s argument. There is a very active market for shares of Facebook, he notes, through services such as SecondMarket, which specialize in trading the restricted stock of private companies such as Facebook and Zynga (which is reportedly worth as much as $5 billion based on the activity in that market). So Facebook is worth $33 billion in the same sense that Google is worth $165 billion, Spolsky argues (there’s also a lot of back-and-forth in the YCombinator comments about the relative merits of Chicago — where 37signals is based — vs. Spolsky’s home of New York, but we’re leaving that part out).
The whole section “Minority investment evaluations aren’t real” is so economically bizarre and incorrect that I don’t even know where to start. It’s like you wrote a blog post arguing that it is incorrect to refer to a 5′ tall boy as 5′ tall because he’s often sitting down.
Hansson counters that the private market is not as liquid (meaning there isn’t as much activity as the public markets) or as transparent to outside observers. And what about the sale of stock to companies like Microsoft — which bought 2 percent of Facebook for $240 million in 2007 — or Russian venture fund Digital Sky Technologies, which also bought a stake last year? Elevation Partners invested $120 million in June, the deal that implied a valuation of $23 billion (just to complicate things further, Elevation bought its stake through private share trades on secondary markets). Hansson says these don’t count because they involve such a small portion of Facebook’s outstanding stock.
But Spolsky is right that this criticism doesn’t really apply; only a small amount of Google’s stock is freely tradable on public markets as well (since insiders control an estimated 30 percent and institutional holders have another large chunk locked up) and yet we’re quite comfortable saying that the web giant is “worth” $165 billion. Hansson is also on thin ice when he argues that bond markets are more transparent than the market for private stock: In fact, the bond market is still incredibly opaque to anyone but a registered bond trader. Until recently, current bond prices weren’t even posted and updated regularly the way stock prices are.
In reality, of course, every economist knows that things are only worth what people will pay for them, and since no one has actually paid $33 billion for Facebook, we shouldn’t really say that it is worth that much, or that Zuckerberg is worth $6.9 billion. But then, no one has paid $165 billion for Google either. The fact is that market valuations — whether private or public — are really just a convenient method of tracking what some people are currently willing to pay for a small chunk of the company. It may not be totally realistic (in fact, an acquirer would likely have to pay much more than just its $165-billion market cap in order to buy Google), but it is the way things are done, and by that rationale, Facebook has just as much claim to its “worth” as Google does.
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