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Summary:

Goldman Sachs is reportedly investing $450 million in Facebook, giving the social networking company a theoretical market valuation of $50 billion and positioning it for what seems like an inevitable IPO. That may be good for Facebook and Goldman, but will it be good for investors?

It’s been over a decade since Time Warner and America Online merged in a $180-billion deal, marking the peak of the Internet bubble and the beginning of a long drought for technology stocks — a drought that has arguably been broken only by Apple and Google. Now Facebook seems to be taking the lead in the next wave of tech-stock enthusiasm, with Goldman Sachs reportedly investing $450 million in the social network, giving the company a theoretical market valuation of $50 billion and positioning it for what seems like an inevitable IPO. That may be good for Facebook and Goldman, but will it be good for investors?

Although it’s leading the charge, Facebook isn’t the only company fueling interest in tech stocks that have yet to go public; Zynga has been pouring gasoline on that fire as well, with investments from Mail.ru, formerly known as Digital Sky Technologies (also an investor in Facebook, including the latest round with Goldman) and others. Groupon is also a player in this growing frenzy, raising money privately after turning down a reported $6-billion acquisition offer from Google. And Twitter is another star of the private-investment market, with funds being set up specifically to invest in shares of it and other tech startups via the secondary market for its privately held shares.

All these deals reinforce that the current tech-investing bubble — if there is one — is different from the one that popped so spectacularly in the late 1990s, because the current version exists (for the moment, at least) in the private sector. Apart from Google and a couple of other companies, most of the activity is occurring in secondary markets such as SecondMarket.com, or through private investment funds and financing rounds such as the one Twitter recently closed, which valued the company at almost $4 billion. There have been no moon-shot public IPOs that flamed out within days or weeks, no Pets.com or similar issues to raise warning flags.

In other words, the only ones who would arguably suffer from a tech-bubble popping are the so-called “sophisticated investors” who take part in secondary-market trades — the kind who will be invited to join the special vehicle that Goldman Sachs is setting up to invest in Facebook, a vehicle it says will be restricted to high net-worth individuals and could raise as much as $1.5 billion. If nothing else, the Facebook deal is likely to increase the SEC’s interest in looking at the behavior of such private investment vehicles.

While the action for Facebook and others is focused in private and secondary markets right now, however, Goldman’s involvement virtually guarantees that this will soon spill out into the public markets — if not this year, then in 2012, when Facebook is expected to do an IPO. Will Facebook be the new star of the technology sector, as Google has been for the past half a decade or so, or will it become a symbol of how over-inflated expectations have become for social networking? The company has annual revenues that are estimated to be in the $2-billion range, but $50 billion is still a hefty valuation to try to live up to — and going public is only going to increase that pressure.

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Post and thumbnail photo courtesy of Flickr user Photo Clinique

  1. Beginning of the end for Facebook. Hype repercussions will end up making it the new pets.com

    fido net < sixdegrees < friendster < myspace < facebook

    Reference

    http://en.wikipedia.org/wiki/Pets.com

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  2. [...] but regardless of its rationale for further infrastructure investment, the time to do so is now. If Facebook does indeed go public, it will likely find that analysts and shareholders aren’t too keen on major capital [...]

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  3. And for your enjoyment…Great Press Release by Jason Fried…

    37Signal Valuation Tops $100B After Bold VC Investment – http://bit.ly/fCVcUj

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    1. That is a good one :-)

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  4. Joel McCorkle Monday, January 3, 2011

    This is bad for Industry.25X times valuation of current revenue.. this is crazy..
    Facebook is killing a lot of startups…

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  5. thegeniusfiles Monday, January 3, 2011

    Very bad sign of the direction in which Facebook is heading. Goldman was at the epicenter of the global financial meltdown that castrated the vestigial remnants of US democracy. Now they turn their attention to the technology sector. Time to find an open source replacement for Facebook.

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    1. An ‘open source’ replacement sounds good. Its getting harder and harder to feel good about being associated with Facebook.

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  6. [...] Are Facebook and Goldman Sachs Reinflating the Bubble? It’s been over a decade since Time Warner and America Online merged in a $180-billion deal, marking the peak of the Internet bubble and the beginning of a long drought for technology stocks — a drought that has arguably been broken only by Apple and Google. Now Facebook seems to be taking the lead in the next wave of tech-stock enthusiasm, with Goldman Sachs reportedly investing $450 million in the social network, giving the company a theoretical market valuation of $50 billion and positioning it for what seems like an inevitable IPO. That may be good for Facebook and Goldman, but will it be good for investors? Gigaom [...]

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  7. [...] was the top-visited site in 2010; http://eicker.at/1y Goldman invests $500M, values them at $50B; [...]

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  8. hey thanks for the insight. I read your comments and others’ about Facebook. I have become less optimistic about Goldman’s backing of Facebook. I’ve also started blogging about what I learn in finance. You seem an insightful source of commentary, and I will def pay more attention to your thoughts in the future.

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  9. With so many investors having their own ideas about the future of the company how can they be able to continue with the successful implementation of their visions?

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  10. [...] There’s and endless stream of news and analysis of Facebook’s recent dealings with Goldman Sachs resulting in a $50bn valuation.  While a lot of chatter is focussed around an IPO there is less about whether Facebook is a bubble. [...]

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