One of our knowlegable readers commented in our post about ad agency Interpublic taking a 0.5 percent stake in Facebook, in return for spending $10 million in advertising. “Mike James” breaks it down very well, and it is worth reposting in full:
“This is an interesting deal. It seems that Facebook is actually giving Interpublic an equity stake in exchange for generating advertising revenue for the company. ‘If you can help us generate $10 million in ad revenue we’ll give you 0.5% of our company.’ Seems to indicate to me a bit of desperation on the part of Facebook. If you have a compelling offering, it would be expected that advertisers are willing to pay to advertise without receiving an ownership stake in the business. You don’t see other media companies (including online and social networking services) giving ad firms a stake in their business if they advertise with them. Based on this I infer that:
a) Facebook is not profitable (not surprising when you consider they reportedly have 100+ full-time employees and have taken on $25+ million in equity financing). They are looking to find a viable advertising model that could help them become profitable and are willing to go to great lengths to do this.
b) Facebook is cleverly trying to create the impression that it’s really worth $2 billion. It’s no coincidence that the $10 million for .5% equates to the valuation they’ve been seeking from a buyer. Of course, this is a nice sleight of hand because they’re giving up equity in exchange for something that a ‘normal’ business wouldn’t have to. ‘Get us $10 million in advertising and we’ll throw in a small piece of the business.’ This is a very small spend for a group like Interpublic so there’s little downside for them. I doubt you’d see any institutional investor or VC buy in at this valuation. So hats off for them trying to continue this crazy $2 billion quest with some creative dealing that may fool some people.”
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