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Facebook is a $100 Billion Tulip
December 11, 2011 - 8:00pm

This post is aimed at university chief investment officers. Please don't put endowment resources into the planned 2012 Facebook IPO. If Russian oligarchs or Wall Street fund managers want to place a Facebook bet, by all means go for it.

Higher ed has been living with Facebook from the beginning. The social network's roots are in higher ed, and not a day goes by when someone doesn't say, "Why can't (tool x - take your pick) be more like Facebook?" The value of Facebook is not theoretical to our higher ed community. We live with the platform and its gravitational pull every day. It is this daily experience with Facebook that has convinced me that the $100 billion Facebook potential valuation for the company, that the WSJ and others are reporting on for the planned IPO, is nuts.

Why is Facebook a One Company Bubble?

Assumptions: A $100 billion valuation is a statement about investor beliefs in future earnings. The existing revenues and profits do not support such a valuation. Almost all of Facebook's $4 billion in revenues, and $500 million in profits, come from advertising. A $100 billion valuation assumes that Facebook will: a) be able to substantially grow beyond its 750 million users, b) that advertisers will dramatically increase how much they will pay to reach these users, and c) that Facebook will diversify its revenues through new products and partnerships. All of these assumptions seem suspect to me, and if any one of the assumptions fails so does the huge valuation. 

History: We hear all the time that Facebook is different because it is a "platform." Whenever everyone starts saying the same thing I begin to get suspicious. We are told that Facebook will not suffer the fate of other social networks, such as MySpace, because it is platform that other applications (such as gaming) can be built upon. I wonder, however, what makes a private space like Facebook so different from other web sites that also tried to be all-encompassing ecosystems.  AOL was more than a dial-up service; it was a dedicated alternative to the Internet, offering an aggregated audience connected to specialized communities and sites. Does anyone go to anymore? Remember Geocities? Or Altavista?  

Collapse: We want to believe that things end in an orderly and predictable fashion. They don't. From empires to businesses, civilizations to ideologies, the historical path to oblivion is often sudden and unpredictable. Facebook may or may not collapse, but I have no doubt that investors (and the tech and business press) are underestimating this possibility.

Amazon: Let me ask you this. If Facebook were to go away tomorrow, how much would you really miss it? How hard would it be for you to find a substitute? How hard would it be for another company to fill the Facebook void? If Amazon were to go away I'd be very upset.  I've made big investments in content that is stored on Amazon's servers, and served by Amazon devices (from e-books to audiobooks). I've built up my wish list over many years. I depend on Amazon as a bridge, and a physical platform, to deliver the content (both digital and physical) that I want. None of these things are true of Facebook.   

Is a Facebook IPO something that higher ed chief investment officers would consider investing in? 

I'd like to learn more about the linkages between university endowments, investing, and technology companies. Where is a good place to start?


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