The Facebook Deal

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TheFacebook Deal

TheFacebook Deal

Everynew company aims at growing into a large, influential corporation inthe future. In a contemporary global environment characterized bysuch firms, very few make it to the top. One such business that hasbeen able to grow into a globally recognized brand within arelatively short period is Facebook (Turban et al., 2015). Launchedin 2004 as The Facebook by Mark Zuckerberg, EduardoSaverin and Chris Hughes, the company has grown into one of the mostprofitable firms with a global presence, thanks to a series of stepsthrough which it has been able to raise funds (Basich,2016). These steps include seed funding, funding from angelinvestors, venture capital funding and Initial Public Offering (IPO).This paper discusses some of the major venture capital funding thathelped propel the company to the global success it currently enjoys(Brigham&amp Ehrhardt, 2013 Mangalindan, 2011).

Taulli(2012) describes seed funding as a company’s first round offunding. This stage involves a relatively small amount of money,ranging between $1000 and $100,000. According to him, it makes itpossible for start-up businesses to test their hypothetical product.Facebook was initially launched as The Facebook with contributionsfrom Mark Zuckerberg and his classmate, Eduardo Saverin. Together,they raised about $15,000, which helped cater for some costs,including website operations. However, the relationship between thetwo hit a snag, a fact that led Eduardo Saverin to freeze the newcompany’s bank account (Turban et al., 2015). Zuckerberg had nooption, but to seek the help of his father, with whom they raised anadditional $85,000, an amount that helped keep the company afloat.Additionally, Taulli (2012) describes seed funding in detail,pointing out that, for most companies, this stage tends to be a mess.In Facebook’s case, he states that the lack of experience inbusiness and legal matters among the co-founders led to the initialfunding problems they faced.

Thenext stage of investment involves angel investors. It includeswealthy individuals who, upon witnessing the potential of an emergingcompany during its early stages, decide to invest in it. According toTaulli (2012), angel investing involves large amounts of moneyranging between $100,000 and $1000, 000. In Facebook’s case, thecompany raised a total of $ 600,000 from angel investors, with PeterThiel, PayPal’s CEO and co-founder, contributing the largest shareof $500,000. Other angel investors in Facebook were Reid Hoffman andMark Pincus, who contributed $40,000 each. Some Facebook employees atthe time also invested in the company, making a contribution of$20,000. Read (2010) posits that just like many other startups,Facebook’s angel investment was a pooled investment. He states thatthis type of investment limits the amount of equity that eachinvestor can obtain as well as their liability.

Angelinvestments are usually followed by venture capital funding, which isthe focus of this paper. According to Taulli (2012), venture capitalfunding involves various managers who invest a large amount of moneyacross a portfolio of companies. He points out that it often takesplace in a number of rounds, with the first round ranging between $5and $10 million. In its different rounds of venture capital, Facebookinvolved some investors, including Accel Partners, Greylock Partners,Meritech Capital Partners, Microsoft Corporation and Digital SkyTechnologies Limited. The company participated in the first round ofventure capital funding in April 2005, in which Accel Partners helpedit raise $12.7 million (Brigham &amp Ehrhardt, 2013). The number ofactive users on Facebook at the time was 5.5 million only. The moneyobtained from the first round of funding was aimed at expanding thecompany, allow it to reach more users, and cater for the growingexpenses of the expanding workforce.

InApril 2006, other venture capitalists provided more funds to thecompany. This was the third round of its funding and involvedGreylock Partners, MeriTech Capital Partners and the existinginvestor Accel Partners. The company announced that it had raised$27.5 million. According to Turban et al. (2015), Facebook neededthis money for additional investments for its continued growth.Another round of venture capital funding involved Microsoft later onin 2007, with reports indicating that it invested $240 million.According to Taulli (2012), this amount was meant to help the companyventure into the global markets. Mangalindan (2011) posits thatMicrosoft was criticized for making such an investment, with marketexperts arguing that it was an over-investment. However, the growingvalue of the company over the following few years proved the criticswrong. In May 2009, another venture capitalist, Digital SkyTechnologies, invested $240 million in Facebook. These funds wereprobably meant to strengthen the company’s position in the socialmedia market given the increased competition from other companiessuch as Twitter (Brigham &amp Ehrhardt, 2013).

Inhis discussion of venture capital funds, Taulli (2012) points outthat, traditionally, venture capitalists were involved with moremature companies. He opines that over the past few years, there hasbeen a shift in this trend, with venture capitalists investing incompanies that are in their early stages of development. He pointsout that, for many entrepreneurial ventures such as Facebook,early-stage venture capital funding has a host of benefits, and oneof them is the higher value of the company. He states that, in theearly stages, the venture capitalists only invest a small amount ofmoney, a fact that makes them not spend a lot of time on negotiatingthe valuation figures. He further reiterates that incorporatingventure capital funding in the early stages of a company’s growthcan also be disastrous because the venture capitalist may decide todedicate their time to the partnership if the venture shows littlesigns of breakout momentum. Venture rounds are sought for a number ofreasons, key among them include evolving a product, improving afirm’s infrastructure and developing business people.

Witheach venture capital round, Facebook’s post-money valuationincreased. One of the factors that could have contributed to thebubbly valuation was the nature of the industry the company operatedin (Thebusinessvaluer, 2016). During that time, the pace oftechnological development was quite high, with the number of internetusers expanding each year. Being an internet-based company, thelikelihood that the number of Facebook users would grow with eachpassing year was quite high. True to this, the number rapidly grewover that period. Management stability could have been another factorthat contributed to the corporate valuation (Dickie, 2006). Duringthe period, the company experienced very little management issues, afactor that motivated more venture capitalists to be part of it.

Beforeinvesting in any venture, investors have to investigate the entitiesoutlook. They have to value the company and determine whether it willgenerate profits moving forward or not (Carver,2012). The market forces in the industry in which the start-upoperates is an important determinant of its value. They include thesize of existing firms in the industry, the demand and supply of theproduct or service offered by the company and the industry’soutlook (Espinal,2016). For Facebook, the nature of the market within which thebusiness operates played an important role in investor valuation. Theindustry was relatively young and with a limited number of players.Additionally, the demand for social media services kept increasingover the years, a factor that led to an increase in the number ofFacebook users over time. The higher the number of users, the higherthe company’s value became. The number of investors interested inacquiring the company also pushed up its value. Both Yahoo and Googleexpressed interest in acquiring it, but the Facebook founder wasdetermined not to sell it. The investors might have used a host ofvaluation methods, including asset-based valuation, market andcomparable transaction approaches (Brigham &amp Ehrhardt, 2013).

Inconclusion, Facebook’s case provides a perfect example of howstart-up businesses source capital for their expansion. Launched in2004 as The Facebook by Mark Zuckerberg, EduardoSaverin and Chris Hughes, the company has grown into one of the mostprofitable firms with a global presence, thanks to a series of stepsthrough which it has been able to raise funds. These steps includeseed funding, funding from angel investors, venture capital fundingand Initial Public Offering (IPO). This paper focused on the venturecapital funding activities the company engaged in its early years ofdevelopment. Through this process, it raised funds for a number ofactivities, including the expansion into the global market as well asthe improvement of its infrastructure to compete with rivalbusinesses such as Twitter. With each round of venture capitalfunding, its valuation kept increasing.

References

Basich,Z. (2016). ATrip Down Memory Lane: Facebook’s Private Years, 2004-2012.WSJ.Retrieved 11 August 2016, fromhttp://blogs.wsj.com/digits/2012/05/17/a-trip-down-memory-lane-facebooks-private-years-2004-2012/

Brigham,E. F., &amp Ehrhardt, M. C. (2013). Financial Management: Theory &amppractice. Cengage Learning.

Carver,L. (2012). Venturecapital valuation.Hoboken, NJ: Wiley.

Dickie,R. (2006). Financialstatement analysis and business valuation for the practical lawyer.Chicago, IL: ABA Section of Business Law, American Bar Association.

Espinal,C. (2016). Howdoes an early-stage investor value a startup? With |.Seedcamp.com.Retrieved 11 August 2016, fromhttp://seedcamp.com/resources/how-does-an-early-stage-investor-value-a-startup/

Mangalindan,J. (2011). Timeline:Where Facebook got its funding.Fortune.Retrieved 11 August 2016, fromhttp://fortune.com/2011/01/11/timeline-where-facebook-got-its-funding/

Read,R. (2010). DeleteMe: An Argument Against Facebook.Lulu.com.

Taulli,T. (2012). Alook at the stages for a company`s financing | InvestorPlace.InvestorPlace.Retrieved 11 August 2016, fromhttp://investorplace.com/ipo-playbook/follow-the-money-from-seed-funding-to-ipo/#.V6x7bU-YtTo

Taulli,T. (2012). Howto create the next Facebook.[New York]: Apress.

Thebusinessvaluer.(2016). Factorsaffecting the valuation of a Business.Thebusinessvaluer.co.uk.Retrieved 11 August 2016, fromhttp://www.thebusinessvaluer.co.uk/business_valuation_factors.php

Turban,E., King, D., Lee, J., Liang, T., &amp Turban, D. (2015). ElectronicCommerce(8th ed.). Cham: Springer International Publishing.

The Facebook Deal

  • Uncategorized

TheFacebook Deal

TheFacebook Deal

Evidently,every new company seeks to explore its strengths, opportunities andimprove on its weaknesses so that it can widen its client base andgeneral profitability. This is essential in maximizing the value ofshareholders and any other parties interested in knowing theperformance of the company. They include the stakeholders, clients,top executive management and the government for taxes. In acontemporary global environment, stiff competition by companies inthe same industry is normal. It requires proper administration andefficient strategies for any company to remain afloat. Facebook Inc.is not exceptional. It is a company pretty known by everyone (Turban,et al, 2015). Launchedin 2004 as The Facebook by Mark Zuckerberg, EduardoSaverin and Chris Hughes, the company has grown into one of the mostprofitable firms with a global presence. Thanks to a series of stepsthrough which it has been able to raise funds (Basich,2016). This paper primarily seeks to establish the type of financingused by Facebook and the reasons as to why such funding was used ineach round. Also, the essay will postulate what the money was usedfor in each successful round of funding. Equally important, anexplanation of the company’s bubbly corporate valuation during thisperiod will be provided. Finally, the paper will determine how muchinvestors valued the company as well as its major financial numbers.

Accordingto Taulli (2012), seed financing is the company’s first round offunding. This stage involved a relatively small amount of money,ranging between $1000 and $100,000. The low capital made it easy forthe company to conduct a pilot for the proposed business. Facebookwas initially launched as The Facebook with contributions from MarkZuckerberg and his classmate, Eduardo Saverin. Together, they raisedabout $15,000, which helped cater for some costs, including websiteoperations. However, the relationship between the two hit a snag, afact that compelled Eduardo Saverin to freeze the new company’sbank account (Turban et al, 2015). Zuckerberg was compelled to seekthe help from his father, with whom they raised an additional $85,000to facilitate the company’s operations. In accordance with Taulli(2012), lack of experience in business and legal matters among theco-founders led to the initial funding problems they faced.

Thenext round of funding involved angel investors. This stage includedwealthy individuals who, upon witnessing the potential of an emergingcompany during its early stages, decided to invest. As postulated byTaulli (2012), angel investing involved large amounts of moneyranging between $100,000 and $1000, 000. In Facebook’s case, thecompany raised a total of $ 600,000 from angel investors, with PeterThiel, PayPal’s CEO and co-founder, contributing the largest shareof $500,000. Other angel investors in Facebook were Reid Hoffman andMark Pincus, who donated $40,000 each. Some Facebook employees at thetime also invested in the company, making a total contribution of$20,000. Read (2010) suggests that just like many other startups,Facebook’s angel investment was a pooled investment. He furtherargues that this type of investment limits the amount of equityobtained by each investor as well as their liability.

Angelinvestments are usually followed by venture capital funding, which isthe focus of this paper. According to Taulli (2012), venture capitalfunding involves various managers who invest a large amount of moneyacross a portfolio of companies. He points out that it often takesplace in a number of rounds, with the first phase ranging between $5and $10 million. In its subsequent stages of venture capital,Facebook involved some investors, including Accel Partners, GreylockPartners, Meritech Capital Partners, Microsoft Corporation andDigital Sky Technologies Limited. The company participated in thefirst round of venture capital funding in April 2005. In this case,Accel Partners helped it raise $12.7 million (Brigham &amp Ehrhardt,2013). The number of active users on Facebook at that time was 5.5million people. The money obtained from the first phase of fundingwas aimed at expanding the company, facilitate its reach to moreusers, and cater for the growing expenses of the expanding workforce.

Thethird round of financing, involved contributions made by venturecapitalists. It happened in April 2006 when Greylock Partners,MeriTech Capital Partners and the existing investor Accel Partnersfunded the organization. The company announced that it had raised$27.5 million. According to Turban et al, (2015), Facebook neededthis money for additional investments to ensure steady growth.Another round of venture capital funding involved MicrosoftCorporation later on in the year 2007. Reports indicated that thecompany invested $240 million. As posited by Taulli (2012), thisamount was meant to help Facebook Inc. venture into the globalmarkets. Mangalindan (2011) points out that, Microsoft was criticizedfor making such a venture. Market experts argued that it was anover-investment. However, the growing value of the company in thesubsequent years proved the critics wrong. In May 2009, anotherventure capitalist, Digital Sky Technologies, invested $240 millionin Facebook Inc. These funds were specifically meant to strengthenthe company’s position in the social media industry given theincreased competition from other companies such as Twitter and Google(Brigham &amp Ehrhardt, 2013).

Inhis discussion on venture capital funds, Taulli (2012) points outthat, traditional venture capitalists were involved in more maturecompanies. Moreover, he also argues that over the past few yearsthere has been a shift in this trend, with venture capitalistsinvesting in startup companies. Notably, he notes that, for manyentrepreneurial ventures such as Facebook, early-stage venturecapital funding is beneficial, and one of them is the higher value ofthe company. He further states that, at development phase of anorganization, the venture capitalists only invest a small amount ofmoney, a fact that makes them not spend a lot of time on negotiatingthe valuation figures. On the same note, he also reiterates thatincorporating venture capital funding in startup organizations can bedisastrous because the venture capitalist may decide to dedicatetheir time to the partnership if the undertaking shows little signsof breakout momentum. Venture rounds are sought for a number ofreasons, key among them include evolving a product, improving afirm’s infrastructure and developing business people.

Witheach investment capital round, Facebook’s post-money valuationincreased. One of the factors that could have contributed to thebubbly valuation was the nature of the industry the company operatedin (Thebusinessvaluer, 2016). During that time, the pace oftechnological development was quite high, with the number of usersexpanding each year. Being an internet-based company, the likelihoodthat the number of Facebook subscribers would grow with each passingyear was quite high. As a result, the number rapidly grew over thatperiod. Management stability could have been another factor thatcontributed to the corporate valuation (Dickie, 2006). During theperiod, the company experienced very little management issues, afactor that motivated more venture capitalists to be part of it.

Beforeinvesting in any venture, investors have to investigate the entitiesoutlook. They have to value the company and determine whether it willgenerate profits moving forward or not (Carver,2012). The market forces in the industry in which the start-upoperates is an important determinant of its value. They include thesize of existing firms in the industry, the demand and supply of theproduct or service offered by the company and the industry’soutlook (Espinal,2016). For Facebook, the nature of the market within which thebusiness operates played an important role in investor valuation. Theindustry was relatively young with a limited number of players.Additionally, the demand for social media services kept increasingover the years, a factor that led to a significant growth in thenumber of Facebook users over time. Both Yahoo and Google expressedinterest in acquiring it, but the Facebook founder was determined notto sell the organization. The investors might have used variousvaluation methods, including asset-based valuation, market andcomparable transaction approaches (Brigham &amp Ehrhardt, 2013).

Inconclusion, Facebook’s case provides a perfect example of howstart-up businesses source capital for their expansion. Launched in2004 as The Facebook by Mark Zuckerberg, EduardoSaverin and Chris Hughes, the company has grown into one of the mostprofitable firms with a global presence, thanks to a series of stepsthrough which it has been able to raise funds. These steps includeseed funding, funding from angel investors, venture capital fundingand Initial Public Offering (IPO). This paper focused on the venturecapital funding activities the company engaged in its early years ofdevelopment. Through this process, it raised funds for a number ofactivities, including the expansion into the global market as well asthe improvement of its infrastructure to compete with rivalbusinesses such as Twitter. With each round of venture capitalfunding, its valuation kept increasing.

References

Basich,Z. (2016). ATrip Down Memory Lane: Facebook’s Private Years, 2004-2012.WSJ.Retrieved 11 August 2016, fromhttp://blogs.wsj.com/digits/2012/05/17/a-trip-down-memory-lane-facebooks-private-years-2004-2012/

Brigham,E. F., &amp Ehrhardt, M. C. (2013). Financial Management: Theory &amppractice. Cengage Learning.

Carver,L. (2012). Venturecapital valuation.Hoboken, NJ: Wiley.

Dickie,R. (2006). Financialstatement analysis and business valuation for the practical lawyer.Chicago, IL: ABA Section of Business Law, American Bar Association.

Espinal,C. (2016). Howdoes an early-stage investor value a startup? With |.Seedcamp.com.Retrieved 11 August 2016, fromhttp://seedcamp.com/resources/how-does-an-early-stage-investor-value-a-startup/

Mangalindan,J. (2011). Timeline:Where Facebook got its funding.Fortune.Retrieved 11 August 2016, fromhttp://fortune.com/2011/01/11/timeline-where-facebook-got-its-funding/

Read,R. (2010). DeleteMe: An Argument Against Facebook.Lulu.com.

Taulli,T. (2012). Alook at the stages for a company`s financing | InvestorPlace.InvestorPlace.Retrieved 11 August 2016, fromhttp://investorplace.com/ipo-playbook/follow-the-money-from-seed-funding-to-ipo/#.V6x7bU-YtTo

Taulli,T. (2012). Howto create the next Facebook.[New York]: Apress.

Thebusinessvaluer.(2016). Factorsaffecting the valuation of a Business.Thebusinessvaluer.co.uk.Retrieved 11 August 2016, fromhttp://www.thebusinessvaluer.co.uk/business_valuation_factors.php

Turban,E., King, D., Lee, J., Liang, T., &amp Turban, D. (2015). ElectronicCommerce(8th ed.). Cham: Springer International Publishing.

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