Site Entrepreneurs Mull Build or Sell
As Facebook.com's mastermind, Mark Zuckerberg is sitting on a potential gold mine that could make him the next Silicon Valley whiz kid to strike it rich.
But the 22-year-old founder of the Internet's second largest social-networking site also could turn into the next poster boy for missed opportunities if he waits too long to cash in on Facebook Inc., which is expected to generate revenue of more than $100 million this year. The bright outlook is one reason Zuckerberg felt justified spurning several takeover bids last year, including a $1 billion offer from Yahoo Inc.
"We clearly have a bias toward building than selling," Zuckerberg said in a recent interview. "We think there is a lot more to unlock here."
The build-or-sell dilemma facing Zuckerberg is becoming more common among the precocious entrepreneurs immersed in the latest Internet craze, a communal concept of content-sharing that has been dubbed "Web 2.0."
Besides Facebook, other Web 2.0 startups frequently mentioned as prime takeover targets include online video site Metacafe Inc. and Photobucket Inc., which has emerged as one of the Internet's busiest destinations by hosting personal videos and photos that are routinely linked to top social-networking sites like MySpace and Facebook.
These sites find themselves at a critical juncture reached several years ago by the Internet's first big social-networking site, Friendster.com, which chose to stay independent instead of selling. That decision is now regarded as one of Silicon Valley's biggest blunders.
Web 2.0 startups have emerged as hot commodities because they are drawing more people away from television, newspapers and other media traditionally used for advertising. Online video channels and socials networks, a catchall phrase attached to sites that enable people with common interests to connect and deepen their bonds, are particularly hot.
Deep-pocketed companies are now angling for a piece of the Web 2.0 action -- a quest that already has yielded a couple big jackpots, helping to propel the sales prices of startups to their highest levels since the dot-com boom.
News Corp. paid $580 million in 2005 to buy MySpace, the largest social-networking site, and Google Inc. snapped up video-sharing pioneer YouTube Inc. for $1.76 billion late last year.
"I'm surprised a lot more companies haven't already been bought," said Reid Hoffman, a veteran Silicon Valley executive who has invested in many startups, including Facebook. "My hunch is the deals are only going to get more expensive in 2008 and 2009."
In 2006, the average price paid for a startup funded by venture capitalists rose 19 percent to $114 million. That was the highest amount since the dot-com frenzy of 2000 when the average price of venture-backed startups peaked at $337 million, according to data from Thomson Financial and the National Venture Capital Association.
If the dealmaking market continues to heat up, Zuckerberg will end up looking smart for rebuffing Yahoo and other suitors that included Microsoft Corp. and Viacom Inc.
Assuming Facebook hits its financial targets, the Palo Alto-based company should be able to command a sales price well above $1 billion or pursue an even more lucrative initial public offering of stock in the tradition of Google, Yahoo Inc., eBay Inc. and Amazon.com Inc. -- a group of Internet icons now worth a combined $250 billion.
A Facebook sale or IPO is bound to happen eventually so the startup's early investors, consisting mostly of venture capitalists, can realize some profits. Facebook has raised about $38.5 million since Zuckerberg started the site in 2004 while he was still a sophomore at Harvard University.
Zuckerberg has some flexibility in deciding when to cash out because Facebook already is profitable.
An IPO or sale will "make sense at some point for the company, but I never think that's the goal," said Zuckerberg, who is believed to control nearly one-third of Facebook's stock. "The goal is to ... continue introducing certain revolutionary products that push us to the next level."
Marc Andreessen, who made a fortune during his 20s as co-founder of Web browser pioneer Netscape Communications, is among those who believe Facebook is going to become even more valuable during the next year or two.
"Facebook is doing the smart thing. If you are in a big market like social networking, you are usually better off waiting (to sell)," said Andreessen, who is now chief technology officer for another social-networking startup, Ning Inc. Had MySpace remained independent, it would probably be worth $5 billion now, Andreessen estimated.
Should Facebook stumble, it may some day be suffering the same pangs of regret tormenting Friendster Inc., which turned down a takeover bid from Google in 2003 when it reigned as Internet's hottest social-networking site.
Had that offer been accepted, Friendster founder Jonathan Abrams and a small group of early investors reportedly would have received $30 million in Google stock that would have been worth about $1 billion today.
Abrams left Friendster in 2004 after a falling out with the company's venture capitalists. Now working on its fourth chief executive since Abrams' departure, Friendster so far hasn't been able to recapture the buzz that once made it a prized commodity.
In January, Friendster attracted just under 1.3 million U.S. visitors, leaving it far behind MySpace (61.5 million visitors), Facebook (19 million visitors) as well as several relative newcomers to social networking like Bebo.com, MyYearbook.com and Hi5.com, according to data from comScore Media Metrix.
Other tales of woe are bound to emerge after the latest dealmaking cycle winds down, predicted Ken Marlin, a technology investment banker in New York.
"The world is filled with companies that waited too long to sell and missed their window of opportunity," he said. "We think this land grab (on the Internet) probably will only last another year or two."
Palo Alto-based Metacafe fielded a takeover offer shortly after Google and YouTube first got together in October before deciding to remain independent, said co-founder Arik Czerniak. "We are 100 percent committed to building the business ourselves," he said.
Toward that end, Czerniak recently turned over the chief executive reins to Erick Hachenburg, a former executive for video game-maker Electronic Arts Inc. Czerniak remains an executive and major shareholder at Metacafe.
Denver-based Photobucket also prefers to remain independent as it strives to nearly double its registered users to 60 million by the end of this year, said Alex Welch, who has raised about $15 million in venture capital since co-founding the site in 2003. Photobucket's 35 million members currently upload about 7 million photos and 35,000 videos per day -- second only to YouTube and MySpace.
Other trendy Web sites that could elicit takeover interest include: Linden Research Inc., the maker of the virtual world, "Second Life"; Digg Inc., which displays news stories based on the recommendations of readers; and Slide Inc., a photo-sharing site launched by Max Levchin, who already struck it rich as a co-founder of PayPal Inc., an online payment service bought by eBay Inc. for $1.5 billion in 2002.
But no startup is stirring more takeover chatter than Facebook, which began as a site exclusively for college students before opening up to high school students in 2005 and finally accepting all comers last fall.
The site now has nearly 17 million registered users, most of whom fall into the under-35 demographic prized by advertisers. And Facebook gives advertisers plenty of marketing opportunities because its users churn through about 1 billion Web pages per day.
Facebook struck its first major financial partnership last summer with Microsoft, which reportedly guaranteed to deliver about $200 million in ad revenue through 2008. Zuckerberg said the advertising contract with Microsoft recently had been extended through 2011. Terms of the extension haven't been disclosed.
Although he dropped out of Harvard in 2004 to move Facebook to Silicon Valley, Zuckerberg still leads the ascetic lifestyle of a college student even as he runs a business with 200 employees.
Zuckerberg says he keeps little more than a mattress in his apartment, which is located just a few blocks away from Facebook's office. The proximity allows him to walk to work every day, usually wearing Adidas sandals ideally suited for lounging around a campus dorm.
Being comfortable is important to Zuckerberg because, like so many of the Silicon Valley prodigies before him, he tends to spend long hours at the office plotting strategy.
"For now, I just think it's very important to have a good sense of direction about where we are going," he said.