Facebook's Operations At "Near Break Even" Often Meant "Nearly Broke"

Despite the numerous rounds of funding that Facebook has become widely known for over the past couple years, things were not so easy at the beginning. Right from the get go, Mark Zuckerberg and his family had to lend the company over $60,000 in order to cover costs after Eduardo Saverin, one of the company's initial partners locked up the company's bank accounts. Even with the company constantly on the edge of going broke, it has managed to stay afloat through numerous rounds of funding. One of the most significant of those rounds was from Accel Partners, who invested $12.7 million and resulted in Jim Breyer having a Facebook board position. The valuation of the company at that time was placed at almost $97 million, and outrageous valuation for a company that was so young (just over a year old at this point). However even with a lot of cash in the bank, the company continued to burn through it at a rapid pace. As David Kirkpatrick writes, in the soon to be released book "The Facebook Effect": For all the promise Thefacebook's unique data held for advertisers, most of the ads that were selling on the site at that point were generic banner ads. Facebook had contracted with serveral ad networks, which were posting ads willy-nilly. None of it was generating very much revenue. The company was steadily burning through the money it had raised from Accel. By year-end, it had $5.7 million left from the $12.7 million it had raised. Thefacebook had not yet become a real business. A number of rounds later (including Microsoft's monumental investment of $240 million at a $15 billion valuation), Facebook was still burning through cash thanks to insanely fast growth. When Sheryl Sandberg first joined Facebook as COO of the company in 2008, she was tasked with monetizing the site. Hopefully as quickly as possible. David Kirkpatrick writes about Sandberg renewing the focus on advertising as the primary source of revenue: The matter was hardly academic, because Facebook needed the money. It was burning through the $375 million it had raised from Micros, Li Ka-shing, and the Samwer brothers faster than anybody had expected. Some of Zuckerberg's allies in management had already concluded it had been an error not to accept a lower valuation, which would have allowed Facebook to raise a lot more money because so many more investors would have been willing to buy. While costs continued to soar, the opportunity for Facebook was significant. As Wired effectively articulated in 2009, the company has a significant opportunity to take on Google in a major way. As Kirkpatrick confirms: For all Google's success, it operates almost entirely within a relatively small sector of the overall advertising industry. Only 20 percent—at most—of the world's $600 billion in annual advertising spending is spent on ads aimed at people who alreadyk now what they want, Sandberg's researchers discovered. The remaining 80 percent, or $480 billion a year, was up for grabs as more and more ad spending shifted to the internet. As we've covered over the past few years, Facebook ended up launching "Engagement Ads" as an opportunity for brands to have conversations with their customers. Through advanced targeting, Facebook enables these advertisers to reach their exact target market, dramatically more effectively than any other online ad network before them. Despite the focus on increased revenue, Facebook took it's last round of funding from DST, helping the company to make it to a point where it had become "cash flow positive". As Facebook now has revenue from Credits and its branded engagement ads, it appears that Facebook is safe from having to raise more money. However it's still unknown how well Engagement ads are performing. Regardless of Facebook being properly positioned to reap the benefit of the shift of brand advertising dollars from offline to online thanks to the immense amount of time users spend on the site, and the unprecedented targeting opportunity, the rate of the shift in dollars to Facebook is unknown. Whether or not the shift is happening quickly, it appears as though Facebook now has time to test out their business model. With user growth possibly slowing (despite it racing toward 500 million), costs of operations no longer growing exponentially, and with the company's new data centers in the works, Facebook now has a solid runway no matter how fast they move toward 1 billion users.

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Facebook's Operations At "Near Break Even" Often Meant "Nearly Broke"

Nick O'Neill

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Nick O'Neill