Chapter 3. People Build Connections

IN OCTOBER 2007, SILICON VALLEY WAS BUZZING. Microsoft’s $240 million advertising deal and investment in Facebook, for a 1.6% equity share, valued the 3-year-old company at a total enterprise valuation of $15 billion (compared to Google’s public stock valuation of $181 billion at a stock price of $600 a share). Some observers immediately dismissed the number as a throwback to the dot-com bubble, the “irrational exuberance” of naïve and enthusiastic stock purchasers in the late 1990s. But the “smart money” venture capitalists and private-equity firms took notice.

After all, Microsoft and its investment bankers were sophisticated mergers-and-acquisitions dealmakers. There were whispers of a closed round of bidding where Google’s outright offer of $11 billion had been the “floor” for anteing up, with all of the large multinationals and media firms expressing interest. From the point of view of Facebook and Microsoft, the final deal was a win-win. Facebook’s privately held stock was ratcheted up as if it were already publicly valued by the $240 million transaction, and Microsoft’s stock gained as well upon the announcement.

Financial deal making aside, what kind of financial analysis might tell us whether Facebook was worth $15 billion? Let’s turn to the generalized framework of the customer-based financial valuation model we explained in Chapter 1, in valuing Netflix as the sum total of the lifetime value in subscription fees of its installed customer ...

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