Facebook founder sets sights on big leagues

News that Facebook is seeking additional funding from hedge funds and private equity groups following an investment by Microsoft this week illustrates the degree to which Mark Zuckerberg, the website’s 23-year-old founder, is determined to buck convention in his quest to turn the social network into the next internet giant.

The $240m financing round with Microsoft valued the internet upstart – which has yet to turn a profit – at a staggering $15bn.

Facebook said its immediate plans for the cash include hiring 400 new staff, buying more computers and investing in developing a new advertising system. But the scale of the investment round, at $500m or more, points to Facebook’s ambition to join the ranks of the world’s biggest internet companies.

However, some veteran technology financiers have questioned how easy it would be to convince other backers to buy into the company at such a high valuation. “It would be the highest valuation of any private equity [deal] in history,” said one prominent Valley financier who said he had been approached by Facebook.

By shunning an initial public offering in favour of private financing, Mr Zuckerberg may be seeking to emulate Google, the internet search company, which put off an IPO for several years until it had a firmly established revenue model.

During the dotcom boom, the situation was typically the reverse, with promising start-ups seeking to go public as soon as possible in order to raise money for future growth and provide liquidity for their backers.

Although Facebook’s social networking technology – which allows users to share messages, photos and other information with friends online – has attracted more than 49m active users, the company has yet to perfect its sales model.

Facebook is expected to reveal a new ad system featuring improved targeting next month. For the time being, it relies on an existing ad deal with Microsoft and an advertising system called “flyers” – which allows advertisers to target users according to their specific interests and group affiliations – for most of its sales.

For all the recent buzz and attention, some analysts have predicted that Facebook is set to bring in just $100m-$150m in sales this year.

The fact that Mr Zuckerberg was able to draw such a high valuation underscores his growing power in Silicon Valley. It also demonstrates the degree to which Microsoft is desperate to hold on to its advertising relationship with Facebook after being beaten to several big internet advertising deals by its rival, Google.

Private equity and hedge fund investors may be more difficult to win over, however, particularly at such a ripe valuation.

“I just don’t know how you can pay that sort of valuation for an option on a business model,” says one big private equity investor.

The investor says the enthusiasm can all be traced back to the success of Google, which came up with a new way of making money that no one had expected – so people wonder if it can happen again. “I think Google has energised people. We didn’t need a new search engine – but they came up with an entirely new business model.”

He said this attempt to value Facebook in the absence of a clear new business model recalled the atmosphere around internet start-ups during the height of the dotcom mania in 1998-1999.

“People invented ways to value a company – how many PhDs you have, how many page views you have. Everybody made stuff up,” he said.