Last updated: January 3, 2011 11:48 pm

Facebook nears public crossroad

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Facebook founder and chief executive Mark Zuckerberg

Facebook founder and chief executive Mark Zuckerberg is building a cash war chest

For Facebook, news of the capital infusion that kicked off its new year comes with many of the hallmarks of a public offering.

But if the social networking site wanted to set itself apart from arch-rival Google, whose 2004 IPO marked the high point for tech finance in the last decade, it could hardly have found a clearer way to do it.

The latest round of capital raising could bring the social networking site $2bn in all, should Goldman Sachs follow through with a plan to raise $1.5bn from its wealthy clients and its own employees. At that level, it tops the amount raised in most of the largest full public offerings, including the $1.2bn that Google raised in its own, highly unorthodox, auction-based IPO in 2004.

Building a large cash war chest is just the latest step in a financial strategy that has brought Facebook many of the benefits of being a public company, without the headaches. This has come as a result of other private share sales, which have already raised more than $800m, and the emergence of a secondary market that makes it easier to trade shares in private companies.

As a result, Facebook has been able to bring in important strategic allies, including Microsoft and Russian internet investor DST, while fuelling its rapid expansion and at the same time providing an outlet for early investors and employees who want to cash in some of the paper profits on their shares. Allying itself with an institution closely identified with the power of Wall Street extends that.

Yet Facebook’s ability to tap Wall Street while skirting the full IPO process may not sit well with some. The Securities and Exchange Commission has already started its own investigation of the flourishing secondary market for private company stock: one concern is how the shares are valued when they are sold to private investors through funds that have been set up to give access to the internet’s latest hot phenomenon.

On Monday, SecondMarket, a broker-dealer, said it received a request for information from the SEC about “pre-IPO pooled investment funds” and is cooperating with the inquiry.

Also, with a fast-growing base of investors finding a way to tap into Facebook in spite of its private status, the company risks running foul of a piece of US securities law that already tripped up Google, helping to precipitate its own full IPO.

Once their shareholder numbers top 500, US companies must file financial returns, disclosing their performance – and removing one of the attractions of staying private. With Goldman looking to extend the attractions of investing in Facebook to many more, the arrangement that has allowed this without triggering the 500-shareholder rule could face scrutiny.

With greater insight into its finances than most investors, Goldman and DST have been willing to accord Facebook a valuation of $50bn and a figure that caps a headlong, two-year expansion that has seen the closest power on the internet to rival Google.

The valuation debate around Facebook closely echoes the one that swirled around the search company itself at the time of its own IPO in 2004. Its revenues are rumoured to be in the range of $2bn.

At 25 times current revenues, that puts Facebook’s latest valuation far ahead of other internet companies at a comparable stage in their development. Underpinning the optimistic valuations, however, is a belief in the long-term influence such companies can have, rather their immediate financial performance.

Google was eventually valued at some $20bn in the IPO process, but within a year its value had soared to nearly $100bn as investors reassessed its potential impact on the internet advertising market.

For Facebook, part of that rapid escalation has come while it is still a private company, adding to the controversy. On all the public measures of user engagement, the company has certainly taken the internet by storm. Based on the latest figures, it now attracts more page views than Google, a measure on which it is now the leader on the web.

Its moneymaking potential rests in more than just the ability to serve advertising to this massive, and growing, audience.

As the biggest platform for social media – it accounts for about half of all global social networking activity, according to ComScore – Facebook is becoming the gatekeeper to a large slice of web activity, with other companies building their services on top of it.

That gives it the ability to make money by taking a slice of the revenues from a much wider range of web behaviour, according to Imran Khan, an internet analyst at JPMorgan.

With that sort of sway, it could eventually even displace Google, which accounts for more than a third of all the advertising revenue generated on the internet, Mr Khan added.

Additional reporting by Kara Scannell in New York

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