Facebook

It looks like Facebook’s worker bees will finally have some scratch to show for their work. Digital Sky Technologies, a Russian investment group, has announced a tender offer of $100m for 1.54 per cent of Facebook’s common stock. The deal follows a purchase of $200m in preferred Facebook stock that DST bought in May. Facebook’s 850-odd employees should be happy with the deal as it values the company at $6.5bn, well above the $4bn valuation that their stock options were rumoured to have been trading on in the secondary market this year. With a flotation still some way off, employees with vested options can now turn some of their paper gains into cash by tendering into DST’s offer. But what about DST? It has paid $300m for a tiny stake in a company expected to generate just $500m in sales this year and which is not expected to become cash-flow positive until next year. For Facebook to hit that $6.5bn valuation requires some heroic assumptions about its growth prospects.

Assume Facebook generates a token $10m-$15m of cash flows next year. With a 10 per cent cost of capital and a terminal growth rate of 2.5 per cent, Facebook over the next six years would have to grow at about the pace Google did at a similar stage in its life for DST to begin to break even. Google’s cash flows after investment this year are on track to be a stellar 36 times what they were in 2003.

DST presumably has seen Facebook’s internal projections. Growth trends suggest it could reach $1bn in sales by 2011. But if Google is any guide, Facebook will also have to invest furiously, particularly in staff and servers, to scale up its business. Generating positive cash flow is one thing, providing meteoric returns quite another.

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