What is Facebook's valuation made of?

Even more fictitious than Facebook's revenues is its valuation. A market value, after all, requires a willing buyer and a willing seller, and Facebook CEO Mark Zuckerberg, and his board members have repeatedly said they don't want to sell. (Facebook has a valuation as a private company, of course, but trust me, it's nothing near the numbers insiders are bandying about.) So why make up multi-billion-dollar valuations for the company, seemingly out of whole cloth? Because it saves them from having to hear out lowball offers, I imagine — and it also sounds mighty fine in the press. Here's a thought for newly hired number-fudger Gideon Yu, however, as well as that stock-plan administrator Facebook wants to hire: The higher a private company's value, the harder it is to dole out lucrative options to new employees. After the jump, my theory on what Facebook's worth, and why.

What is Facebook's valuation made of?


My assumptions:

  • Facebook turned down multiple offers from Yahoo, reported variously as $1 billion, $1.4 billion, and $1.6 billion. Call it $1.6 billion, and let that be the floor for Facebook's value.
  • Peter Thiel, the former PayPal CEO and early Facebook investor, like many PayPal insiders, believes PayPal sold out to eBay far too cheaply for $1.5 billion. Thiel certainly won't settle for a headline number less than twice his eBay deal, so tack on another $1.5 billion.
  • Never underestimate the hubris of a 20something first-time CEO. For Mark Zuckerberg's wishful thinking alone, shovel on another $5 billion.
  • Everyone believes that Facebook is going to come up with some magical new business model. They may be wrong, but for the fairy-dust hopes of the Valley, add another $0.9 billion to bring the total to a nice, round $10 billion.
And Facebook's real value? It will be set on the first day of trading after an IPO, of course — or when Facebook makes a liar out of Zuckerberg, Thiel, and the rest, and sells out.