Thursday, April 29, 2010

Thoughts on Facebook's Valuation: "Facebook is a Ponzi Scheme" (off-topic)

We do have interests outside of energy, macro, fat cats and erupting volcanoes.
Such as this Bloomberg headline from last month:
"Facebook Valued at $11.5 Billion in SharesPost Index".
We looked at the "Private-market exchanges" a few times last year. In "Nasdaq Progressing On New Private-Market Exchange" I said:
The WSJ's Venture Capital Dispatch blog has been on top of what I think will be a big story in the next couple years. Any time you have a business that occupies a space at the interstices of regulation you have the opportunity for outsize returns on equity for the creators and all kinds of interesting effects for the end user....
More on SharesPost at "Private Equity, Venture Capital: "SharesPost Enables Trading of Green Startups"'.

The other thing about the headline is that valuation figure.
Holy Hannah!.

Here's one possible explanation from Joseph Javier Perla:

Now that you know what a Ponzi scheme is, I will tell you how and why
Facebook is a Ponzi Scheme.

Facebook posts huge revenues. In fact, they recently asserted that
they are EBITDA profitable. This boosts both their respect in the
world and their valuation. However, these returns, while real, are
unsustainable. They exist and are sustained in the same manner that
Ponzi schemes are. Facebook is a Ponzi Scheme.

Have you ever bought a Facebook ad? I have. I have talked to many,
many people who have. We have spent hundreds, many have spent
thousands or even more, experimenting with Facebook ads. They are
worthless. Nobody ever looks at them, and nobody ever clicks on them.
I just talked to someone who was trying to promote a book. He found
it cost him over $100 in ads to sell one book. Moreover, as you
increase your ad spending, people get used to the ads and just ignore
them. So, your already low click-through rate goes down even further.

People go to Facebook to interact with their friends. It is
fundamentally different from the ad platform that is Google. People
go to Google to find something they need, which a good percentage of
the time can in fact be solved by someone's ad. Facebook ads, on the
other hand, annoy users. They yield no real profits.

But, then, how is Facebook so profitable? Are they lying? No. They
are growing. More and more people get on Facebook, and more and more
businesses hear about how many people are on Facebook. It seems like
a huge opportunity. So each business individually and in turn
experiments with Facebook ads. They spend hundreds or thousands or
more on Facebook ads. At the end of the first run, they see bad ROIs.
They tweak the ads and spend more money and try again. Nothing. So
they stop, understanding that Facebook ads are worthless. Everyone
I've talked to who has actually bought Facebook ads knows this. But,
not everyone has bought Facebook ads yet. There are still more and
more new businesses finding out about Facebook ads. As they grow,
even more businesses give their money to experiment in destined

Eventually, though, and this might take a long time, but it is finite,
everyone will have tried Facebook ads and know that they are useless.
Eventually, after 10 million businesses have invested $1000 each, and
Facebook has earned $10 billion in revenue in total, then they will
have run out of new customers and their revenue will dry up. A
useless product is never sustainable. I wish I could short Facebook....MORE