Financials[edit]
Initial funding[edit]
Facebook was initially incorporated as a Florida LLC. For the first few months after its launch in February 2004, the costs for the website operations for thefacebook.com were paid for by Mark Zuckerberg and Eduardo Saverin, who had taken equity stakes in the company. The website also ran a few advertisements to meet its operating costs.[52]
First angel investment (Series A)[edit]
In the summer of 2004, Peter Thiel made a $500,000 angel investment in the social network Facebook for 10.2% of the company and joined Facebook's board. This was the first outside investment in Facebook.[53][54][55]
In his book The Facebook Effect, David Kirkpatrick outlines the story of how Thiel came to make his investment: Former Napster andPlaxo employee Sean Parker, who at the time had assumed the title of "President" of Facebook, was seeking investors for Facebook. Parker approached Reid Hoffman, the CEO of work-based social network LinkedIn. Hoffman liked Facebook but declined to be the lead investor because of the potential for conflict of interest with his duties as LinkedIn CEO. He redirected Parker to Peter Thiel, whom he knew from their PayPal days (both Hoffman and Thiel are considered members of the PayPal Mafia). Thiel met Parker and Mark Zuckerberg, the Harvard college student who had founded Facebook and controlled it. Thiel and Zuckerberg got along well and Thiel agreed to lead Facebook's seed round with $500,000 for 10.2% of the company. Hoffman and Mark Pincus also participated in the round, along with Maurice Werdegar who led the investment on behalf of Western Technology Investment. The investment was originally in the form of a convertible note, to be converted to equity if Facebook reached 1.5 million users by the end of 2004. Although Facebook narrowly missed the target, Thiel allowed the loan to be converted to equity anyway.[56] Thiel said of his investment:
"I was comfortable with them pursuing their original vision. And it was a very reasonable valuation. I thought it was going to be a pretty safe investment."[56]
Accel investment (Series B)[edit]
In April 2005, Accel Partners agreed to make a $12.7 million venture capital investment in a deal that valued Facebook at $98 million. Accel joined Facebook's board, and the board was expanded to five seats, with Zuckerberg, Thiel, and Breyer in three of the seats, and the other two seats currently being empty but with Zuckerberg free to nominate anybody to those seats.[57]
Series C[edit]
In April 2006, Facebook closed its Series C funding round. This included $27.5 million from a number of venture capitalists, including Greylock Partners and Meritech Capital, plus additional investments from Peter Thiel and Accel Partners. The valuation for this round was about $500 million.[55][58][59]
A leaked cash flow statement showed that during the 2005 fiscal year, Facebook had a net loss of $3.63 million.[60]
Sales negotiations[edit]
With the sale of social networking website MySpace to News Corp on July 19, 2005, rumours surfaced about the possible sale of Facebook to a larger media company.[61]Zuckerberg had already stated that he did not want to sell the company, and denied rumors to the contrary.[62] On March 28, 2006, BusinessWeek reported that a potential acquisition of Facebook was under negotiation. Facebook reportedly declined an offer of $750 million from an unknown bidder, and it was rumored the asking price rose as high as $2 billion.[63]
In September 2006, serious talks between Facebook and Yahoo! took place concerning acquisition of Facebook, with prices reaching as high as $1 billion.[64][65] Thiel, by then a board member of Facebook, indicated that Facebook's internal valuation was around $8 billion based on their projected revenues of $1 billion by 2015, comparable to Viacom's MTV brand, a company with a shared target demographic audience.[66]
On July 17, 2007, Zuckerberg said that selling Facebook was unlikely because he wanted to keep it independent, saying "We're not really looking to sell the company... We're not looking to IPO anytime soon. It's just not the core focus of the company."[67] In September 2007, Microsoft approached Facebook, proposing an investment in return for a 5% stake in the company, offering an estimated $300–500 million.[68] That month, other companies, including Google, expressed interest in buying a portion of Facebook.[69]
Microsoft investment (Series D)[edit]
On October 24, 2007, Microsoft announced that it had purchased a 1.6% share of Facebook for $240 million, giving Facebook a total implied value of around $15 billion.[70] However, Microsoft bought preferred stock that carried special rights, such as "liquidation preferences" that meant Microsoft would get paid before common stockholders if the company were sold. Microsoft's purchase also included the right to place international ads on Facebook.[71] In November 2007, Hong Kong billionaire Li Ka-shing invested $60 million in Facebook.[72]
Switch to profitability[edit]
In August 2008, BusinessWeek reported that private sales by employees, as well as purchases by venture capital firms, were being done at share prices that put the company's total valuation at between $3.75 billion and $5 billion.[71] In October 2008, Zuckerberg said "I don't think social networks can be monetized in the same way that search did ... In three years from now we have to figure out what the optimum model is. But that is not our primary focus today."[73]
Facebook hired Sheryl Sandberg as its Chief Operating Officer in March 2008. Sandberg is reported to have held a number of brainstorming sessions with Facebook employees on their long-term monetization strategy, which led to the conclusion that advertising would be the main source of monetization. Under Sandberg's leadership, Facebook made a number of changes to its advertising model with the aim of achieving profitability. In September 2009, Facebook stated that it had turned cash flow positive for the first time.[74]
In early 2012, Facebook disclosed that its profits had jumped 65% to $1 billion in the previous year when its revenue, which is mainly from advertising, had jumped almost 90% to $3.71 billion.[75] Facebook also reported that 56% of its advertising revenue comes from theU.S. alone, and that 12% of its revenue comes from Zynga, the social network game development company. Payments and other fees were $557 million up from $106 million the previous year.[76]
Acquisitions[edit]
In August 2013, Facebook acquired social media real-time news aggregator FriendFeed,[77] a startup created by Gmail's first engineer Paul Buchheit.[78][79][80] In February 2010, Facebook acquired Malaysian contact-importing startup Octazen Solutions.[81] On April 2, 2010, Facebook announced acquisition of photo-sharing service called Divvyshot for an undisclosed amount.[82] In June 2010, an online marketplace for trading private Facebook stock reflected a valuation of $11.5 billion.[83] On April 12, 2012, Facebook acquired photo sharing service Instagram for approximately $1 billion in cash and stock.[84][85] On March 8, 2013, Facebook announced that they acquired the team from Storylane, but not the product itself.[86] On February 19, 2014 Facebook announced it is acquiring WhatsApps Inc, a smartphone instant messaging application for $19 billion in a mix of stock and cash. The acquisition is the most ever paid for a venture-capital backed startup.[87]
Design[edit]
The Facebook design has seen numerous design iterations throughout its existence. Each of these design changes has come to be synonymous with angry users who dislike adjusting to a new layout.[88][89] As of Facebook's 10th birthday in January 2014, it had seen several major design revamps, each one ushering in new functional capabilities and user interaction features.[90]
IPO[edit]
Main article: Facebook IPO
Facebook filed for an initial public offering (IPO) on February 1, 2012.[91] The preliminary prospectus stated that the company was seeking to raise $5 billion. The document announced that the company had 845 million active monthly users and its website featured 2.7 billion daily likes and comments.[92] After the IPO, Zuckerberg will retain a 22% ownership share in Facebook and will own 57% of the voting shares.[93]
Underwriters valued the shares at $38 each, pricing the company at $104 billion, the largest valuation to date for a newly public company.[94] On May 16, one day before the IPO, Facebook announced that it would sell 25% more shares than originally planned due to high demand.[95] The IPO raised $16 billion, making it the third largest in U.S. history (just ahead of AT&T Wireless and behind only General Motors and Visa Inc.).[96][97] The stock price left the company with a higher market capitalization than all but a few U.S. corporations – surpassing heavyweights such as Amazon.com, McDonald's, Disney, and Kraft Foods – and made Zuckerberg's stock worth $19 billion.[96][97] The New York Timesstated that the offering overcame questions about Facebook's difficulties in attracting advertisers to transform the company into a "must-own stock". Jimmy Lee of JPMorgan Chasedescribed it as "the next great blue-chip".[96] Writers at TechCrunch, on the other hand, expressed skepticism, stating, "That's a big multiple to live up to, and [Facebook] will likely need to add bold new revenue streams to justify the mammoth valuation".[98]
Trading in the stock, which began on May 18, was delayed that day due to technical problems with the NASDAQ exchange.[99] The stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price.[100] At closing bell, shares were valued at $38.23,[101] only $0.23 above the IPO price and down $3.82 from the opening bell value. The opening was widely described by the financial press as a disappointment.[102] The stock nonetheless set a new record for trading volume of an IPO.[103] On 25 May 2012, the stock ended its first full week of trading at $31.91, a 16.5% decline.[104]
On 22 May, regulators from Wall Street's Financial Industry Regulatory Authority announced that they had begun to investigate whether banks underwriting Facebook had improperly shared information only with select clients, rather than the general public. Massachusetts Secretary of State William Galvin subpeonaed Morgan Stanley over the same issue.[105] The allegations sparked "fury" among some investors and led to the immediate filing of several lawsuits, one of them a class action suit claiming more than $2.5 billion in losses due to the IPO.[106] Bloomberg estimated that retail investors may have lost approximately $630 million on Facebook stock since its debut.[107]
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