naveen’s weblog

Over the last year, it has been fascinating to witness the surge of Facebook’s valuation from the $1 billion that Yahoo was supposed to have offered it, to the $4 billion territory, to Peter Thiel’s assertion that Facebook is worth atleast $8 billion, to yesterday’s investment by Microsoft, valuing it at $15 billion. At every single one of those points, a huge majority of tech writers derided the valuation as inflated, bubbly and insane. Regardless, within about a month or so of the price point being floated and being ridiculed, folks started talking about it being a possibility. By this point, the next valuation was being talked about by the Facebook powers-that-be, and in deriding the new (now higher) valuation, people ended up speaking of the old valuation (the one they thought was ridiculous) as less insane, and implicitly accepting it as being legitimate. Turns out there is a rational explanation to this irrationality – humans rely on mental anchors. In a sea of uncertainty, we all have anchors (via Rough Type)

Facebook’s team of management and investors have done an amazingly good job of maneuvering themselves into this cushy position. Have to commend them on a job well done. Regardless of what the current revenues, expected revenues, expect growth or expected growth rate of facebook are, facebook is worth what someone in the market is willing to pay for facebook. And Microsoft, and reportedly two hedge funds from NY, think facebook is worth $15 billion.

Nick Carr makes the connection with “mental anchors”, but says it is ridiculous to extrapolate Microsoft’s $240 million investment in facebook for a 1.6% stake, to its valuation being $15 billion. He says it is a strategic investment on Microsoft’s part, rather than a financial one. While this does sound credible, if the reports of two hedge funds investing at the same valuation turn out to be true, it would appear there are people who do value facebook at $15 billion, no matter what the bloggers say . Or for that matter, what Steve Ballmer’s professed views are about the faddishness of social networks, and the number of man-months it would take to build a social network .

Like Marc says, “You have to love this industry“.. Endlessly fascinating!

Now, if facebook had actually taken Yahoo’s offer a year or so ago, would YHOO be worth $56 billion now ? Something to ponder upon, no?