Posts Tagged ‘Henry Blodget’

Facebook’s $100 Million Deal: Responding to Henry Blodget

May 10, 2008

I am not sure if Henry Blodget of Silicon Alley Insider is playing devil’s advocate or if he really believes that Facebook opted for debt financing because it “couldn’t raise the rest of that $500 million round at that $15 billion valuation.” But his question is certainly legitimate and provocative.

Here’s what I think:

1. This was a smart business decision: Even if Facebook could raise more money at a $15 billion valuation, it makes economic sense to use some minimal form of debt financing to pay for capex. It’s reflects the company’s maturation process. As my story shows, more and more startups are beginning to take advantage of debt financing. Moreover, as Lee points out, even at a discounted $5 billion valuation, $100 million in debt would give Facebook a paltry 2% debt-to-equity ratio. That hardly puts the company in risky territory even if the economy gets worse.

2. As crazy as this sounds, I think Facebook would have a decent shot at raising more money at a valuation at or close to $15 billion. Does that mean I believe Facebook is worth that much? No. But Facebook’s valuation doesn’t depend on my opinion. It’s based on the marketplace’s opinion. And already, two of the most successful business enterprises in the world (Microsoft and Hong Kong billionaire Li Ka-shing) have ponied up large slugs of capital at a $15 billion valuation.

There’s dumb money, smart money and strategic money. And Facebook was shrewd enough and successful enough to take the strategic capital. Microsoft has helped Facebook generate advertising revenue while it gets its own ad business going, while Li Ka-Shing will open many doors for the company in Asia.

Both of these players invested in the company at a valuation that most people couldn’t stomach because they believe they can generate more value on the asset compared to other entities that don’t bring as much strategic value to the table (and because they can afford to lose $100 million or more). This is exactly why News Corp paid a massive premium for Dow Jones. Is Dow Jones worth $5 billion? Probably not to anyone except Rupert Murdoch. Only time will tell if these moves were brilliant or boneheaded. But there is perverse logic at work here.

So bottom line: I would venture that Facebook has a good chance at raising more money from another strategic-type investor at that seemingly irrational valuation–especially if it keeps growing its business and starts to figure out how to monetize social networks.

Sub-Prime Boomerang: The Danger of Over-Regulation

April 1, 2008

Over the last two days, the Bush Administration and U.S. Secretary of the Treasury Henry Paulson have outlined their proposals to overhaul the financial regulatory structure of the U.S. Ordinarily, this is the kind of topic that puts people to sleep. But thanks to the Sarbanes-Oxley laws passed after the last financial scandal, techies know that financial regulation can be a very dangerous thing.

Was there a need to reform our accounting and governance laws after the the blow-ups and fraud at Enron/WorldCom? Of course there was. Was the regulatory response appropriate? Not really. Whether it was unintended consequences or just plain ignorance, Sarbanes-Oxley has made it much more expensive and difficult for small companies to raise money in U.S. capital markets. See Henry Blodget’s rant on this topic–it’s spot-on.

Now, we are faced with another similar situation. Is there a need to overhaul our financial regulatory regime? Of course there is. But lawmakers should move more deliberately and carefully this time around. For one, the financial system is already self-correcting its problems. Second, remember that this crisis exploded in one of the most regulated parts of the economy-the banking sector. Third, the U.S. is facing increasing competition in this new multipolar world. Our financial markets have been a source of strength and competitive advantage the last 60 years. We can’t afford to screw this up.

Any reform should be guided by two principles. One, better oversight of the home lending market. Since the basis of this latest scandal was poor lending standards to home-owners, which are leading to record foreclosures, policy makers should focus their efforts om improving oversight of this sector. As a purchaser of two homes, I know that mortgage brokers are some of the most unscrupulous people who often screw over customers and provide them with inaccurrate or incomplete information.

Second, the government should focus on improving transparency in financial markets. As my colleague Mike Mandel wrote yesterday, “the most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid.

For me, the main lesson from this debacle is that both banks and investment banks must be required to fully report what securities they are holding, both directly and indirectly. No more off-the-book special purpose vehicles, no more hiding derivatives under the table. If a bank or an investment bank is holding a security, they have to publish the amount and the basic characteristics.”

This is a great suggestion–and one that dovetails with the mission of the Securities and Exchange Commission. One of the smartest aspects of our securities laws is their focus on transparency through the required filing of regular financial reports. Lawmakers can not legislate away greed or a recession, nor should they try. But they can and should force commercial and investment banks to disclose all of the investments they make in a clear and concise manner. That way, investors and consumers and regulators can make their own informed decisions on how they want to deal with these assets.

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Thanks Bloggers

February 2, 2008

So much for a relaxing Friday at the office!

I blew away my traffic records over the last few days, thanks to my fellow bloggers. Big ups to Chris Williams of The Register, whose post about my social networking stats commentary triggered thousands of new viewers from across the world! I’ve always liked The Register and now I like it even more!

Major props to some of my other favorite bloggers who have been working their tails off the last few days but managed to throw Creative Capital a bone: the tireless Peter Kafka of Silicon Alley Insider, the Voices section of AllThingsD (cool idea Kara and Walt!) and USA Today’s On Deadline.

I hope everyone gets some rest over the weekend. Next week should be another wild ride with Yahoo! in play. In fact, Henry Blodget recently reported that a “Valley source is hearing that a major private-equity firm was just days away from making its own bid for Yahoo when the Microsoft bomb hit this morning.” Who could it be now?