Yuri Milner just might be Facebook's newest best friend.
The Russian businessman has amassed a fortune from investing in Internet companies throughout Europe and Russia, and his firm, Digital Sky Technologies (DST), is now the owner of 2 per cent of the popular social networking site.
The $200-million (U.S.) investment provides the Silicon Valley darling with an injection of cash that will be used to help it build for the future. But it's also raising questions about the long-term financial health of Facebook and whether one of the world's most popular websites, with more than 200 million members, is capable of crafting a lasting business model that will turn it into the next Google or Yahoo.
The deal values Facebook at $10-billion, $5-billion less than what the site was reportedly worth in October, 2007, when Microsoft Corp. snatched up a 1.6-per-cent stake in the company for $240-million.
Although Facebook chief executive officer Mark Zuckerberg says the Microsoft deal happened at the “peak of the market,” some analysts say social networking sites have lost some of their lustre.
Properties such as Facebook, MySpace and Twitter remain difficult to monetize through advertising, causing cash flow problems that hamper any plans for expansion.
“It's probably an indication that they're running out of their original venture capital funds and that their revenues aren't topping up their funding relative to their needs for things like capital expenditure and keeping up with the demand for capacity,” said Jeffrey Lindsay, senior Internet analyst at Sanford C. Bernstein in New York.
Despite possessing technology that enables marketers to target the interest of users, social networking sites still struggle to generate revenue because users don't want to pay for the services and display advertisers aren't convinced of the benefits, Mr. Lindsay said.
Josh Bernoff, an analyst with Forrester Research and the co-author of Groundswell: Winning in a World Transformed by Social Technologies , said the deal is a way for Facebook to send a message to the world that its valuation remains high. “It's also a way for them to pay back some of the insiders who have been there and have been waiting for a chance to cash out some of their stock,” he said.
“I wouldn't say they're in a capital crunch, but the time to take money is not when you're running out. So it's better to take an investment now, especially since they have some pretty significant expenses and have not been able to ramp up the revenue to go along with that.”
Mr. Zuckerberg said privately held Facebook's revenue will grow 70 per cent this year over 2008 and that the company will have positive cash flow by 2010. Analysts estimate the company generated anywhere from $200-million to $400-million in revenue in 2008, a fraction of Google's $21.75-billion.
“Relative to the economic conditions for when the Microsoft deal happened and that being more of a strategic partnership than a straight financial investment, we feel really good about the progress we've made,” Mr. Zuckerberg said during a conference call yesterday. “The financing will serve as a cash buffer to support our continued growth, allowing us to scale.”
Although many industries that rely on advertising have suffered as a result of the global economic meltdown, Mr. Bernoff said Facebook and other social networking sites are seeing more interest from traditional advertisers looking to stretch their marketing dollars online.
“I don't think that the recession is the problem here,” he said. “The problem is that Facebook has to prove that advertising in its format pays off and it has to make it easier for marketers to work with them. If they can continue to get investments like this, they can put off the day of reckoning about their revenue situation.”
As part of the deal, DST will also purchase $100-million worth of Facebook shares from existing shareholders.
