New Social Network - "Were You There?"

I met Jonathan Hull, founder of "Were You There?" at a recent SVASE event. I just set up a membership and started playing around.

"Were You There?" bases its social networks on events, times, and places. Couple of examples - there are groups around the Kennedy assassination, Elvis Presley, and Venice, Italy.

Cool stuff. Definitely worth checking out for an interesting perspective on developing a new social network.

Venture Capital Investment Competition & the University of San Francisco

The Venture Capital Investment Competition (VCIC) is a unique opportunity for university students to act as investors, instead of the standard competition where students present their business plans.

In an obvious attempt to be a homer, I'd like to congratulate the University of San Francisco Graduate Student Team for their outstanding performance at the February 8th event, finishing in 2nd place with universities like USC and UC-Irvine in the field.

Mark Cannice is the Executive Director and Founder of the USF Entrepreneurship Program. Over the past couple of years, Mark and his colleagues have quickly transformed the department from a great little secret to an outstanding program for developing entrepreneurs in the fertile Silicon Valley environment.

Mark compiles the Venture Capital Confidence Index, and reported his most recent findings here.

The Predictions Business...

The Industry Standard is back in the publishing business again. For those of you, okay, for those of us, that feel compelled to be right all the time, they have their "Predictions Board." Put your money where your mouth is - wager $100,000 in Standard Dollars on predictions in the tech industry.

If there's competition and a bit of gambling involved, count me in. I already see some predictions about FaceBook, Salesforce, and a few others that I like.

Last time I had an encounter with the Industry Standard was one of their roof top parties back in 1999 or so... Wonder if they'll be throwing galas like that again...

The Facebook Multiplier: Economic vs. Market Valuation

I get the social part of it. I just found a friend of mine from high school, spent 10 minutes with my wife perusing pictures to put on my profile, and even reviewed 20 results for “Sambucci” including two in London, one in Glasgow, and one in Ecuador. I don’t get the 100x revenues to determine its $15 billion valuation.

Facebook’s foray into tracking member purchases went awry. Advertising dollars reach their ceiling quickly unless you’re Google.

The Facebook marketplace is less than overwhelming. There are 2598 items for sale in Silicon Valley, CA at the time of this posting. When I click “For Sale", the first page results include a 5"x5" cheese cake for $50, Oracle SQL/DBA Training for $360, and a 2007 Hybrid Ford Escape 4WD for $26,000.

Huh?

A marketplace is a place of aggregation where economic activity transpires. On the Internet, eBay is the typical example - an established marketplace with buyers and sellers. Defining the market more loosely, the same occurs when someone uses Google or another search engine to find a product that they eventually purchase. Members join Facebook for social networking, not to directly engage in economic activity.

With no indications that Facebook’s revenues are rising exponentially, it’s likely that direct revenues Facebook will generate for itself will remain relatively low compared to the true online marketplaces like eBay (~ $7 bln in 2007) and Google (~$15+ bln in 2007).

If this is indeed true, they why use Facebook’s revenues as the metric for valuing the company (currently at 100x revenues according to Microsoft’s recent investment)? Maybe there’s a more accurate way…

Let’s assume that because I’m a Facebook member, I meet up with a long lost high school friend in New York City and have dinner. It’s fair to assume that this happens frequently with many Facebook members – connecting with friends either directly or in part because of Facebook – which results in economic activity of some sort taking place (a $100 dinner in this case).

By taking this approach, we can then begin to connect a certain amount of economic activity attributable to Facebook. Some members are “power” users and others are more cursory like me. But overall, there is likely some average amount of economic activity per member that can be measured. Economists use “mulipliers” to calculate these “down line effects” of some event or activity. (In fact, the consumption multiplier is the rationale for the recent tax cuts approved by Congress and President Bush.)

If we can quantify these economic activities per Facebook member, then why not use a “Facebook Multiplier” to determine the firm’s value? This multiplier is not related to the revenues of Facebook. Instead, the newly-created revenues of other market participants as a result of Facebook existing become the determining factor to establish Facebook’s economic value to the market. Using the multiplier establishes a true intrinsic value for the firm, not an arbitrary market value as was done with Microsoft’s investment in Facebook.

This proposed multiplier may indeed show that Facebook’s firm value is indeed 100x revenues, but not because we use Facebook’s revenues as a basis for arriving at the valuation. Instead, Facebook is valued based on its contribution of total economic activity. This multiplier can be justified going forward because of the lock-in effect of Facebook, and possibly the growth of the multiplier as Facebook members utilize Facebook more frequently.

This creates a clear divide between Facebook’s economic value (its contribution to the economy as a whole) and its shareholder value (market value). To the displeasure to future Facebook shareholders, the multiplier approach values Facebook on the total revenues that it creates in the general economic, not revenues that it collects as a participant in the market.

The result? Facebook’s economic value is different than its market value. In fact, its economic value is greater than its market value. We assume that shareholders value a firm based on future earnings due to them as a part owner of the company. Shareholders that purchase shares of Facebook based on the market valuation of $15 billion established by Microsoft will be sorely disappointed if the firm’s personal revenue growth of Facebook remains at its current level.

In the end, I’m not contesting that Facebook is worth $15 billion. It could be even more than that. I just disagree that Facebook’s market value is $15 billion. The firm may hold an economic value of $15 billion with the resulting multiplier effect, with the market value falling far short of this number.

(Also consider that perhaps Microsoft established a $15 billion market valuation for Facebook to artificially inflate the market price to other would-be suitors…)

Caveat emptor.

Funding 2.0 - SVASE

Last Thursday, I attended an SVASE event - "Funding 2.0 – How To Build A High Growth Startup Fast And Cheap." It's always interesting to check out the mindset of the Valley's newest entrepreneurs and hear what its successful members have to say.

Panel members were:

Mike Cassidy, Entrepreneur in Residence, Benchmark Capital
Matt Mullenweg, Founder, WordPress
Naval Ravikant, Partner, The Hit Forge
Peter Yared, Founder & CEO, wdgtbldr

Here are a few memorable one-liners (might be slightly paraphrased, but I think I'm close....):

Mike Cassidy on developing a strong Web 2.0 company:
"Find the lock-in effect; the network effect. That makes it hard for users to switch."

Matt Mullenweg referring to start-ups that are beginning to turn the corner:
"When you're in the green, the best times are ahead of you."

Peter Yared about outsourcing hardware:
"There should be no IT people in a software company."
"Why buy the elephant when you can ride the elephant?"

Naval Ravikant on making money on the web:
"Most money on the web comes from search mistakes."

I spoke to Peter for a couple of moments before the Panel began. Unfortunately, I didn't know of his success as an entrepreneur - our conversation was rather light. Had I known, I would have pressed him for some advice about Altos Research and our AltosCharts application...

SVASE continues to impress with their abundance and quality of events. I recommend their events to any enterpreneur that wants to get out, practice their pitch to strangers, meet people like you, and learn more about what to expect in getting your ideas from concept to realization. Must have been 150 people there.