Happy Columbus Day

[without commentary]

"They... brought us parrots and balls of cotton and spears and many other things, which they exchanged for the glass beads and hawks' bells. They willingly traded everything they owned.... They were well-built, with good bodies and handsome features.... They do not bear arms, and do not know them, for I showed them a sword, they took it by the edge and cut themselves out of ignorance. They have no iron. Their spears are made of cane.... They would make fine servants.... With fifty men we could subjugate them all and make them do whatever we want."

From the Diary of Christopher Columbus

via A People's History of the United States of America by Howard Zinn

Is Facebook worth $33 Billion Dollars?

A couple days ago, David Heinemier Hansson of 37signals wrote a post saying that Facebook was not worth $33 Billion dollars. It was in response to numerous articles valuing the company at $33 Billion - based on the price that a few investors were willing to pay for a slice of the giant social network.

He then got slammed by Joel Spolsky for not understanding basic investment terminology and valuation principles on Hacker News. I'm pretty into finance discussions and follow Mish, Andrew Horowitz, ZeroHedge, PeterShiff and Solari pretty regularly, so I thought it would be fun to chime in with my thoughts on the whole "what is Facebook worth?" discussion.

While this is certainly obvious, I feel like I need to acknowledge I'm no DHH and I'm no Joel Spolsky. Not yet anyway. :) Each of them are titans in the software world in their own right and I have enormous respect for both of them.

I find it really interesting though when people of their caliber disagree so strongly about something, and I think this is an important discussion that's missing a perspective not being taken into account. So, I'm going to jump in with my thoughts on the matter.

Heres the short story: they're both right in the short term, and Joel is in the camp of people massively speculating.

Was that $800,000 dollar house in 2006 worth $800,000? Yes, because someone was willing to pay that much for the house. But also no, because that house was valued during a credit bubble, one which couldn't last, and the smart people sold their homes knowing they were not in fact "worth" what the market was willing to bear.

DHH saying that facebook isn't worth $33B reminds me of Schiff talking in Vegas to a bunch of mortgage brokers about the coming housing crash.

I like the housing analogy for more than just the sake of bubble comparisons though. Just like a home, a business should be valued based on the following: is the money coming in greater than the interest that would have to be paid on a loan to buy said business, plus expenses? If yes, it's worth the purchase price. If not, then it's overvalued.

This simple equation is what told the smart people that the housing bubble was real and was about to blow. A $5000 mortgage on a home you could rent out for $3000/mo makes no sense. Yet, a lot of people put themselves in this exact situation.

Why?

Because they were speculating that the value of the house would continue to rise. It's the same scenario with Facebook.

Let's now use the above math to figure out whether it would make sense to buy Facebook at $33B. Let's be EXTREMELY generous and say you could get a $33B loan at 4% interest for 30 years. This would be nearly impossible by the way. Most business loans are 5 or 10 year loans - but lets stick with 30 since it'll keep us going with the housing analogy.

This would give you an annual interest payment alone of roughly $1.2 Billion, and this would be before any expenses were paid.

Unfortunately, since Facebook is a private company, no one really knows what Facebook's revenues are. Estimates vary widely from $500 million to $1 Billion for top line revenue and it's anyone's guess as to what their profit is - if they're even profitable at all.

But let's again be super, SUPER generous and say that Facebook has $1 Billion in revenue and $500 million in profit. This would give them a 100% profit margin and put their expenses also at $500 million.

So, if you were to buy Facebook at $33 Billion dollars you would have $1.7 Billion dollars in interest and expenses to tend to with revenue of $1 Billion, putting you in the red to the tune of $700 Million a year right from the start. (Another way to look at it - if you took your $33B and spread it across thousands of CDs at 3.5% interest you'd make about $1 Billion a year in interest and have zero risk.)

And again, this is under the most generous circumstances from both obtaining a loan and from guessing at Facebook's revenue. REMINDER: It's not even clear that Facebook is profitable right now. It's entirely possible that my little company has a higher profit than Facebook.

Now, is it possible that Facebook can find a way to make more money out of their users? Absolutely. I personally am fascinated by the reality that if Facebook started charging $25 per year and only kept 20% of their users they'd have revenue of $2.5 Billion and could fire everyone that's trying to figure out how to make money selling ads.

So, is Facebook "worth" $33 Billion right now? Sure, the market seems to be indicating that price right now for a piece of the company, but only because of massive speculation. But, it seems like one hell of a lousy investment without a significant overhaul of their revenue model.

(Side note: Spolsky inexplicably claims that Chicago is a "city with no other internet industry" apparently forgetting about Groupon, Orbitz, and a host of others. Now might be a good time to remind Joel that the speculative mania that nearly brought down the entire US economy was born in New York.)

Turning Points

Malcolm Gladwell wrote about The Tipping Point, but I think there's something more subtle - and maybe even more powerful - in turning points.

To reach a tipping point, we first have to go through a turning point. A business, after all, can't reach a tipping point without the founder deciding to launch the business. An idea in a book can't spread without the author deciding to write the book. And our opinions of people are formed by watching their actions.

Watch someone in a moment of grand selfishness, your feelings toward them change, and it can be a turning point in your relationship.

What's interesting about turning points is that they can be big or small, positive or negative, minor or major. In each instance though they have the potential to be extremely powerful.

I think most of us would do well to think for a moment about whether our turning points are helping us reach the tipping points we want.

The night before the night before

One of the best sleep lessons I ever received was from my high-school diving coach, and I figured it was something I should share. He would always tell us that getting a good night sleep before a competition wasn't all that important. Instead, it was the night before the night before the competition that really mattered.

Part of the logic here is that if there's an important event, you may be a bit jittery the night before anyway, so it's best to figure you may have a hard time sleeping, even if you're trying to get a good night sleep.

I don't have any scientific evidence, but anecdotally, I've noticed that this is really true for me, and seems to be the case for business as much as it was the case for sport.

I've noticed that if I'm not in a great mood or am feeling pretty tired, it's almost certain that two nights prior I didn't get enough sleep. Maybe this is why a lot of people are crabby on Monday?

Likewise, I'm able to function really well on very little sleep the night before some important thing, as long as two nights earlier I got a good amount of sleep.

Maybe you'll find this tip as helpful as I have, so give it a try. If you have an important presentation, or sales meeting, interview, or whatever; don't worry too much about getting a good night sleep the night before.

Instead, worry about the night before the night before.

It will be because of...

I tend to think a lot about the decisions I've made, and how they effect my present. I don't always like this about myself, becuase too much of it and suddenly I'm dwelling or obsessing. Looking back to much can keep us from moving forward, but at the same time I like thinking about and understanding how our decisions affect us.

Actions do indeed have consequences.

Looking at what we're doing today, in the context of looking at it from the future, can help us make good decisions; and maybe more importantly, keep us from making bad decisions. Or at least, get us to do something instead of nothing.

Think about what you're doing today and wonder if a positive statement would preceed it. For example, "This great thing happened to me.....because for three months straight I sat on my couch every day and watched TV for 5 hours." Um, probably not.

On the other hand, "I grew in ways I never though possible because I decided to travel around the world for 6 months...." Yeah, that makes sense.

This notion is interesting to me in part because the people who seem to have awesome, adventerous lives, are often referred to as being "care-free". I think it's the opposite though. The people that seem to have care-free lives have these lives because they cared enough to make the decisions that they knew would make them happy.

Full of care would probably be a better way to describe it.

If you think about the things that make you the happiest, I'd be willing to bet that they came about because of some thing you did that was different, new, exciting, engaging, or risky.

I think it's good to ask ourselves what we would like out of work, life, family, or really anything - and to then wonder if we might obtain it because of what we're doing today.