Banking giant Goldman Sachs has invested $500 million in Facebook, buying shares at a price that puts the value of the entire company at $50 billion. If all shares in the company were priced equally (they are not) then we could assume that Goldman, and co-investor Russian giant DST, bought 1% of Facebook. What’s most important isn’t the amount of literal control over the company that the banks bought, rather it’s the valuation this gives the company and the relationship the investment fosters between Goldman and Facebook.
ReadWriteWeb readers, probably more concerned with technology and innovation implications than the business end of this deal, may benefit from a summary of the flurry of news coverage that began last night with the scoop by Andrew Ross Sorkin and Evelyn M. Rusli at the New York Times.
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1. Scale
Goldman and Digital Sky Technologies, the Russian firm that has invested big in Zynga, Groupon and Facebook, are pooling together the funds of wealthy clients to invest $500 million now and up to $1.5 billion total. That investment prices Facebook’s total value at $50 billion.
For perspective, Goldman has $900 billion on its balance sheet of all its investments. Apple is the world’s second single most valuable company behind Exxon, having just passed $300 billion. Google has a $200 billion market cap (is Facebook worth 25% what Google is?) and Twitter is now reported to be looking at raising still more money (beyond its $200m last month) from Kleiner Perkins and Digital Sky at a valuation of $3 billion.
In other words: This deal is in some ways a big move by Goldman but in other ways, for people like this it’s just another day in the office. The company hopes this will help them pocket larger sums when Facebook goes public on the stock market, when its wealthy leaders are looking for a bank to run their personal investments and when Goldman can impress everyone with how prestigious they are to land this deal. For more perspective see the New York Times analysis piece here and Reuters financial blogger Felix Salmon.
2. From Disruption to Co-Optation
Facebook, Twitter, Zynga and Groupon moved quickly in 2010 to go from culturally disruptive outsiders to being welcomed as small players in the world’s economy. None have been as economically disruptive as Craigslist and the internet in general have been for example to the media economy, but even the media economy is tiny compared to the real economy: trading in liquid money, like natural resources, Intellectual Property and money.
Whenever these companies take money to grow, of course, it comes at some expense to them in terms of independence. Big, traditional money puts cash into an upstart technology company and suddenly conversations around big decisions become very different. The golf course conversations about Facebook around the country will change too, they’ll be about buying shares pre-IPO from Goldman instead of about how confusing the kids are these days. Most likely, both types of conversation will go on.
If you were hoping for Facebook to do something really risky, really culturally disruptive (I have been), the odds of that are getting slimmer fast.
3. More Money for the Tech Ecosystem
Goldman’s investment in Facebook is going to be great for all the industries the company’s young leaders are likely to spend their money in, including tech startups. From early Facebookers becoming angels backing tiny new companies (some of which may be acquired later by Facebook) through Facebook backers Accel Capital turning its 5 year old investment of nearly $13 million into a whole lot more. Much of that will go to the fund’s clients, but it should end up being good for future startups as well.
On the other hand, hundreds of millions more dollars run through Facebook will also mean that many more engineers will end up working there – instead of innovating independently. Facebook (and Google) swallowed up big portions of the Silicon Valley bleeding-edge consumer software engineering scene in 2009 and 2010. Expect to see that trend continue.
4. More Control for Facebook
Thank goodness for Google and Twitter. Without them, Facebook’s control over peoples’ identities online would be virtually unchallenged. The challenge those two companies pose isn’t very strong, either. Facebook is pushing fast to make itself the default login and identity system on sites all around the web. From little sites happy to rid themselves of the risk of a Gawker-style security breach to big big media sites that Facebook is visiting the offices of and woo-ing with promises of big social distribution.
It’s not good for any one company to have so much control over something so essential as our online identity. Imagine if there was one credit card company, or one bank. Bad news.
More Facebook may mean better feature development for users in the short term, and it may mean more ubiquity for Facebook in the medium term, but in the long term it could mean trouble for the web in general. There is already far too great a risk that as Facebook policies and procedures go, so will go the rest of the web, whether that’s what’s best for the web and its users or not.
Presuming you’re not a Goldman customer looking to buy pre-IPO Facebook stock – but rather a web user and lover – what does this mean to you? It’s hard to say. There will be upsides and there will be downsides. On balance, I don’t think it’s good news, though.
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