At a Y Combinator event in October, Facebook’s Mark Zuckerberg told an audience of young entrepreneurs, “We’ve not once bought a company to get a company. We buy companies to get excellent people.” Indeed, Facebook has grown notorious for small, talent-driven acquisitions, like its $10 million purchase last year of Hot Potato, a year-old social collaboration startup whose founder, Justin Shaffer, is now a Facebook product manager.
Facebook purchased roughly 10 startups last year and has plans to do “double-ish” that amount this year, according to Vaughan Smith, its director of corporate development. But in order to fit into its new $50 billion valuation, a number of investors in the know suggest that Facebook will have to supersize its acquisition strategy, and fast.
Viewed through any lens, Facebook’s numbers are staggering. Reports state Facebook’s profit was roughly $400 million last year on net income revenue of approximately $2 billion. Its revenue potential is even more impressive. According to a person who has seen Facebook’s financials, Facebook is still making less than $2 per user, compared with the closer to $20 per user that Google sees. Still, there’s a sizable delta between the tools that Facebook has to extract this money and Google’s arsenal of search products.
”[S]earch is incredibly valuable and always has been, and social networking traffic has never been valuable,” says Jeremy Wenokur, an L.A-based angel investor who was director of corporate development at Google from 2001 through 2005. “With Google, you’re looking at something that directly correlates to an ad or action. Facebook has to figure out how to make [its] ads targeted and valuable.”
There are plenty of ways for Facebook to get there, suggests Wenokur, including acquiring “gaming companies, entertainment sites, and search companies, of course.” He also suggests Facebook might consider acquiring a Groupon, because it has a social component and because Facebook “should start looking into some fast-growing revenue sectors.”
Wenokur recalls Google couldn’t do major acquisitions before its IPO “because we’d say Google is worth X, but people didn’t believe us.” Facebook doesn’t have that problem, he notes. In addition to the valuation that Goldman ascribed to the company in investing in Facebook, Facebook can point to a robust secondary market to support its claims. With a solid valuation basis and billions of dollars of cash at its disposal, Facebook has the potential to buy much larger companies than Google could have ever dreamed of in its pre-IPO days.
“It’s just a question of when [Facebook] feels that it’s developed enough to handle [bigger] acquisitions,” says Wenokur. “You have to be prepared to it. The right deal has to come along before you do something.” Still, he says, “It’s surprising that they haven’t been buying more companies.”
Zuckerberg is right to focus on great people, but great people are also attracted to a dynamic company that is seeking to grow the pie for everyone – management, employees, and investors alike. By narrowly sticking to a team-driven approach, Facebook could be undermining its leverage in a what is undeniably a very dynamic and chaotic market.
Says Wenokur: “It could be that Facebook is focusing more on the core business — the social networking side — but you can get caught up in that tunnel.”