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Facebook's cash infusion whets appetite of investors

The $500-million investment from Goldman Sachs and Digital Sky Technologies heightens pressure on the social network to go public. But Facebook executives are in no hurry.

January 04, 2011|By Jessica Guynn, Los Angeles Times

Reporting from San Francisco — Everyone wants a piece of Facebook Inc.

News that investment bank Goldman Sachs Group Inc. and Digital Sky Technologies, a Russian Internet investment firm, will invest a combined $500 million in the social networking site has only whetted the voracious appetite of investors seeking to own a chunk of the wildly popular but privately held company, which now has an implied value of $50 billion.

Facebook board member Peter Thiel has said Facebook would consider going public in 2012, in what would undoubtedly be one of the most anticipated initial public offerings ever in the Silicon Valley.

In the meantime, an elite club of private investors lucky enough to snag a sliver of the company stand to make a fortune when Facebook finally takes the plunge. Even some speculators who have paid steep prices to snap up shares on private stock exchanges from former employees and early investors could profit handsomely. Analysts predict that Facebook's already sky-high valuations may hit the stratosphere, putting it in the same rarified league as Google Inc.

"We think Facebook would trade at a $100-billion value if it were public today," said Lou Kerner, a social media analyst at Wedbush Securities.

What's driving the Facebook derby? The massive yet unproven moneymaking potential of the world's most popular social networking site, which boasts more than 500 million users. The company has raised nearly $1 billion without tapping the public markets, creating pent-up investor demand for the next big Internet IPO. The anticipation is similar to the frenzy surrounding the 2004 initial public offering of Google, the world's most popular search engine. Google raised $25 million before going public.

"There's this expectation that just like Google went through the roof, Facebook will too," UC Berkeley law professor Robert Bartlett said.

Facebook is the undisputed — and seemingly invincible — leader in social networking, the latest trend to grab eyeballs and dollars on the Web. Seven years ago, Facebook founder Mark Zuckerberg came up with a new way for college students to connect, sparking an online revolution in the process. Now the billionaire digital age mogul talks boldly of doubling Facebook's users to 1 billion. There are no guarantees that Facebook won't stumble like News Corp.'s MySpace before it, but the money continues to pour in.

Facebook's explosive popularity got a boost last year with the movie "The Social Network." At the time, Thiel tried to capture the exuberance in an interview with The Times.

"Great consumer companies grow fast, and this is definitely one of the greatest consumer companies in all of history," he said. "It is culturally really important, and it represents a permanent shift, sort of like television or radio if they were invented by a few people in one company. That it's a consumer-facing company makes it very interesting to people. People can relate to it. People have ideas of what it should do different or better. It's somewhat of a unique thing. There's a lot of intensity surrounding it."

Facebook owes its status to its increasing ubiquity. It has become the place people go to find their friends, sort of like a modern-day phone book. While Facebook quickly has captured the attention — surpassing Google as the most visited website in 2010, according to Internet analytics firm Experian Hitwise — it has been slower to tap revenue streams such as advertising, payment systems and e-commerce. But some advertisers are bullish on its prospects.

"It's the real deal," Michael Lynton, chairman and chief executive of Sony Pictures Entertainment, said in an interview late last year.

Many analysts agreed.

"Facebook has won the scale game," BGC Partners analyst Colin Gillis said. "Now it has to monetize that scale. Historically, monetizing is not that difficult."

That's the bet that Goldman Sachs is making. Facebook, which had been looking for a benchmark valuation from a major investment bank ahead of an IPO, closed a deal in the last few weeks with Goldman and Digital Sky Technologies. Goldman has chipped in $450 million but is expected to sell $75 million of that stake to Digital Sky, which now owns a little less than 10% of Facebook. It's widely speculated that Goldman is the leading candidate to take Facebook public.

News of the investment from such a prominent Wall Street player triggered hopes that Facebook would finally proceed with an IPO. "It seems like there is a fair amount of momentum for Facebook to go public now," Standard & Poor's equity analyst Scott Kessler said.

The blockbuster deal will give Facebook more money to develop new products, pursue acquisitions and pick off employees from other top Silicon Valley companies. A Facebook spokesman declined to comment.

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