Last October Microsoft solidified Facebook’s value to the world, $15 billion. Microsoft got a paltry 1.6% stake in the company for $240 million.  Some thought that Steve Ballmer had lost his mind. But what people didn’t realize is how smart he really was. To Microsoft, $240 million is a rounding error, so if they were really crazy they would have bought more of Facebook at an insane valuation. What was brilliant about this move was it established a public valuation for Facebook that was so high and unjustified no one on the planet would touch them. Unless you are Li Ka-shing the Chinese billionarie that put up $60 million at that valuation. Essentially it was a poison pill for anyone that would try to acquire them. (hint, hint, Google)

Even Facebook internally didn’t believe the $15 billion valuation. According to inside sources they were offering employees options at $10 billion and some employees got options at $5 billion. Mark Zuckerberg recently canceled a employee stock buying program when no company would agree that Facebook was worth $4 billion. So what is it worth now? Valleywag was reporting rumors of of people willing to sell their stock at $2.50-4.00, that would put Facebook’s valuation at $1.3 billion. If you look at the numbers Facebook is worth much less. 

They are buring a ton of cash adding new employees and increasing CAPEX spend on new servers to support their growth. Michael Arrington highlighted there burn rate back in October but matters get even worse with their valuation plummeting. Facebook has raised around $500M in funding. They probably have only about 100-150M still in the bank. Their global expansion could easily get more pricey and put them in a cash crunch. Facebook will be forced to do a down round in financing or raise debt. And in this market unless maybe Microsoft or Google would be Facebook’s bank to bootstrap their growth they are going to run out of options fast. Here is my take on their 2009 outlook.

Facebook’s 2009 Projections:

• 250M users
• 1B page views
• $.40 revenue per thousand page views
• $400M revenue – (Microsoft contributes 80% of revenue)
• $200M COGS
• $250M OPEX
• $-50M contribution margin

The key question for Facebook is will they have a breakthrough on the business model. Because right now that are just building a social portal business which will never scale and be as profitable as search. All of their previous attempts to add “the social” to advertising have backfired. Facebook’s Beacon product was a PR disaster.

The other big impact this will have on Facebook is recruiting. Hundreds of the best and brightest people bailed from their day jobs at Yahoo, Google, and other tech companies in the valley to ride the Facebook wave in hopes to get rich. With the valuation plummeting and fear that Facebook might run out of cash it is certainly a riskier option now. Several key people have already left the company including Adam D’Angelo co-founder and CTO, Jeff Hammerbacher, and Matt Cohler. The future does not look bright for Zuckerberg and team.

Zuckerberg says, “There’s this big question about whether we’ll compete with applications. The approach that we take isn’t that there’s some rule that we won’t compete with applications, but we just think that in general it’s not good for us to.”

What he is really saying is I will build first party applications when it’s in Facebook’s best interest. Anything that is really, really important to the community will be strategic to Facebook. Like music, Zuckerberg goes on to confirm that Facebook is working on a music application. He justifies it by saying, “To make a really good music application you have to have access to music. We felt like we had a good chance of helping someone negotiate to get access to the music necessary to create a good music application.” There are plenty of companies that they could have partnered with to get access to music. But they are building an application because they think it strategic to Facebook for a variety of reasons.

Facebook

This is a lot like circa 2001 when Microsoft launch “Hailstorm”, a set of XML Web services that were going to give people more control over their personal information regardless of device or platfofm. “Hailstorm” later launched as a set of .Net services that were part of the Microsoft Passport service. It even launched with prominent Web sites like eBay and Expedia adopting it. Many of the people working at Facebook were probably enjoying college too much to remember. Facebook Connect is nothing more than “Hailstorm” connected to someone’s social graph.