Facebook Gets 200 Million Cash Injection

Posted Friday 29th May 2009 by admin in Social Media.

The ambiguity regarding Facebook’s issues of working capital has been clarified. The questions regarding the social network platform’s deficit in operating costs and revenue have been answered by a Russian holding company. Digital Sky Technologies [DST] invested USD 200 million into Facebook allowing 100 million in shares to be bought; ensuring shareholders could get cash for their stock without going public.

Facebook is an interesting phenomenon as it is still not clear where they will make money. The 270 million plus users have got analysts figuring that where there are that many people gathered, there must be a way of squeezing massive amounts of money from them. The problem being that there is no tangible product; the ads on Facebook are not effective as users are there to socialise, as opposed to shop and there is no fee for membership. So the question remains, how does Facebook capitalise on its success?

To date it has been devouring venture capital and other private equity finance, still searching for an answer to the question of profit. This still has not adversely affected the valuation of the company which was stated at an estimated 10 billion, although during an internal valuation as part a legal proceeding, the company was valued at USD 3.7 billion. The CEO Mark Zuckerberg has stated that there is a structure in place to make Facebook profitable by 2010, although nothing on how this will practically happen.

There have been escalating rumours that Facebook is soon to become a publically floated company. These rumours were fuelled by Facebook’s search for a chief financial officer being focussed toward someone with public company experience. Opening its doors to the public is somewhat an inevitability; however the company would still need to find a profit from somewhere in order to deliver a return.

The investment by DST is not a purely financial one. They are also investing their experience with Russian language social network platforms which command 70% of all page views on the Russian speaking internet and all of their social network sites turn a profit. In theory, all they would need to do would be to apply the same business model of the existing sites to Facebook, just on a larger scale.

This could include revised advertising strategies, upgraded premium services which would be charged for or even some kind of annual membership fee. With 270 million daily users, a registration fee of a dollar or pound per year would go some way to covering operating costs and they would not run the risk of having to introduce more tangible advertising techniques which could be intrusive to the user experience.

More aggressive advertising might have to be introduced in the event of Facebook being publically floated and there not being a return on investment, as the company will have to answer to their shareholders. That sort of advertising was one of the factors that drove people from Myspace to Facebook in the first place, so any dramatic changes which affect users could jeopardise the basis of all this investment – the 270 million daily users.

The money is going to be used to buy stock and develop technologies such as video chat. Resources will also be delegated to developing the market in China and India. The DST investment will see Facebook safely into 2010, however by then it really needs to have a business model in place, as this venture capital private equity is not limitless and business partners such as Microsoft who own 1.6 % of Facebook and DST will be expecting a return at some point.

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