Stephen Foley: Facebook's adventure on the dotcom superhighway may yet fail spectacularly

US Outlook: When is a $100m gift not a $100m gift? When it’s in Facebook stock.

I am absolutely not going to join the chorus of cynicism that has greeted Facebook founder Mark Zuckerberg’s announcement – on Oprah Winfrey’s show, on the eve of the release of the critical movie about Facebook, The Social Network – of a major donation to the school system in Newark. Improving the blighted schools of America’s inner cities offers perhaps the greatest leverage for domestic philanthropy, and Mr Zuckerberg, whose girlfriend trained as a teacher, has been genuinely invested in the issue and persuaded of the transformative powers of Newark’s charismatic mayor, Corey Booker. It is unequivocally a wonderful gift.

But uncertainty arises because Mr Zuckerberg’s Startup: Education foundation is being seeded with Facebook stock. Newark must make sure it can definitely turn the promise into cash. Facebook’s valuation, vacillating in

recent months between $23bn and $33bn, is highly speculative, and almost certainly too high.

Facebook is not traded on the stock market. Those valuations are based on the price fetched for the very small number of shares that trade on a secondary market, where departing employees can cash out and eager venture capitalists can buy in.

When Facebook will properly float, and its valuation be subjected to the rigour of a bigger market, is one of the white-hot debates of the tech industry. Despite being embedded in so many of our lives, and despite passing 500 million user profiles, the company is expected to bring in revenues of no more than $2bn this year and, with the costs of staff and servers rising with the number of users, it is not clear it is making much real profit.

It seems counterintuitive, but it is entirely possible that a company seen by maybe half of all the world’s internet users might be worth very little. Facebook doesn’t charge its users. It has contrived, too, to make little money from the third-party apps that users add to their profiles. It has recently been talking up the prospects of turning Facebook Credits into a virtual currency, on which it takes a 30 per cent cut, for use across the web, but I’d be wary of financial regulators sniffing around if this really does take off. As for selling access to the data it collects from its hundreds of millions of users, privacy concerns have already put a cap on those ambitions.

None of this is to say it won’t find a way, but a valuation of more than 10 times revenue, and God knows how many times earnings, seems racy, to put it mildly, unless there is a clear business model. I wouldn’t put any of my money into Facebook at this point, unless I could afford the risk of losing it all.

It is the job of venture capitalists, who seem to be the main buyers of Facebook on the secondary market, to make big punts like this. Stock market investors, including mutual funds entrusted with our pensions, will probably want to wait, which is why a flotation could be further off than is imagined. This isn’t the boom, after all.

Google has a lot to answer for. Its founders focused on building the world’s best search engine, not on building a profitable company. The business model came long afterwards, based on selling what are still the most effective kind of ads on the web, alongside search results. This “build now, business later” approach is typical of most of the big internet sensations of the last few years, but it fails more often than it succeeds. (Even at Google, which acquired YouTube halfway through the video-sharing site’s build phase and has failed to make money on the deal.)

The funding promise Mr Zuckerberg made to Newark yesterday, and the challenge he made to the city to raise matching funds, makes the issue of Facebook’s private market valuation more than an academic exercise. It will take years for Facebook to really justify the number put on it, until which time its thinly traded stock could halve or worse.

Or go to zero. Remember that the jury is still out. Facebook might yet turn out to have been a wonderful experiment that, in an economic sense, was simply a misallocation of capital by its venture capital backers. In layman’s terms, a waste of money.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want for the fitness tech, or the style
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own