5 February 2012

It was the summer of 1990. I had just turned 21. I was sitting at a piano in Menlo College Campus in California, whiling away an afternoon on an 8ft concert grand that had seen better days.

It was a creative place for me and whilst it was mid holidays and the majority of students were on vacation, I really got a sense that I was in a special place. I had a great summer and made some lifelong friends and although I considered moving there, I was fundamentally a musician and back then, wild horses would have not dragged me from my vocation.

I never realised just how important Palo Alto was going to be in the technical revolution that followed. With Stanford University on its doorstep too, the area is steeped in history. In the same way people look upon Manchester as a central point for the Industrial Revolution, Palo Alto and Silicon Valley have to carry similar weight.

Since then, we’ve seen meteoric rises from a number of the world’s largest technical giants; Apple, Cisco, eBay, Google, who all house their head offices there.

One of the most recent of the dominant players is Facebook who moved to Palo Alto in 2003. They have had an interesting rise to fame and good fortune, although the fortune is a little more recent.

With traffic volumes exceeding Google, Facebook has more than 830 million users and, as a result, has to be the world’s most high profile website.

In recent years, it has entered everyone’s homes and hearts, linking families, businesses, long lost relatives, school mates. It has done the impossible. It is doing the unimaginable. It crosses borders as easily as water and it knows no boundaries. There is no culture that has rejected it. It works in every language. Fundamentally, it feeds the needs of all humans, whatever creed or continent.

The billion dollar question is: how far can it go?

There is no point trying to work out how Mark Zuckerberg created such a masterpiece as I doubt he really knows. There was evidently a gap in our social lives that none of us knew about and Facebook filled it. What Zuckerberg has done extraordinarily well is exploit that gap and give us exactly what was needed.

So, with talks of the Facebook IPO, is it worth the $100 billion that they are hoping to raise? It sounds like a lot of money and with economies all over the world facing tougher times around the corner, it seems crazy that a website that allows us to communicate with each other can be worth so much.

Yet, if you put it into perspective, $100 billion is only 27 times the annual revenue of $3.71billion. When Apple went public in 1980 it was valued at $1.19 billion 25 times its earnings. It is moderate in comparison to Google who went for 218 times earning back in 2004. Yet Google delivered and in the last 8 years it has changed the face of advertising. Facebook would have to be the world’s first $700 billion dollar company to replicate Google’s rise.

When you consider the fact that Facebook grew 88% last year, it is a tempting gamble, yet a great many brokers are warning against investing in the rising giant. Personally, I can see it going for a great deal more than 27 times even though the market currently dictates around 12 times. There is an emotional attachment that people have with the site and that sometimes carries a great deal of weight, so I wouldn’t be surprised if the initial entering is particularly high.

If you scrape away all the hype though and compare it to Apple who grew profit 85% to $25.92 billion, Apple trades at a modest 13 times its price to earnings.

If you apply the Facebook multiple, UKFast would be valued at almost $1.0 billion.  ($939 million to be exact.)

Maybe I should have stayed in Palo Alto after all, especially when you apply the Google multiple. UKFast would be worth $7.5838 billion. Now even my wife couldn’t spend that much.

Whatever the outcome, you have to hand it to Zuckerberg; he’s done well. And in spite of a great many people all professing to have either come up with the idea or influenced it, he has hung on to the lion’s share, getting credible people in around him who have track records in designing large scale corporates, enabling him to remain creative.

This is the thing I admire the most in any business. It’s the first thing that suffers usually. Demands on the entrepreneur dictate new pressures and larger responsibilities as businesses sky rocket, so much so that they often suck the life and fun out of most founders. Yet in spite of this and some pretty stupid gaffs, Zuckerberg enters the Silicon Valley Hall of Fame as one of the youngest internet billionaires.

On the subject of gaffs, Zuckerberg paid David Chloe, a graffiti artist who decorated a wall of his first office in Palo Alto, shares instead of a few thousand dollars. Those shares are now worth an estimated $200,000,000.

Ironically, the fee for the picture David Chloe painted is more than the cost of the building that they left. I am not sure I’d want to paper over that mistake.

So, as Facebook move to Menlo Park Campus to their new HQ, I can’t help thinking of the neglected piano. I do hope that, with all that money sloshing around, someone takes the trouble to give her a tune and a tinkle every now and again.

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