The game is on. Zynga's IPO filing

Zynga filed on Friday IPO and in their filing are some interesting points.

Despite their high revenue in Q1 this year ($235 million) the net revenue is only $12 million. most of the costs went into R&D, cost of revenue (shares to FB) and Sales and Marketing. Zynga has 232 million active users and makes most of its money with virtual goods.






Reading through the filing makes it clear that Zynga's highest risk is the relationship to Facebook. Most players are playing through the Facebook platform and buying there virtual goods for Farmville etc. FB gets a 30% share of these virtual goods revenue.

Facebook is critical for Zynga and Zynga is critical for Facebook. The planned IPO ($1 billion) could help Zynga to build a stronger network outside from FB.

Zynga is less than four years old. Their first game on FB was poker. Since then Zynga did build games like Faemville and Fontierville. Mark Pincus (one of the Zynga founders) had founded three other companies before he started Zynga. The most famous one was tribe.net one of the first social networks. Zynga got from beginning $29 million in VC. Since then Zynga got hundreds of million of more VC and has been many months with their games on FB leading the top 10 apps on FB.

In July 2011 it had 3 games in the top 10.




In December 2010, Zynga did hold 6 of 10 top games see my blog.




In June 2009 only 2 games.





All images from allfacebook.com.

Zynga is still leading developer on FB but the MAUs (MAUs is the number of individuals who played a particular game during a 30-day period, as recorded by our internal analytics systems.) are declining.

And Zynga is not anymore in the top fast growing apps.





Is the filing maybe coming to late, where many people prefer to play angry birds or prefer to play outside of FB?

I don't think so, as long Zynga will work on building a network which can be without
FB and if Zynga is bringing out new games. Which might be not too hard. Zynga did acquire at least 11 companies in the last twelve months (XPD in Beijing, Challenge Games in Austin, Unoh Games in Tokyo, Conduit Labs in Boston, Dextrose AG in Frankfurt, Bonfire Studios in Dallas, Newtoy in McKinney, Texas; Flock team; Area/Code in New York, and Floodgate Entertainment, MarketZero).

Making most of the money with virtual goods is risky, it is just money from the consumer. But I believe VG will be even stronger and a part of our live in the future.

Zynga has now over 2000 employees which I believe is just ok, but they should not hire much more. I don't see really a need for more employees at a gaming platform or game producer. More people will water down the quality. Which means you need much more people to get to the same result as a few, which increases the costs extremely.

I still believe Zynga is a good buy and we all should consider to get some stocks. But if Zynga keeps staying so close connected to FB or is relying on FB and they don't come up with some more different types of games then we should sell within 12 months. Otherwise Zynga could have a chance to be the next Electronic Arts for social and mobile gaming.

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Groupon filed for IPO - now we know the real deal

Groupon just did file for IPO which helps us to understand how well Groupon does, and unfortunately I see a lot of things which let me believe that Groupon will not exist anymore in 5 years.
Groupon lost in 2010 $413 million and in the first quarter of this year $114 million. These are impressive numbers but of course not positive impressive. Therefore Groupon is talking about Adjusted CSOI (adjusted consolidated segment operating income). In accounting it is called non-GAAP (generally accepted accounting principles).
In 2010 and the first quarter of 2011, Groupon said its Adjusted CSOI was $60.6 million and $81.6 million, respectively. Sounds much better, right?
But we all remember as well that Groupon got $950 million investment in January 2011. In March Groupon had only $209 million in cash. Where did all the money go?

The company’s IPO filing spells that out: most of the money went to previous investors and c-level employees.

The details: Groupon raised a total of $946 million in two funding rounds last winter. It kept $136 million of it help run the money-losing company. The remaining $810 million was paid out, via stock purchases, to CEO Andrew Mason and some of his backers, including Eric Lefkofsky, and, notably, the Samwer brothers, who sold their CityDeal company to Groupon in 2010.

Looking at the filing we can see that Groupon made in 2010 $713 million revenue with a Gross profit of $280 million and did spend $263 million in Marketing. In the first three months of 2011 (not audited) they made a revenue of $644 million and did spend $208 million in marketing. This let us expect that Groupon will make $2.5 billion revenue in 2011 with $800 million spend in marketing and a lost of almost $500 million. The IPO is looking to get $750 million in. Which would be mostly gone for compensating the lost.

Groupon is only three years old and did grow from $30 million in the second year to $713 million in the third year. This is a growth rate of over 2376%.

However Groupon is making big lost each year, because of the aggressive marketing. The marketing helps Groupon to grow so fast and is much bigger than living social or other similar services. Not always the best system wins, but the system which spends the most money.

One thing makes me sad with Groupon and is for me an early indicator that Groupons founders and c-level exit strategy is the IPO. I don't see any of them really interested to run Groupon as a company for 100 years. If you look at the lost the company made but the top level management got millions in stocks which is basically fine for the work they do for the company. But at the same time they got a lot of money from the $950 million in investment even, if the company lost a lot of money. Mr Lefkofsky made alone through the $950 million deal $320 million in cash.









I would have expected that he would not take the cash and instead grows his shares and keep the cash in the company. Taking so much cash by knowing that the company is still losing almost a billion is not a good sign. If you look at his career, then you can see he is a person who invest in a company, help the company to get much more funding and then takes a lot of money out with no feelings how the company will do. The companies will eventual file for bankruptcy but he will be a billionaire.

But we should not forget he is only 40 and has already brought two companies successful public and is net worth $800 million.

Echo Global Logistic, Inc and InnerWorkings



And if I want invest money again, I would follow what he Mr. Lefkofsky is doing, I think he has a good feeling what is going on. A very smart guy.

Here is the complete filing paper for the IPO:
PDF file
page 93ff is very interesting in terms of compensation.

Who is Mr. Lefkofsky?
Wikipedia:
Lefkofsky began his career selling carpet at the University of Michigan. After law school, in 1993, he and a college friend, Brad Keywell, borrowed money from relatives to buy an apparel company in Madison, Wisconsin named Brandon Apparel.
In 1999, Lefkofsky and Keywell created an early Internet company called Starbelly that specialized in promotional products. Starbelly experienced rapid “pre-bubble” Internet growth and was sold to Halo Industries in January, 2000.
After Starbelly, Lefkofsky, along with a core team of investors and entrepreneurs, founded InnerWorkings in the fall of 2001. InnerWorkings provided print procurement services for mid-sized companies and achieved solid year-over-year growth. In August, 2006, InnerWorkings had a successful initial public offering in the U.S. stock market (nasdaq: INWK). Lefkofsky is on the board of directors of InnerWorkings.
In February 2005, Lefkofsky and Keywell created a freight logistics company called Echo Global Logistics. Echo attracted series D financing from New Enterprise Associates (NEA), one of the largest technology investors in the country, in June 2006. Echo Global Logistics went public on the NASDAQ under the symbol 'ECHO' and is now successfully being traded.
In June 2006, Lefkofsky and Keywell founded MediaBank, a media-buying technology company. MediaBank provides advertising buyers with planning, buying, accounting and analysis software. In June, 2007, MediaBank acquired Datatech, one of the leading media planning and procurement platforms in the advertising industry. In July, 2007, New Enterprise Associates invested in MediaBank.
In January 2007, Lefkofsky co-founded and provided $1,000,000 in funding for ThePoint.com, an online collective action website started by Andrew Mason. New Enterprise Associates lead an early stage investment round in ThePoint. In late 2008, The Point changed its name to Groupon.com. In October 2009, Groupon raised $30 million from Accel Partners and New Enterprise Associates. In April 2010, Digital Sky Technology and Battery Ventures invested $135 million in Groupon at a valuation of $1.35 billion. In August 2010, Forbes reported that Groupon is the fastest growing company in history.
In February 2010, Lefkokfsky and Keywell announced a new venture firm called "lightbank" that plans to develop new companies in the Chicago area.

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Linkedin.com is now public - phishing starts

I am linkedin user since 4 years and I like it. I think it is so far the best professional network I used. I never had issues with linkedin and never got suspicious emails using as cover linkedin. This changed this week. I have a certain email address just for linkedin.
Yesterday I got to another email address (my public email address) an email which seemed to be from linkedin.

Usually when somebody wants to connect to you, you would get an email similar to this:



The email is send to your email address stored in linkedin.

The email I got yesterday looked like this:




If you don't look closer to the email you would not recognize it as a fake. But what made me suspicious was that the email was send to my public address. I first thought somebody did try to connect to me by imputing this email address in linkedin because we never met each other (linkedin ask then to input an email address).
However I looked at the sender email address which was a really weird email.




Linkedin usually does not have unreadable email addresses. Next I went to linkedin to search the person Mark Andronas but did not find any person with this name in linkedin. Another weird part was that the email had two names. Mark Andronas and Neal Collins which I could not find neither on linkedin.com

Clicking on "connect that you know Neal" will bring you to http://salesforceappi.com/loginapi.php?tp=1da14085e243eaf9

A Domain registered in Shanghai
Registrant Contact:
zhang yong
yong zhang xfire2311@hotmail.com
+86.2136854127 fax: +86.2136854127
shanghai
shanghai shanghai 310016

(I am aware by posting the name and phone number of this person will have as result that this person might try to hack my blog)

The page itself is a php page which looks like the linkedin.com log in page which asks for your username and password. You would disclose to the person in Shanghai your linkedin account.

I guess since linkedin got big and public, we will see more such scam.


Please never click on any linkedin email with links on it in your mail program. If it is a real linkedin email then it shows up in your linkedin online account. Please open the emails there. And if it is a case you don't see the email in your online linkedin account and you are not sure the email is real, then contact linkedin fraud department https://help.linkedin.com/app/ask/subject/Possible%20Phishing%20Attempt

They will let you know if it is real or a fake email.

Here some tips from linkedin:
Suspicious emails should always be handled carefully. Please be cautious in opening any attached files or links included in the email as it may contain malware which could be damaging to your system. Note that any links in messages from LinkedIn should only direct you back to LinkedIn.com webpages. If you already opened attachments or clicked on links from within the message, you will want to run a current version of antivirus software to scan your computer for malicious viruses. To learn more about privacy best practices and what you can do to protect your account security, click here.

Your privacy is our top concern. We work hard to earn and keep your trust, so we adhere to the following principles to protect your privacy:

We will never rent or sell your personally identifiable information to third parties for marketing purposes.
We will never share your contact information with another user without your consent.
Any personally identifiable information that you provide will be secured with all industry standard protocols and technology.


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What is the value of Facebook?

The Wall Street Journal reported the social-networking giant is on track to make $2 billion this year in profit before interest, taxes, depreciation and amortization. Using published estimates from market-research firm eMarketer, the paper said Facebook is likely to rack up $4.05 billion in ad revenue this year, more than double 2010's take of $1.86 billion.

The $4.05 billion in revenue does not tell us yet how much the value of Facebook is and how much more they can grow in terms of revenue.

Let us look into some other figures. Facebook has currently 3,000 employees. This would be $1.35 million per employee.
Apple made last year $57 billion in revenue and has about 35,000 employees which will set the revenue per employee to around $1.5 million. Therefore in terms of revenue per employee, Facebook could be compared with Apple. And Apple Valuation price-to-EBITDA is factor 10. Which would put the value of FB to $20 billion.

Another important number is the market share Facebook has today. According to comScore, Facebook has a market share of 31.2% in display ads.
Facebook served up nearly a third of the 1.11 trillion display ads delivered to US Internet users in the first three months of this year, industry tracker comScore said on Wednesday. Yahoo! websites ranked second with 112 billion impressions, followed by Microsoft, AOL, and Google in that order.


If I can count correct, Facebook would make $3.38 per CPM.
The question is how much more market share can Facebook achieve? Let us assume they can get up to 50% then their annual revenue (if ads are the only income) would be around $7.5 billion. $3.38 is already on the high side. The average for online ads was $2 in 2010.
There is not much revenue growth to expect if the CPM (cost per thousand impressions) price does not go up. I used CPM measurement because it is the easiest way even if Facebook is using CTR (Click through rate)

Second income source for Facebook are virtual goods and other things bought through Facebook credits. FB gets 30% of all FB credits used.
Some vendors estimate that U.S. revenue grew from a negligible base in 2008 to US$1.2 billion in 2009, with projections to at least double in 2010. (The worldwide market, led by Asia, is estimated at about $6 billion.)

Let us assume that 30% of virtual goods revenue will be generated by Facebook and we reach in 2011 a overall revenue of $9 billion. This would mean Facebook would get another $1 billion in revenue from virtual goods / Facebook credits.

Overall FB could make $8.5 billion in 2011 in gross revenue which would be around $4 billion EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Which could get FB for IPO (initial public offering) a value of $40 billion if we use factor 10.

Is factor 10 too low, right on spot or too high?

Tim Mullaney did the work and looked into 6 companies to compare with Facebook.


Company: Open Table
What it does: Online restaurant reservations
Valuation price-to-EBITDA*: 53.7
Facebook's value at that multiple: $107.4 billion

Company: Google
What it does: Search engine
Valuation price-to-EBITDA*: 9
Facebook's value at that multiple: $18 billion

Company: Priceline
What it does: Online travel
Valuation price-to-EBITDA*: 22
Facebook's value at that multiple: $36 billion

Company: Netflix
What it does: Movie subscriptions
Valuation price-to-EBITDA*: 27
Facebook's value at that multiple: $54 billion

Company: Apple
What it does: Computers, smartphones
Valuation price-to-EBITDA*: 10
Facebook's value at that multiple: $20 billion

Company: Salesforce.com
What it does: Cloud computing
Valuation price-to-EBITDA*: 52
Facebook's value at that multiple: $104 billion

Of all them, Google is the most similar company to Facebook but does not require login. However Google is the biggest Internet search engine which reaches 72% market share in 2011. Valuation price-to-EBITDA would be around 9 and FB value with this multiple would be $18 billion.
Forbes:
While we anticipate Google’s search market share will expand from 68% in 2010 to ~72% by the end of our forecast period, Trefis members predict a share of 75%, implying a modest upside of 3% for our estimate of Google’s stock.

Only Apple and Google are really in the ad business or in same size of revenue per employee like FB. Apple does not do a significant revenue yet in their ad sales, but they have a micro payment system similar to FB credits (Apple app store and iTunes, both take 30% of revenue). On the other hand Google is still dominated in the lucrative market for texts ads posted with search results.

The other companies which have a higher multiple are either much smaller (less market penetration) or a B2B model. Open table is reaching less than 1% of potential customers. There is still a lot of growth possible. Netflix has 20 million users and can still ten fold in the US. If they go international even 40 fold.
Priceline has as well a lot of space to grow. FB with already 600 million users can grow, if everybody in the world uses FB, max. 10 fold. And there is not much more ad placements possible on the pages without annoying the users. The most growth FB can get is in FB credits.
Salesforce is a B2B business which has high potential. With a consumer portal, the risk is high that the users switch from one portal to another within a day especially if they don't lose money, because the service is free. A good example is myspace. 4 years ago they have been bigger than Facebook. Today myspace is not playing a significant role anymore. But salesforce is binding their clients for 3 years and switching an CRM is not easy for an enterprise company. And companies are hiring always sales people. Each new sales person gives SFDC $1,200 more a year, therefore SFDC has much higher multiple.

Not being a financial expert, I would say that FB value would be something between $18 billion and $35 billion, even if FB is traded in the second market with $70 billion. Everything higher than $35 billion estimated value for the IPO would be not recommended.
Here is a chart from Silicon Alley Insider which puts FB to $50 billion in January, which I think is too high. It is based on investments into FB to received shares, Goldman and Sachs invested into FB this year $1.5 billion based on a $50 billion value. These guys should know better than me the real value of FB which means I am much too low with my valuation.




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Linkedin is going public - is the time right?

Linkedin is the first of the new social starting stars with over 90 million users.
Linkedin is a social met work for professionals and has a basic free service. Users cam have better search function or other services if they pay a membership fee. Linkedin is right now at a value of almost $3 billion on the second market.

Linkedin started in November to find banks for their public offering process, interviewing bankers in early November before choosing Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase as its three lead advisers

Is the time right for an I.P.O?
A lot of people are waiting for Facebook, twitter and Groupon to go public. The hype for social is big and being the first to go public might boost the stock market for linkedin.
But on the other hand, many people might want to wait and see where it is going. Linkedin is much smaller in user base than Facebook or twitter and much less revenue than Groupon, and therefore the initial offering should be pretty low per stock.
It might have been smarter to wait till Facebook goes public, because many people won't want to spend $80 or $120 on a stock from FB and therefore might to buy linkedin stocks just to be in the social stock trading.

On the other hand linkedin can now need the money to expand more aggressive in Europe. Xing is still market leader in Europe as a professional social network.

It will be interesting to see how linkedin will perform on Wall Street and it will be slight indicator for Facebook and Groupon how the public and Wall Street is taking social companies.

Facebook is pretty smart to wait till a few of it competitors are public to learn from their mistakes. Facebook understood early that as a market leader it is not always the best to be the first. And nobody has yet experience with social platforms on the stock market.

Google learned in the time back a lot by watching other companies going public and chose the best time to file for IPO. Google was able to digest all what was going on and could therefore modify their approach that they even came up with a new way how people could reserve stocks.

I think linkedin could perform better if they would have wait to be the third or second one on the stock market in the US.

It will be interesting to watch. And if you have few thousand available, then buy linkedin stocks and sell them when Facebook goes public to use the money for Facebook stocks. Keep them 18 months and then in vest the winning in Apple or Asia, this is never wrong.

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Is Facebook overvalued?

Digital Sky Technology did offer in October 2010 some of it's Facebook shares (but then invested again $50 Million this week).
On Tuesday a German investor in Facebook sold all his his shares. Thomas Heilmann had a stake in the social networking website “in the area of one-tenth of a percent” at the beginning of 2009, without specifying the exact size of the share. The current valuation of Facebook is “crazy,” Heilmann said in an interview with Tagesspiegel (businessweek.com)

All this could be an indication that FB investors are believing that FB is overvalued. Or as Mr. Heilmann says "crazy".

Investors have usually a deeper knowledge of the financial situation of the invested companies. Another Interesting point is that Facebook just now got another investment of $500 Million. If their system would work really well and revenue (estimated $2 Billion) is higher than costs, why is there a need to get another investment in?

The shares at second market are skyrocket which is the base for the estimated value of $50 Billion. Everybody who wants (and can afford) to buy shares through secondmarket.com or Sharespost.com will now pay over $110 a share. A lot of people have a hope that FB will go as well or better than google.

Google started in 2004 with $85 a share and raised within the first day by 20% and had an Initial Market Cap of $23 Billion. Which was big. We are now 6 years later and Google has a market cap of $193 Billion. This is 8.5 times of original offering. But the profit margin is only 29% (Baidu, Web.com and AOL have a higher margin. Baidu has over 43%).

Facebook would need to start with am initial market cap with $35 to $50 Billion which is not too far from realistic, if we take in account that we are now 6 years later.

Secondmarket.com has already $1.3 Billion in FB shares to offer, which most of them are coming from early investors

Big difference in Google and FB is that google.com was in 2004 only number 5 website ( behind yahoo, Microsoft, Time Warner and eBay). Facebook is already number 1 and higher valued than yahoo or eBay.
On the other hand when people search for something they are more likely clicking on ads then when they read posts from friends or play games. Games make already 30% of FB traffic.
Which is not too bad for FB because mot of the games make revenue by selling virtual goods and these have the bought through FB using facebook credits, which FB gets 30% of it.
In matter of facts the biggest losers right now on FB are their own apps like links and notes.




The good news are that brands are going more and more into Facebook and have their own fan page with e-commerce, which is missing in google. Google only offers click away. On the other hand Facebook can offer much better personalized ads then any other website on the web.
Plus the trend goes away from "click" thinking and more to ad penetration.

All these are good indicators that FB could be big, bigger than google.

Let us summarize. google only income at the time back was through ads. Facebook generates (if it works well) through ads, FB credits and e-commerce (fan page with shop must pay to FB a certain amount for each sold item through FB). these are already 3 types of revenue income.

But on the other hand the government is trying to build a new law which does not allow anymore to send too many user information to advertisers. If this law goes through then the advantage of FB will be much lower.

And there are the costs. Facebook is build on open source like php and mySQL which saves a lot for software license but needs much more hardware. FB is already leasing over 50,000 servers.

Infrastructure is expensive. All the new features and initiatives add up to more users, more traffic and more growth. And that means more servers and more data centers. Facebook is currently spending at least $50 million a year for leased data center space. As the company moves into the data center construction business, that spending will jump significantly.

The company is approaching completion on its first company-built data center in Oregon, representing an estimated investment of between $180 million and $215 million in construction costs and IT equipment. Facebook recently committed to spend $450 million over the next five years to build a second data center in North Carolina.

This means most of the investment goes into Data Center. And Facebook is still hiring people and need soon more office space. All together can easily cost 2 Billion. I believe right now, if FB goes public and generates revenue as expected, the profit margin would be far under 10%, which is lower than industry standard (profit margin for internet information provider average is 21.7%), and this is what the investors see and maybe sell their shares. For them FB in terms of profit margin does not seem to be very lucrative.

I am just happy that i have not enough money to think about investing into FB.



Facebook IPO Stories summarized below

1/2/2011 Facebook has raised $500 million from Goldman Sachs and a Russian investment firm in a deal that values the company at $50 billion, The New York Times reported. This indicates that Goldmann Sachs will be most likely the FB IPO bank.

10/8/10 Investors offered a slice of Facebook (Financial Times) Mail.ru, a subsidiary of Digital Sky Technologies, could go public later this year. A portion of DST's stake in Facebook is expected to be owned by Mail.ru.

10/1/10 Facebook does 5-for-1 stock split (CNN Money) The company is splitting its stock for the third time in its history.

9/28/10 Facebook Board Member Says Possible IPO In Late 2012 (SmarTrend) Board member Peter Thiel has said that the company may hold their IPO in 2012 if they meet revenue targets.

9/27/10 The Value of a Piece of Facebook (New York Times) The secondary market for the company's shares continues to be active. Most recently the company was valued at $33 billion based on private transactions.

8/19/10 What's Facebook Really Worth? (MoneyShow) Most estimates currently value the company at between $30 million and $60 million.

7/30/10 Facebook Said to Put Off IPO Until 2012 to Buy Time for Growth (Bloomberg) Facebook likely won't hold its IPO until 2012. This would give the company time to find grow additional revenue streams and give the CEO time to perfect the skills needed to lead a public large-cap tech company.

7/24/10 Facebook IPO "when makes sense": CEO (The Economic Times) CEO Mark Zuckerberg is waiting until the time is right for his company's IPO.

6/28/10 Elevation Invests Another $120 Million in Facebook as that IPO Looks More Distant (TechCrunch) Elevation Partners went to the secondary market to buy another large amount of shares in Facebook.

6/17/10 Facebook '09 Revenue Neared $800 Million (ABC News) Facebook is in better financial shape many had believed in the past. Impressive growth catapulted their revenue to the $800 million mark in 2009.

6/3/10 Facebook CEO says no date in mind for IPO (Reuters) CEO Zuckerberg does not worry about possible dates for the company's IPO. He's focused on running the business.

3/3/10 Facebook Valued at $11.5 Billion in SharesPost Index (Bloomberg Businessweek) If you use transactions in an index on the SharePost website as a guide, Facebook is worth $11.5 billion.

1/26/10 Facebook investors: Seriously, no IPO this year (CNET) Investors Jim Breyer and Yuri Milner say the IPO won't happen in 2010.

1/14/10 Facebook Shares Just Keep Climbing (Forbes) Facebook shares have risen to $32 apiece on SharesPost. That values the company at $14 billion.



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