So, Facebook announced yesterday at TechCrunch50 that they were finally cashflow positive. This is pretty big news. It means they’ve created a real business, one that is, in theory, self-sustaining. They’ve reached the holy threshold where venture capitalists stop biting their nails and thinking “man should I have sold this earlier…” Now the management team can seriously start getting wined and dined by investment bankers hungry for “the IPO of the year.”
But, after we congratulate the team for a job well done (nice job people) we probably ought to think about what this means for social media as a business. Here is a company that now has 300 million users - and has just now become cash flow positive. What is that, like 5% of the Earth’s population? What number of companies ever founded reach that high of a global penetration? That’s a pretty amazing number. And they needed that many users to become cashflow positive?
I believe that Facebook has raised over $700 million in venture capital. Impressive. I doubt that more than a handful of companies, ever, have raised that much private capital. I don’t know how much of that has been used in the quest to become cashflow positive, but I assume it is a decent amount. Although, to be fair, a meaning amount of that capital might have gone to providing liquidity to the management team.
So what does this say about social media as a business model? The requirement to get sooo large and burn sooo much capital calls into question the basic business model of a social media company. The pure online company with revenue only coming from advertising just doesn’t seem to make sense if you have to get that big to become a self-sustaining company.
Just to be clear - I am not questioning Facebook. I am pretty much amazed at what they have created and am excited to see what is next for the company, both as a venture-junkie and a FB user. But I just wonder if these stats are the death nail in the advertising-based online business model. Who else could possibly reach cashflow positive with a pure advertising model if you need that many users and that much capital?
