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?
September 17th, 2009 at 1:26 pm
Hey Healy. For sure, only very very very few social media will reach 300m users. In FB's discussions, we tend to look only at the topline and tend to forget the cost side. Let's not forget that FB has a high cost of service per user due to storage of videos, pictures etc – not all social media start-ups have this. Second, FB has invested massive amounts of money on things that are not directly related to their core service. And to be honest, I don't really understand why they need 1000+ employees.
September 17th, 2009 at 5:19 pm
Forget to say, I agree with your conclusions ad-based only business model won't be enough for most social media.
September 17th, 2009 at 6:38 pm
I'm sure that some of the high costs were due to the decision to "go big." I guess that is forgivable, and I clearly understand the decision to do so. But it just makes it very clear that the amount of scale required to do an ad-only model is just too big if you are going to continue to push for heavy growth. Or perhaps it is just too inefficient for any real online business.
September 25th, 2009 at 4:36 am
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