Fred Wilson: Some Perspective

I don't disagree with PG when he says that Facebook's IPO performance (or lack thereof) has the potential to impact valuations in startup land. I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening.

But let's put Facebook's current valuation in perspective. At the closing price of $26.90, Facebook commands a valuation of $57.5bn (according to Google Finance). Facebook had around $4 billion of cash prior to going public and raised about $10 billion, so let's assume they have $14 billion in cash on the books. That means Facebook has an enterprise value of roughly $43 billion.

In its last quarter Facebook had $1 billion of revenue and 40 percent pre-tax operating margins. If we annualize those numbers, that would be $4 billion of annual revenue and $1.6 billion of annual pre-tax operating margins. Let's use pre-tax operating margins as a proxy for EBITDA, because this whole post is back of envelope quality analysis and please take it for what it is.

That means that Facebook's enterprise value is greater than 10x current revenue run rate and greater than 25x EBITDA. These are big multiples, folks. I am happy to take those numbers for any company out there.

Clearly Facebook is a premium company and commands a premium valuation and entrepreneurs should not expect to get 10x revenues and 25x EBITDA for their companies in a sale or an IPO. But even at half those numbers, there are fantastic returns for investors and entreprenuers to be had.

If speculators are disappointed with the performance of the Facebook IPO it is because they had ridiculous expectations of what rational investors would pay. The market has put a premium valuation on a great company and we should be happy about all of that. I certainly am.

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