Where Are The Profitable VC Funded Web 2.0 Startups? - Page 2
EBITDA is supposed to be a measure of how much debt you can put on a company. It is usually applicable to well established businesses in traditional industries. Recently it has been used in relation to Facebook and other large web ventures. This is where it gets interesting for web entrepreneurs and their investors.
Is Facebook Profitable?
According to a report in BoomTown in January 2008, based on an interview with Mark Zuckerberg:
"Revenue for Facebook for 2007 will be $150 million, as has been widely reported. But for 2008, Zuckerberg projected revenue to be increased to $300 million to $350 million.
More interesting was the news that Facebook would spend $200 million next year on capital expenditures, which is a whole lot of servers.
By the way, more expenses, noted chatty Mark, those employee levels would rise to more than 1,000 in 2008 from 450 now.
And Zuckerberg also said the company's EBITDA-earnings before interest, taxes, depreciation and amortization and a number widely used by Wall Street as an indication of operating performance-would be $50 million in 2008.
That means the company would have a negative cash flow of about $150 million (EBITDA minus CapEx), rather than break even, as it does now."
Is Facebook profitable today, in the last quarter of 2008? Well it is almost certainly EBITDA positive, butthat is not the true measure. The answer is "maybe". If Facebook is hitting $300m to $350m this year (2008) and their operating costs have doubled from $50m to $100m (which is reasonable assumption as they said they would more than double employees from 450 to 1,000), they would have EBITDA of $200m to $250m. That sounds pretty good. But after $200m in Capex for servers, they are only breaking even on free cash flow at the bottom of their revenue forecast range. And, given the failure of Beacon and declining CPM rates on social networks, my guess (it is only a guess) is that Facebook revenues will be at the lower end of their forecast or even below.
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Bernard,
Great post. This is a great analysis of the current Web 2.0 business.
About your discussion about big business vs. small business and profitable vs. nonprofitable, I have a feeling that there is an essential piece of picture that is losing in the current infrastructure. In normal sense, when a company is growing, its capability of making profit should increase with its growing. However, it is not the case in Web 2.0 industry. It means that there must be a way to help reduce some redundant cost in many Web 2.0 companies that make many of them turning around from nonprofitable to profitable simultaneously. I have some thoughts in my mind though it is not well organized at this moment. Maybe I would share with you later.
cheers, and thank you for the great post.
Yihong
Is Amazon AWS a serious option?
Of course it is- why wouldn't it be?
I think $200mm for servers is extremely strange(and yeah...1,000 employees?!!).
Especially in a world where: "...given the failure of Beacon and declining CPM rates on social networks, my guess (it is only a guess) is that Facebook revenues will be at the lower end of their forecast or even below.".
Now I like Facebook. It's a terrific service and my only concern with it is the same one you're voicing: even for a service as awesome as FB, what will it take to achieve profitability? Or are the backers going to continue backing it in the -hope- that sometime in the not-so-near future, it'll all have been worth it?
I keep going back to the most popular service on the Internet today: YouTube. If YouTube's having a tough time turning profitable, even with Google backing 'em up, then that's something worth taking a good hard look at.
Maybe you're right....maybe it does take a while for web 2.0 services to show profitability. But is our landscape built to forgive for that long?
Or are the "gritty entrepreneurs" better off, short-term and long-term, whether it's a credit crunch or milk 'n honey? ;)
Either way- super post. It makes for excellent thought-fuel. Thank you!
PresenterNet has been boot-strapped since 2005. Only founder case (around $600K) was used and it continues to be profitable. The time has come though for serious investment if growth is to be obtained.
Is Amazon AWS a serious option?
Of course it is- why wouldn't it be?
I think $200mm for servers is extremely strange(and yeah...1,000 employees?!!).
Especially in a world where: "...given the failure of Beacon and declining CPM rates on social networks, my guess (it is only a guess) is that Facebook revenues will be at the lower end of their forecast or even below.".
Now I like Facebook. It's a terrific service and my only concern with it is the same one you're voicing: even for a service as awesome as FB, what will it take to achieve profitability? Or are the backers going to continue backing it in the -hope- that sometime in the not-so-near future, it'll all have been worth it?
I keep going back to the most popular service on the Internet today: YouTube. If YouTube's having a tough time turning profitable, even with Google backing 'em up, then that's something worth taking a good hard look at.
Maybe you're right....maybe it does take a while for web 2.0 services to show profitability. But is our landscape built to forgive for that long?
Or are the "gritty entrepreneurs" better off, short-term and long-term, whether it's a credit crunch or milk 'n honey? ;)
Either way- super post. It makes for excellent thought-fuel. Thank you!
Bernard,
Excellent post. I've also enjoyed your recent Enterprise 2.0 posts. These subjects are related. I think that a lot of consumer Web 2.0 startups were funded in a mini-bubble created by Myspace's game-changing sale to News Corporation. VCs were excited by the allure of replicating that success and funded some good ideas and many not-so-good ones.
Although less sexy, I think Enterprise 2.0 startups have a better chance to turn a profit. As enterprise plays, VCs will judge them with a higher standard and demand actual customer traction and accelerating revenues. Startups with demonstrable market acceptance will actually get funded and have a clear road to profitability. At that point, it's more about ramping sales with an aggressive sales team than having to guess about viability.
Economic downturns are difficult environments for entrepreneurs. But they are also the times when the truly outstanding entrepreneurs, ideas, and businesses shine. Talent becomes more widely available as other less viable startups lay off staff. For VCs, some of the best returns have come from investments during economic downturns. Terms are more favorable for VCs during "buyers' markets."
I think this is an exciting time! Carpe Diem!
As someone who recruits for these start-ups on site, they get dumber and dumber every year