Would you expect him to do anything else? Invert the question: if you had $500 million cash, would you spend it all on Facebook stock? Or Google stock? Or any one stock?
Even for company insiders who really believe in the future of their company, it isn't prudent to hold more than a small fraction of a billion-dollar fortune in one stock, from a purely rational perspective. Of course, the public expects irrationally enthusiastic behavior from founders, which is the only thing that leads to the gigantic fortunes amassed by the Gates/Ellisons of the world.
Is this some sort of extreme cognitive dissonance?
Why can't people just accept that Facebook is a fad?
It does not mean the world is going to end. It's a fad, not a solid company. We went through this before 12 years ago. Eventually the market figures it out. Move on. That's what Thiel is doing.
More fads are around the corner. Investors will keep falling for the same old tricks.
Gates and Ellison are very poor comparisons. Their software was not web-based (=ad-based), their main market was the enterprise and they went to great lengths to create long-term customer lock-in. They began in a different era, and are nothing like Facebook, which is a photo-sharing website that relies on display ads and game-playing "whales" to make money.
I'm pretty bearish on Facebook's stock, but there's nothing here to indicate its just a fad. This is a company with over a billion dollars in revenues per quarter with a pretty consistent 15-25% profit margin.
Is it the next Google? Its looking more and more like its not, but that doesn't mean its going to be the next Yahoo! either.
Facebook would be unbelievably lucky to be the next Yahoo! -- sure, they're dead meat now, but that just means its easy to forget what a success Y! used to be.
Facebook would have to really screw up at this point in order to end up the next Yahoo! They made 1 billion in 2011, while yahoo only made over 1 billion 3 times (max was 1.8 billion in '05, my sources are the yahoo annual reports) since 96. The question isn't whether Facebook can be as big as Yahoo!, that is basically assured. The question is whether they can be the next google (who went from making 400 million when they ipo'd to 9.7 billion today).
Absolute numbers are not a meaningful metric -- much better to compare e.g. each sites percentage of overall traffic, or dollar of revenue per user. There's so much more money being flushed down the internet toilet these days that I would be shocked if Facebook were anywhere near Yahoo!'s numbers from their peak.
I guess we haven't agreed upon what metric we are even trying to compare (not surprising then we have a disagreement). I was making a comment on facebook vs yahoo as a profitable business, so I looked at profit. Facebook may never get to yahoo in terms of $/user (I don't know what yahoo's numbers are like now, or at their peak) but what exactly are you trying to compare such that you think $/user is a worthwhile stat to look at?
You can make the argument that it's a different era now, so looking at total profit isn't an apples to apples comparison, but a counterargument could be that the internet is a much more competitive landscape than it was in, say, 1996 so that it's actually more impressive what facebook has done in this era.
Not sure how I can explain it any further than I already did, but diversification is smart regardless of what company you've founded.
Even if you've created a company which cures cancer, educates the world's children, and solves global poverty at a 40% profit margin, once you have 100% of your multi-billion dollar fortune tied up in it, it's time to diversify.
He dumped his shares at half the IPO price. Say what you will about diversification, it doesn't represent much faith in the future growth of the company. You don't "diversify away" from a good investment.
So, if you believe that Thiel is a savvy investor, then it's hard to be bullish in Facebook.
"You don't 'diversify away' from a good investment." -- that's exactly what you do. Given that there's nothing as a 100% sure good investment, you diversify away from investments that seem great to distribute your risk.
Let's say Company X has a 10% chance of being worth nothing, and 90% chance of being worth five times what it is today. Is that a good investment? Of course. Would you want to bet a billion dollars on it? If you had $20 billion, sure -- if you had $1 billion, probably not.
You can easily create a real-world analogy, a dice game where you pay me $X and roll a single die. I keep your money if you roll a six, but give you five times your money back if you roll anything else. You can only play once. How much do you bet? I hope you do bet something, because it's a very favorable game to play, but I also hope that you don't sell your car, house, everything in your refrigerator, and your dog to wager everything you have.
The IPO price is not really relevant since he couldn't sell at that price -- he sold nearly everything at the first chance he had, which was wise of him regardless of whether Facebook's stock price goes to $0 or $500.
The bottom line is that this has nothing to do with Facebook and is based solely on the mathematics of random variables.
No, it isn't what I would do. You might re-balance your portfolio if your capital is limited, but you'd be crazy to sacrifice high expected returns for the sake of zero beta. Admittedly, my personal portfolio is much smaller than Peter's.
>"How much do you bet?"
If I were looking to profit from games? A lot. What I wouldn't do is go to a game with worse odds, that paid me for a roll of 6, for the sake of "diversifying", which is essentially what you're implying by saying Thiel sold his stake for this purpose. I would stick to the game with the best odds just like I would stick to the asset with the highest expected return.
I other words, if Mr. Thiel truly believed FB was a $100BB company, he'd be a fool to sell off his shares right now. I think this reveals that he doesn't really believe that. Neither do I, so I don't blame him.
Yes, diversification is smart. But you're trying to use this general idea to explain a specific decision that is clearly a matter of timing.
You could claim that everytime an insider at any company sells the majority of his stock he is diversifying. But that's not really looking at what the real reason is. There is a reason that "now" is the "time to diversify". And it's not just because diverisification is generally smart investing.
I guess Facebook represents something for a lot of HN commenters. When Facebook starts it's decline it signifies some larger problem.
It was a tremendous success, some people made many millions from Facebook. So what's the problem if the fad dies down and it all goes south eventually?
"So while the timing may look ugly, Thiel has been with Facebook since [2004] nearly the beginning of the company’s eight-year slog towards going public. It’s not anathema to cash out — especially at an 800x return."
Eventually the market figures it out. Move on. That's what Thiel is doing.
Thiel is an investor. Most investors eventually move on. He invested in 2004. 8 years, and he netted a billion dollar cash profit so far on a $500,000 investment. He's not in it for long-term company building like Zuckerberg is. He's not trying to be Warren Buffett. He shouldn't be panned for this. And he still owns millions of shares. So it's not like he's completely out.
The social web is just as important as search on the web. The web will always have search engines, and it will always have social networks. Google took over where Excite and Altavista left off. Facebook took over where MySpace and Friendster left off.
Google controls the majority of the social search market.
Facebook controls the majority of the social network market.
So you might be saying, that's nice, but Facebook can't monetize it's users!
Have you ever looked at Google search results lately and noticed that nearly 1/2 the screen above the fold could be ad space? Don't believe me? Search for "iphone".
Yet we all think nothing of it. We've accepted it as users of Google.
Imagine if Facebook found a way to get it's users to ACCEPT ads. Start small, like Google and gradually increase it over time to what it is now.
The "social web" is no where near as important as search. Imagine removing search from the net. Now imagine removing Facebook or other social networking sites. The difference is staggering.
I think you should consider your own example more closely. "Search" is not just Google, it would be all search engines (good luck finding that old email). Similarly, removing social would not just remove Facebook, it would also remove hacker news (certainly a social website) and all the other forums you frequent.
Social websites, widely, are websites that allow users to connect to each other. Even 4chan is social. Without search, we couldn't find anything on the web, but without social we couldn't talk to anyone. I don't know which is worse, but they would both be enormous losses.
I think you are calling more things social than the word pre-supposes. If you call 4chan "social", then you have the wrong definition - 4chan is a forum, a place people discuss things.
Facebook, or "the social web" as its coined these days, is about the friend graph (ditto with twitter - its about who you follow, and who follows you), not about discussions.
Imho, the web will function perfectly well without facebook - each of the features of facebook such as photosharing, event organizing etc, all have ready replacements. Sure, the friend graph helps you connect easier/faster, but taking it away isn't as detrimental as taking away search.
As I said in my post, I'd include forums in "social." Facebook has the graph, but you could construct a weaker form of that graph using any of the popular community-focused sites.
Not really. Facebook and other social sites nowadays all rely on one true personal identity. On forums on the other hand you can be whatever, multiple times, and have a discussion with yourself (even a meaningful one).
I have at least one friend with multiple Facebook accounts, which he has talk to each other as a joke. Much like Facebook, most of the significant interactions on forums happen between permanent, established accounts (4chan could be the exception that proves the rule, as everything on it is arbitrary and real projects are organized elsewhere).
Facebook wants to portray itself as a one-person-one-account service, but the lack of extra accounts is largely because they've obsoleted most of the reasons people would create multiple accounts.
For what it's worth, I think Facebook is a fad, and I think it's peaked. I know this is purely anecdotal, but most of my friends and colleagues deleted or abandoned their profiles long ago. The majority of the people I know that actively use the website are in their 50's and up. Like my mother.
I remember about four or five years ago when everyone was asking each other to look them up on Facebook. I never hear this anymore! The only time I ever note that Facebook is mentioned in conversation is with respect to their stock price or some privacy gaffe. And yet Google, Apple, and even Microsoft products frequently crop up in discussions I have.
> The social web is just as important as search on the web.
Teachers are just as important as lawyers. But search captures people looking to solve problems (i.e. potential customers) while social captures people looking to waste time.
Only as to the year. Give it time. They have a lot of money to spend so the decline will be slow and they will not go down without making lots of noise and buying out lots of potential successors. But the decline is beginning. Sooner or later Facebook believers have to accept this.
I'm excited about the decline because it means the rise of something better. Continual improvement. When one door closes, another opens. But I recognise that many others do not share my optimism. Facebook represents something to them, I guess. I can't quite understand it.
Facebook is one step along the path. It was a fad that drew a remarkable amount of attention and participation. The internet just keeps growing. We are in its infancy.
> The internet just keeps growing. We are in its infancy.
Exactly. The internet 10-15 years from now will be unrecognizable, especially the social parts. Facebook (and Twitter, by the way) certainly won't be doing the innovating, and odds are they won't be able to keep up either.
Personally, I thought FourSquare might be the next big thing, but they failed to do anything compelling with the basic idea of location-based social networking. I still think that something big will come along in that space eventually, though.
Everyone keeps focusing on Facebook as an ad platform, and pointing to the difficulty in monetizing mobile via ads. But I'm betting Facebook is on the brink of rolling out a digital wallet. They already act as an authentication/identity service with hundreds of millions of users. If those users linked their FB accounts to their bank accounts, they'd be able to buy anything on any integrated website that they log into with FB Connect -- or eventually in any store that wants to handle FB payments. With FB taking a small cut of every transaction, I imagine PayPal and Stripe would be in trouble, no? Mobile doesn't have to be about ads....
>"I'm betting Facebook is on the brink of rolling out a digital wallet."
I'm betting they're on the brink of slicing dicing and selling everyone's personal information. It's more profitable. It makes use of their principle asset. There are few comparable companies to act as competitors. It's a really big and lucrative market.
And it solves their problem with monetizing mobile.
You could both be right. Login with Facebook, buy with 1 click. And let the merchant know all kinds of information about you to show you the right products.
of course not - they are called average users for a reason. But when shit hits the fan and someone's privacy was violated and made the media, then FB will have a nightmare of a PR incident, and if there is money involved, probably law suits etc. Its just human nature to ignore what you can - and this privacy problem is a long term problem that tends to get ignored in the short term.
You are somehow assuming that they only had a reason to learn from their last mistake. The fact that there have been numerous mistakes suggests that they don't get it and won't learn from it.
The thing is, those privacy incidents weren't gaffes: they were intentional. As far as I know, Facebook has only had one unintentional mistake when they accidentally DoS'd themselves. There might be more I'm forgetting, but the point still stands. Facebook didn't reset people's privacy settings by mistake.
Getting into payment processing will expose them to SOX and PCI compliance. They'll still be able to reset your privacy settings for your profile, but they'd be sued out of business if they did something like that for your payment profile. No matter how much it looks like they do, Facebook rarely makes mistakes.
He converted a $500,000 investment into more than $1,000,000,000, which is at least 200,000% ROI. Would you recommend against diversification at this point? Do you provide financial advisory services by any chance?
I am positive he is doing diversification but not with facebook as part of his portfolio; as he sold pretty much all of his facebook stock. So once again. Facebook insider chooses to sell most of his stock prior to IPO, and prior to first quarter results. Very highlightable..
A) he has sold a good portion of it. B) Berkshire Hathaway is a holding company. It is diversified already. So there is much less of a need to sell it.
So you're saying Berkshire Hathaway is much better setup as a long term business than Facebook; therefore a better investment. I don't disagree at all.
I think this is just thiel putting his money where his mouth is. Anybody who has followed him knows it's no secret that he's spoken out against companies solving small problems and has even implied facebook to be squarely in that camp.
I'm going to buy when it gets closer to $10 per share. Half the world uses Facebook every day so let's not pretend it isn't an awesome business with utterly massive potential.
"awesome business" and "massive potential" aren't mutually exclusive events. It can have massive potential, but never deliver and still be a terrible business.
Sure, it's got a lot of upside if you can buy it at the right price, but up till now, it hasn't shown advertisers (who make up the majority of their revenue) that it can deliver customers as acceptable CPAs. Until that happens, we'll still be waiting for facebook to be an "awesome business."
I don't think CPAs are the right metric. Facebook is massively engaging. I think TV is the most natural synergy b/c people socialize around it today but only in one household.
Facebook should also launch a web search similar to Google just go capture some market share in search-driven advertising.
Around the world, Facebook is the fastest loading website (it often beats Google). Its infrastructure is ready to make a truly global play of some kind.
Expect something huge after the stock price stabilizes a bit.
Facebook is massively engaging, but the ads they allow to appear on the site are incredibly off-putting.
I personally don't mind ads on sites, but the Facebook ads that I'm fed all appear to be for slimy businesses (I'm constantly seeing ads for Canadian Pardons that are using what I believe to be unauthorized images of celebrities) or have seemingly low-to-no production values.
They need to fix or curate the way ads are displayed, because I think it will eventually become a hindrance to their success.
Perhaps CPA is not the right metric. But a bunch of hype that glosses over the fact that Facebook doesn't really actually make very much money is not the right metric, either.
Yup. Especially considering their revenue has also been falling, that there are concrete reasons to think that it will continue to do so, and that they're operating in a notoriously brutal and fickle space. There's money there, but not enough to cushion a fall.
Facebook should sponsor and create content viewing events that are only visable via facebook.
What if there was a "real world FB" where FB users live together and drama ensues - and the only way to watch it is FB.com.
There are so many other things that FB could do to truly be a platform: Education via FB, Work via FB (think having a mechanical turk via FB where users could sign up to be a part of the service and use the FB platform to earn money), videoconference within FB, etc etc etc.
Facebook may stick around for years to come, but I disagree that it's an awesome business. Unless oriented towards professional profiles (like LinkedIn), social networks are a terrible idea. Just because everyone likes something, doesn't mean it it's in their best interest. Facebook is just a voluntary invasion of privacy. Right now most people are either using Facebook to post memes and soft core pornography that they find elsewhere, bitch about how their lives are more difficult than everyone else's because they have a job(try not having one for a while), or to stalk their current / former significant others.
I myself prefer more direct and personal forms of communication like Skype, Instant Messaging(Facebook Chat is merely adequate), phone calls or email. Unfortunately, I am saddled with Facebook because everyone I know has abandoned all other forms of communication.
How many new accounts did you create annually 10 years ago?
How many new accounts did you create annually 5 years ago?
How many new accounts did you create this year?
People don't mind switching, and in fact they don't mind having simultaneous accounts. People on this forum think that they are 'special' inasmuch they don't mind negotiating multiple accounts with relative ease, but it's an inevitable tactic.
Facebook can be used to login to other sites, but with Google+ and Twitter and the $20 share price, nobody small wants to bet on Facebook. It's like making an Xbox 360 exclusive game if there was a $0 porting cost.
If Facebook is bought out by Microsoft or Apple, it will truly be a threat as a universal login system. But until then, they will die a death from a 1000 paper cuts.
I see facebooks problem right now more as an inability to effective monetize their users, rather than at risk of a large set exodus any time soon. Facebook is very ingrained in what so many people and businesses do now unlike any other web service has been. You see Facebook branding on most businesses ads and physical locations.
Of course it is possible to overcome these network effects but I think that if they are smart enough they can keep it going. Then it just becomes a question of what valuation they can sustain without being so invasive as to completely alienate their userbase.
On an anecdotal level I have seen people try things like Path, Instagram, the location based networks etc. Most when the mental overhead of all the social networks get to much eventually just mainly settle back on Facebook (with Twitter being the only real exception)
this is the problem - facebook's value proposition for a user is not Facebook itself, but the ability to interact with another person easily (games, photoshares, pokes etc). However, this isn't actually worth very much money, and to try to extract that from the user is fruitless.
The only real way to monetize is really to sell behavioural data of its users to advertisers. There is real value in that, even if the users don't like it. But its a double edged sword, and this sword is what is going to kill facebook!
Or Facebook could accept a lower rate of monetization and not extend the reach of their advertising. Sure this is a horrible outcome for the share price but could be a better outcome for running a long term sustainable company.
yep. But if you think about the incentives of a CEO (not mark, as its his baby, but just a CEO generally for a company facing this sort of decision), they have every incentive to do a "bad" thing that yields short to medium term benefit, at the cost of long term benefit (coz by then, they would've exited with their millions).
> 2. They haven't found a way to make advertising work on mobile, an increasing part of their visits.
And herein is the problem: Apple - Apple is so against advertising that they created their own iAd network to keep other companies out of the game (it doesn't have to really be a success - just enough to keep devs off competing ad networks).
As long as Apple is influential in the mobile world, Google and Facebook are going to have a tough time with mobile ads... do consumers actually want ads? Apple is betting no, and as far as they're concerned - screw the devs and advertisers.
Android is a more popular mobile OS than iOS by far and in fact googles reason for approaching it that way is that they want a platform to serve ads on.
But so far they havne't managed to find a way to do it.
I think monetization would require near-monopoly-level control for Google. How much would adwords bring in if Google weren't the "default search" destination?
If Google can basically kick Apple back into niche status (not there yet), then they could extract monopoly rents on a defacto standard of ad-based apps either using Google's mobile ad network, or a consortium of which they are the sole influential player.
Perhaps that explains why they haven't tried to heavily monetize this yet - that would pus more consumers into non-ad-based apps where Apple is strongest.
This is also because the business model of apple vs FB|GOOG is completely opposite. People pay apple for their products. People expect everything from Google and FB to be free.
People are paying apple for their products and do not want to pay to have that product riddled with spam.
Frankly, FB has to figure out how to make a search service, via fb.com and their mobile apps.
An interesting twist could be to allow users to search for things that other users are doing or planning to do. e.g. "who is interested in going to the movies tonight?" and let a group organize around that activity - then sell them discounted movie tickets.
It's not just the graph. Intent is very fleeting. You can't know "instantaneous intent" from someone's history and graph (e.g. what will be my next Google query?)
The 10b5-1 is actually bit fuzzy on whether you can cancel trading plan. SEC basically says that if you cancel the trade than you are not legally liable because no transaction actually occurred and so one cannot claim that you profited from insider trading. So in theory you can cancel the trading plan if you like. However if SEC feels that you cancelled only because of price drop then they can come after you for ALL your future trading plans or may even re-examine previous trades to see if you were trying to game the system. Therefore executives are advised by to cancel only under extraordinary circumstances.
So I think Thiel had lot of legal pressure, although technically not an obligation, to sell as per his trading plan filing. He could have taken risk but it's probably not worth it for another half-a-billion of profit if you are already multi-billionaire and if you are already cultivating 1000X returns as it is.
On the other hand it is surprising that he decided to sell most of his stock instead say only quarter or so. I would think Thiel as a long term investor in FB from what I've read in the book "Facebook Effect". Thiel is one of the few person that probably knows most upcoming plans and products in works and problems at FB. A typical strategy for investors like Thiel is to cash out in stages instead of dumping most stock at once like regular VCs do (10-25% each quarter, for example). Considering his level of insider knowledge this only means he did not expect FB stock going up at the time of trade filing in at least 1 to 2 year horizon.
This is even more surprising because I keep thinking FB is going to come out with something like AdSense any day now and almost instantly double its revenues bringing stock back to $25-30. Obviously Thiel has calculated things differently.
The Facebook story is over. They got ahead in the social network game of making communication over the Internet easier. They did this by making Email obsolete. One centralized system where all users can send instant messages to one another without remembering user logins, email addresses, or phone numbers. This is the ONLY advantage Facebook has over its competitors. And I guarantee their current advantages are going to be eroded away by more open protocols. In the same way that Twitter's current advantage in microblogging is also going to be eroded away.
If you get too far ahead of everyone else you become the target, and there are simply so many startups and smart brains working against Facebook and Twitter at this point that they simply will not be able to maintain their leads indefinitely (which is what their market values are incorrectly predicting).
You're focusing only on features, and ignoring the fact that Facebook has more active users on their site for more time per day and with a higher retention rate than any other site in existence, and that network effects have created an almost insurmountable barrier to entry.
You know who currently has an even better advantage in social networks? Cell phone carriers. If I take a look at my Facebook friendlist or feed, and compare it to the last calls and messages made on my cellphone -- they don't match up at all. That means, at least to me, Facebook's graph for me doesn't relate at all to my real world social network, and so most of its value is probably artificial.
Certainly no system ever built can match Facebook's penetration rate, but it will probably always pale in comparison the real world social network. The difference is mobile devices are going to map a lot better to the actual network in ways that Facebook will be unable to capitalize on.
Peter, if you are reading this, there's one question I'd love to ask. Why did tou even buy Facebook shares in the first place? Just to say you owned a part of Facebook? It was a clear failure from the beginning when they hit the market, way overpriced - surely you must of known this too. And then comes why other question. Why sell now, after loosing so much money? If you were willing to take a gamble in the first place, you should of been prepared to stick with it for a few years - it might go back up, but that's only if FB manage to get their shit together.
Did you even skim read the article? He invested $500k as one of their earliest investors, and turned that into $400 million. He sold when he did because of a lock up period.
The market is concluding FB is not likely $1 trillion company. The Q is order of magnitude for FB $TEV.
A. $1000B ? No...
B. $100B? Maybe
C. $10B? Possible
I think Theil is obvi not betting on $1T.
Thus, after 8 yrs, time to go.
At ranges between B and C, holding a large position in a public stock that is exhibiting true volatility (ie, something other than upward drift), is not likely to please his LP investors.
Nor, similarly would it be advised for his own holdings.
Reading more into the tea-leaves (ie, operationally) might be fun, but I'm not sure its adding explanatory power to what we are seeing here.
Even for company insiders who really believe in the future of their company, it isn't prudent to hold more than a small fraction of a billion-dollar fortune in one stock, from a purely rational perspective. Of course, the public expects irrationally enthusiastic behavior from founders, which is the only thing that leads to the gigantic fortunes amassed by the Gates/Ellisons of the world.