Evaluate the qualities of effective corporate governance.
Use technology and information resources to research issues in advanced financial management.
Write clearly and concisely about advanced financial management using proper writing mechanics.
On the first page or in a header, include the title of the assignment, the student's name, the
professor's name, the course title, and the date. Title and reference pages are not included in the assignment page length.
Paper needs to cover the following sections in around 10-12 pages (suggested):
Section1. Executive summary of the paper
Section 2. Briefly describe the type of financing that was being used here and why it was used for each round of funding.
Section3. Speculate as to what the money was used for after each successive round of financing. (Don't forget, Facebook was raising money to finance certain projects.)
Section4. Provide an explanation behind the company's bubbly corporate valuation during this time.
Section5. Determine how outside investors were valuing this company. (Hint: look at similar businesses.)
Section6. Estimate the company's major financial numbers (revenue ,net income, or other financial metrics) during each of rounds for financing.
Section7. Conclusion
Background:
• The past two modules have been a bit of a mash-up of different ideas and tools, which makes it difficult to ask you to perform a neat, simple task that covers all the material that we covered. Instead, we're going to ask you to synthesize the bigger concepts from past lectures. We're going to do so using a company that most everyone is familiar with: Facebook.
• Facebook, as everyone pretty much knows now, rocketed to popularity starting in 2005 and hasn't looked back since. As you might expect from a highly successful, capital-intensive, hightech operation that's growing at blazing speeds, the company has gone through several rounds of financing to finance business growth. We're going to ask you to look at that financing and explain to us what happened.
• Though a savvy researcher could find these transactions herself via Google if she truly wanted to, we've gone ahead and pulled the big ones up for you in chronological order to save you some time. We encourage you to investigate each of these further, however. There's no shortage of background on each of these. Here they are in nice news-bite capsules for digestion:
• The Facebook group announced that it has raised between $10 million to $12 million in first-round financing led by Accel Partners on April 15, 2005. As a part of the transaction, Jim Beyers, a Managing Partner at Accel Partners, joined the company's board. The post-money valuation of the company was $100 million.
• Facebook, Inc. announced that it has raised $27.5 million in its third round of funding led by new investor Greylock Partners on April 19, 2006. New investor MeriTech Capital Partners and existing investor Accel Partners invested in the transaction. The post money valuation of the company was $525 million.
• Facebook, Inc. announced that it will raise $240 million in an equity round of funding from new investor Microsoft Corporation on October 24, 2007. As a result of the transaction, Microsoft Corporation will now hold 1.60% stake in the company. The round was raised at a post-money valuation of $15,000 million.
• Facebook, Inc. announced that it has raised $200 million in funding from Digital Sky Technologies Limited on May 26, 2009. Digital Sky Technologies Limited invested in preferred stock and acquired 1.96% stake, valuing the company at $10 billion.
• So what really happened here? What were the major events surrounding and shaping these investments? We want you to tell us the story of the business as it unfolded through these massive transactions.
• In order to successfully complete this assignment, you'll have to rely on your powers to navigate the world-wide web and your ability to work backwards a bit. The information is out there if you know how to look. Remember that until recently, this was a private company, so we can't easily verify estimates on these financial numbers. So, be sure to justify your thinking with plenty of evidence from similar businesses and events
Helpful pointers:
Section2:
Create a complete financial funding table as per below
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Date
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Funding Rounds
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Valuation
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Number of users
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Investors
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2004
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Angel
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Peter Thiel invests $500,000 for a loan, later converted to a 10 percent stake and eventually reduced to 3 percent. Mr. Thiel also brings in Reid Hoffman and Mark Pincus.
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Oct-04
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|
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Mr. Werdegar provides a $300,000 three-year credit line.
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and so on...
Remember that you are comparing Facebook to MySpace-as that is the only other company at the time that was engaged in this type of online, virtual place for people to interact. So what was myspace worth at its peak or IPO valuation before closing doors
There are several major steps before Facebook had its own Initial Public Offering (IPO). The first three steps happen when a company is private: seed, angel and venture rounds. The final type of financing is the IPO. The seed round of funding is the initial capital to initiate the company. The venture round also consists of Series "A", "B", "C" and "D" stock. As the company progresses through these steps, more shares get allocated to the external parties for funds
Note: Series "A" round - this name is typically given to a company's first significant round of capital financing. The Series "A" funding refers to the class of preferred stock sold to investors in exchange for their investment. It is the initial series of stocks before the common stock and common stock options issued to company's founders, employees, friends and family, and angel investors.
Sample outline
Step 1- Seed Round:
Step 2- Angel Investments:
Step 3- Series A, B, C, and D
Series A funding:
Series B funding:
Series C funding:
Series D funding:
Step 4: Private Equity
Step 5: Initial Public Offering:
What were the financial resources that MySpace used to get established? What was its value as it grew?
Section3:
Research and come up with the investigation on what activities the money was used by Facebook and Myspace
Section 4
Remember, this section is all about determining what factors were driving the company's "current" Bubbly Valuation--higher than what one might guess was the company's net book value. Remember, these are pre-IPO days; therefore, only Angel investors or others willing to invest millions of dollars in private deals would have access to the company's numbers. The general public and average potential investor did not have access to the Balance Sheets.
We do know, however, that their Balance Sheet would not contain the types of high-dollar assets associated with manufacturing firms (equipment, raw materials, work in process, or finished goods inventory) like Nike, General Mills, or Pepsi. The B/S would also not contain vast levels of merchandise inventory, as expected of a retail store like Wal-Mart, Target, or Macy's. No, FB would not have assets such as these to build their wealth; the company's value, therefore, consists of the talent and visions of their managers. (Yes, they would have had servers and other machinery--but not to the extent of manufacturing or merchandising firms. Plus, much of those may have been leased and were not qualifying for classification as Operating Leases.)
So, there had to be something else going on at the time that was getting the investment community so excited about FB.....and willing to say that this company had a brighter future than MySpace or anything else out there. In this section of your paper, focus on such questions as.... What other companies were out there, like MySpace and LinkedIn, and what was it about this new platform called "social media" that was making everyone so happy that Facebook was in the game? From the user perspective, what do you think it was that FB could offer/deliver that was causing membership to skyrocket? Why do you think the creators of the games you could play with your friends while inside FB (Anyone here play FarmVille?) were so willing to pay big money to FB to have their games on this site? Of course, there are plenty of other things you can talk about to explain all the hype surrounding FB... These are just pointers Use similar conditions during Myspaces evaluation.
Section 5
This section is all about determining how investors were (or could have been) evaluating FB in regards to its future potential. Remember, just because FB hadn't had the IPO yet, doesn't mean that common stock had not already been "sold" or used privately during those rounds of financing or an incentives & compensation for employees.
So, this section focuses on the ways that investors can assign a value based on what they believe to be the "future" that FB held! There was information available at the time regarding the revenues FB was getting from advertisers and content providers (like the gaming companies), so investors and the general public weren't totally in the dark. These groups of people just didn't have access to the formal financial statements.
To help explain some of the ways to value pre-IPO companies, check out this site: https://www.quora.com/How-do-you-evaluate-the-potential-value-of-stock-in-a-pre-IPO-company-with-limited-info
Other resources
Please remember that Wikipedia has solid resources on the history of FB (One even contains a listing of revenues & active users during the preIPO days!! These are just examples)
a) https://en.wikipedia.org/wiki/Facebook
b) https://en.wikipedia.org/wiki/History_of_Facebook
c) https://en.wikipedia.org/wiki/Myspace
d) https://en.wikipedia.org/wiki/Myspace#History_of_Myspace
Readings:
- Discuss the value of using break-even and payback analyses
- Weigh the pros and cons of financial valuation techniques
- Provide examples of business situations that would utilize financial valuation techniques
- Analyze the value of various financing options
• Evaluate a company's financial status in terms of The Corporate Life Cycle
• Walsh, "The Illusion of Pension Savings"
• FinancialWeb, "4 Legitimate Uses of Off-Balance Sheet Financing"
• Ostrowski, "New Lease Accounting Standards Soon to be Released"
- Sellers Framework
- Mauboussin & Bartholdson, "Measuring the Moat"
- Boyd & Quinn, "Financial Metrics In Wide-moat Firms"
- Tsang & Xydias, "Cheapest Stocks Since 1995 Show Cash Exceeds Market (Update5)"
- Durell, "How to Use the P/E Ratio"
- MoneyChimp, "Graham-style Formulas"
- Book: Brigham, E. & Ehrhardt, M. Financial management: Theory & practice (14th ed.). South-Western,Cengage Learning.