MONTGOMERY VILLAGE, Md. — January 15, 2011 — Several days ago there was a report about how Goldman, Sachs had invested $500,000,000 in Facebook and that only investors that had available a couple of million dollars would be eligible to get in on the bonanza. Following the report was the statement that this investment would make Facebook worth about $50,000,000,000 (fifty BILLION dollars).
There is no doubt that the history of Facebook is impressive. Someone with very little or no capital starts with an idea and he becomes a billionaire. One could say that almost anyone with some knowledge of the Internet, relational databases and computer programming (of
which there are very many of us), could have done it, having come up with the right idea.
But is this an idea worth investing in long term, or one that will be gone as soon as the next big idea comes along?
Remember that in the early 1990s during the “dot.com” era, quite a few people became millionaires with single ideas. AOL is the most extreme example. For a while AOL was the bee’s knees. We all read how its membership kept increasing almost geometrically. It had taken advantage of the new technology that was being made available to more people for the first time. AOL even bought Times – Warner, the huge media corporation. Then the dot.com bubble burst, and AOL has has been fighting to stay afloat since then.
I remember the conversation that we had in our car pool on our long commute to downtown DC in the 1990s. Some of us thought there was not a real basis for the high value of the dot.com companies at that time. Our minds were still using the paradigm that there had to be something concrete for things to have value. A service, like AOL and most other dot.com companies, did not have a “real” product as its base. In many cases we were proven correct. The bubble burst and those that didn’t get out in time, or continue to innovate, lost a lot of money.
This tough wake-up call should have told us that while ideas are very important, not having something tangible to show for them is risky. Instead, we continued our service-based economy full throttle. Thus, we let countries like China, India, Japan and Brazil actually make things - without our competition - and be the heirs to the 21st century economic treasure chest.
The first time I was asked to join Facebook I was reluctant. What did this site give me that I already didn’t have?
After I finally joined and gave them my information, I was pleasantly surprised to hear from people I hadn’t heard from for a long time. I even rediscovered extended family living in Ecuador and Venezuela. This was delightful. In addition, it allowed me to fill out my family tree, a hobby that I took up after finding out I was the descendent of a Spanish conquistador (= cut-throat) named Sebastian de Belalcazar.
So what is Facebook, really?
From my perspective, Facebook is a site that gets your information, relates it to information that others have provided, and presents the result back to you. It also allows you to promote yourself (hey look at me, don’t I look great?, don’t I write great?, don’t I have great ideas and support great causes?). So what I see is that Facebook’s main value is the information that they receive from us so that we can show off.
Is being able to possess, manipulate and repackage information that valuable?
Am I going to call Goldman – Sachs tomorrow and ask to be included in the great opportunity of investing in Facebook?
Would my $2,000,000 (that I don’t have) be reasonably safe?
While I have always considered myself a man of ideas, living through the dot.com bust made me a skeptic when it comes to ideas-only businesses, like Facebook. (Maybe that is why I am not, and will never be, a millionaire.) This skepticism makes it easy for me to envision a future virus that could attack the databases that give Facebook its value. I can also easily imagine the emergence of (currently unknown) information that for some reason would make people unhappy with, or afraid to use, Facebook. Either event could result in millions of members deciding to leave Facebook.
In our not-too-distant past, a corporation would have hard assets to back itself up. Besides its product, which was a tangible object, the company would have real estate and machinery that would support refinancing during hard times.
Does Facebook have those? More importantly, will I ever be a millionaire?
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