Facebook May Be Growing Too Fast. And Hitting The Capital Markets Again.

When Facebook raised $240 million from Microsoft in 2007, and another $235 million in debt and equity in 2008, everyone thought they had plenty of cash to get through their big growth phase. With that kind of cash, the company could hire as many people as it needed to and not worry about profitability or going public until at least 2009, as board member Jim Breyer said in 2007.

But a confluence of factors may be conspiring to throw those assumptions out the window and force Facebook back to the capital markets much earlier than they originally planned. We’ve heard from multiple sources that they are testing the capital markets right now, in fact, and may be considering a near term capital raise at terms that could be much more favorable to investors than the previous $15 billion round that Microsoft kicked off in October 2007.

Facebook Is Growing, But So Are Costs

There’s no doubt that Facebook is growing at a breathtaking pace. A year ago, according to Comscore, they had just 74 million unique monthly visitors and 35 billion page views. Today those numbers have grown by 118% and 74%, respectively, to 161 million unique visitors and 61 billion page views per month.

Facebook’s growth, thanks to all these user-created translated versions of the site, has probably exceeded even their own internal projections. And running this engine isn’t cheap.

The company is likely spending well over a $1 million per month on electricity alone, say experts we’ve spoken with. Bandwidth is likely another $500,000 or more per month on top of that. The company has earmarked $100 million to buy 50,000 servers this year and next. And sources say they’ve been buying one NetApp 3070 storage system per week just to keep up with all this user generated content. At up to $2 million each, that adds up quickly – we’ve heard estimates that they may have spent as much as $30 million this year alone with the company. And the icing on the cake – earmark another $15 million per year in office and datacenter rent payments.

And don’t forget those human assets. With 750 employees and growing, Facebook is spending at least another $10 million per month on payroll.

It costs a couple of hundred million dollars a year just to keep the lights on at Facebook. But the real problem is keeping up with growth, particularly storage needs. Add another $100 million or more per year for capital expenditures, and you’ve got a company that’s doing exactly the opposite of printing money.

So How ‘Bout Those Revenues?

eMarketer estimates $265 million in revenue for Facebook in 2008. That’s great, right? Well, not really. The company is still losing money – lots of it – at current revenues. And it’s not clear that revenue will grow as robustly as costs.

Most of Facebook’s growth is outside of the U.S. A year ago, according to Comscore, Facebook had 31 million U.S. visitors, about 42% of the total. Today, U.S. visitors have grown to just 41 million.

19 million live in Africa and the Middle East. 26 million are in Asia. Europe, with 48 million Facebook users, has a larger share than the U.S. Another 16 million are in Latin America.

Just one in four Facebook users come from the U.S. today.

As we wrote last summer, most of these international users can’t be monetized today. And to make things worse, bandwidth costs in those countries is generally much higher than the U.S. So the users cost more, and they don’t bring in any revenue.

That international growth might be ok if U.S. growth remained strong. But the U.S. market just seems to be tapped at this point, and gaining market share from MySpace is a battle. As we wrote in August, at current growth rates it will take Facebook 18 years to overtake MySpace in the U.S.

Uh Oh, The Economy

So costs are skyrocketing, and revenues can’t keep up. Ok, But Facebook still has plenty of money, right?


The economy isn’t looking so hot, and it may get worse. If revenues don’t grow substantially, the company’s runway of cash gets much shorter. 2008 revenues are likely $100 million less than the company anticipated a year ago. If the economic train really derails, Facebook could be in big trouble.

A big chunk, probably a majority, of the roughly $500 million the company has raised is already gone. Even more will be spent next year, particularly if international growth rates remain constant (and there is lots and lots of room to grow internationally). Facebook could be down to just a year’s worth of cash at this point, with no IPO horizon in sight.

And even if they have cash into 2010 (its nearly impossible to figure out exactly how much they’re burning), the economic downturn is likely to be much, much worse than they anticipated. If they don’t grab the money now, it may not be available later on.

Which Explains Why CFO Gideon Yu Is In Dubai

Sources have told us that Facebook CFO Gideon Yu was in Dubai this week, possibly meeting with Dubai International Capital, exploring fundraising options.

U.S. investors, including VCs and hedge funds, aren’t interested or aren’t able to invest at the valuation Facebook expects. That leaves Sovereign Wealth Funds as the only viable funding solution. And the window to get money from them may fast be closing, too.

Which explains why Facebook may be looking for money sooner rather than later. If they don’t raise a big chunk of money now from someone who’ll pay whatever it takes to own a piece of Facebook, there may be a heavily dilutive down-valuation round for Facebook in the next 12-18 months.