Facebook is a Dumping Ground for VCs
Step 1: Find a VC to buy into your startup. Step 2: Let the VC swindle a Facebook buyout. Step 3: Celebrate!
That might sound like an exaggeration, but after purchasing Instagram for $1 billion, some analysts are questioning Facebook's business model.
"It's a dumping ground," Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research, told Benzinga.
When asked if Facebook could turn Instagram into a profitable business or use it to strengthen the Facebook brand, Chowdhry said that he believes that smart decisions are made on shared risk and shared reward. "You tell me, what is the risk for Instagram?" Chowdhry wondered. "What is the risk for Facebook? Not just one billion dollars -- their reputation is at stake. They don't know how to make decisions."
"The biggest question is, 'Who is running the show at Facebook?' It is not the CEO," Chowdhry continued, reiterating his previous point. "It's being run by a VC who wants to make sure they not only cash in on Facebook but they also cash in on these stupid junk companies that they have funded that have zero revenues that they get a return and let the public institutions lose their money on it."
Chowdhry said that if Facebook wanted to pay $1 billion for Instagram, the company should have delayed payment until certain milestones were met.
"Those milestones should be based on user engagement of X hours, X people, generating X revenue," said Chowdhry. "Where is that? Do you see that anywhere? I don't. Do you think that is justifiable for a company that is going public to make such a stupid acquisition without telling future investors what milestones they are [expected to reach]? If there are 10 people, the real value (up front money) should only be $10 million. The remaining $990 million should be given when they meet those [milestones]."
Chowdhry then compared Facebook to the federal government.
"Just as the federal government bailed out these banks, Facebook's role is to bail out VCs who have put these investments in companies that have no business model," he said. "That's the role Facebook is playing."
After hearing what Chowdhry had to say, I asked if some of Facebook's investors had also invested in Instagram before the buyout.
"I haven't done the research on that," Chowdhry replied. "But I would say that the VC community is a very tight community. It could be that, directly or indirectly, investors who invested in Facebook could also be, directly or indirectly, investors in the VCs."
Three or four years down the line, investors could be screwed, Chowdhry warned, saying that Facebook could be the next Yahoo! (NASDAQ: YHOO). "It's the next Pandora (NYSE: P), don't even look any further," said Chowdhry. "It's the next Groupon (NASDAQ: GRPN)."
"Facebook cannot be a dumping ground for the VCs' failed initiative," Chowdhry concluded. "And that is what they are turning out to be -- a junkyard."
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