Goldman Sachs CEO
Vinicius Vacanti is co-founder and CEO of Yipit. Next posts on how to acquire users for free and how to raise a Series A. Don’t miss them by subscribing via email or via twitter.
It has recently been reported that Goldman is investing $500 million in Facebook at a lofty $50 billion valuation.
After several small sales on SecondMarket at a $50 billion valuation, TechCrunch’s MG Siegler stated that “With this investment, that valuation has just been validated.”
He’s wrong. It’s not a fair market valuation. Goldman actually values Facebook at way less than $50 billion.
Why? Goldman will make hundreds of million dollars in fees from their new relationship with Facebook.
In many ways, this isn’t a financial investment in Facebook, it’s a strategic investment by Goldman.
Hundreds of Millions of Dollars in Fees
Goldman will get a ton of extra benefits from cementing this relationship with Facebook. Some are even suggesting that fees Goldman will generate from Facebook eventually could pay for the whole investment.
If you factor in how much those fees are worth, you’ll can get a sense of what Goldman actually valued Facebook:
- $1.5 billion special purpose vehicle. As part of the deal Goldman gets to create a $1.5 billion special purpose vehicle to allow private wealth management clients to invest in Facebook with a 4% placement fee.
- Value to Goldman: $60 million to $135 million. 4% placement fee is $60 million; 5% of profits, assuming Facebook valuation increases to $75 billion, that’s $37 million; at a $100 billion valuation, that’s $75 million
- IPO and Corporate Banking Fees. Deal positions Goldman nicely to lead their eventual IPO and be their preferred investment banker on all large financial transactions including debt raises, acquisitions
- Value to Goldman: $100 million to $300 million. IPO fees (6% of offering) alone can be $100 million. Then you get secondary offerings, debt raises, acquisition advisory and all other financial transactions
- Private Wealth Management for Mark Zuckerberg. Positions Goldman nicely to manage the private wealth of Mark Zuckerberg and the hundreds of newly millionaire Facebook employees
- Value to Goldman: $30 million per year. Assuming 1% fee, on now $12 billion of value to Mark Zuckerberg, this could potentially lead to $120 million. However, since most of the money is tied up in Facebook stock, it won’t all be actively managed.
The above valuations are highly speculative and don’t take into account costs associated with generating those revenues, the chance that Goldman doesn’t end up getting all of the business above or the fact that Goldman was likely to lead the IPO already.
That being said, it’s aslo likely that Goldman will generate more benefits than I’ve outlined above.
Goldman Actually Valuing Facebook at Way Less Than $50 Billion
Considering that Goldman is only investing $375 million and assuming Goldman will generate $100 million of value, it implies Goldman valued Facebook at $36 billion, not $50 billion. At $250 million of value, it implies a $16 billion valuation.
And, of course, it’s also likely that all of the fees pay for the whole investment thus saying nothing about Facebook’s valuation.
In other words, this was a strategic investment in Facebook, not a financial one.
Vinicius Vacanti is co-founder and CEO of Yipit. Next posts on how to acquire users for free and how to raise a Series A. Don’t miss them by subscribing via email or via twitter.
