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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.

  • http://bsiscovick.tumblr.com/ bsiscovick

    great post vin.

  • http://bsiscovick.tumblr.com/ bsiscovick

    great post vin.

  • http://twitter.com/markrmcqueen Mark McQueen

    This all would make sense if Goldman actually invested the company cash in the Facebook round, which it didn’t. The round was offered to Goldman’s private brokerage clientele. Since they put up the dough, and don’t benefit from any of the ancillary business that GS may derive from their role in the private placement, the per share valuation is the actual valuation — straight up.

    MRM

    • http://viniciusvacanti.com Vinicius Vacanti

      That’s fair though I think the $375 million is Goldman’s actual investment and the $1.5 billion is what they will give out to clients. Also, the point is that people trust Goldman as a financial investor, not its private clients.

      • http://twitter.com/markrmcqueen Mark McQueen

        Agreed. NYT Dealbook has confirmed that GS led the round with its own capital.

        But the private client group will be paying US$50B valuation, so that’s the price of the round underway; regardless of what Goldman’s ultimate true cost base is.

        MRM

  • http://twitter.com/markrmcqueen Mark McQueen

    This all would make sense if Goldman actually invested the company cash in the Facebook round, which it didn’t. The round was offered to Goldman’s private brokerage clientele. Since they put up the dough, and don’t benefit from any of the ancillary business that GS may derive from their role in the private placement, the per share valuation is the actual valuation — straight up.

    MRM

    • http://viniciusvacanti.com Vinicius Vacanti

      That’s fair though I think the $375 million is Goldman’s actual investment and the $1.5 billion is what they will give out to clients. Also, the point is that people trust Goldman as a financial investor, not its private clients.

      • http://twitter.com/markrmcqueen Mark McQueen

        Agreed. NYT Dealbook has confirmed that GS led the round with its own capital.

        But the private client group will be paying US$50B valuation, so that’s the price of the round underway; regardless of what Goldman’s ultimate true cost base is.

        MRM

  • Inverse137

    What does the mafia value Facebook at? I would like to know what a second group of criminals thinks as well.

    • Trotsky

      DST is already involved

  • Inverse137

    What does the mafia value Facebook at? I would like to know what a second group of criminals thinks as well.

    • Trotsky

      DST is already involved

  • Bobbobwhite

    Goldman, exactly like Buffett and all the billionaires, does no deal unless it gains a distinct financial advantage.

    Over the course of our lives, we have all known at least one “friend” who wouldn’t be a “friend” if they did not gain an advantage in everything shared in the “friendship”. Goldman is merely an extension of that immorally selfish mentality combined in a company.

  • Bobbobwhite

    Goldman, exactly like Buffett and all the billionaires, does no deal unless it gains a distinct financial advantage.

    Over the course of our lives, we have all known at least one “friend” who wouldn’t be a “friend” if they did not gain an advantage in everything shared in the “friendship”. Goldman is merely an extension of that immorally selfish mentality combined in a company.

  • Psilophi

    You can’t just drop numbers like “assuming Facebook valuation increases to $75 billion, that’s $37 million; at a $100 billion valuation.” Those aren’t things you can assume, and if Facebook is worth way less than $50B as you propose here in the title, there is no way an IPO in the next year is going to increase that value to some ridiculous number like $75B.

    You can’t just throw around billions of dollars without being specific. Unless you’re the US government.

  • Psilophi

    You can’t just drop numbers like “assuming Facebook valuation increases to $75 billion, that’s $37 million; at a $100 billion valuation.” Those aren’t things you can assume, and if Facebook is worth way less than $50B as you propose here in the title, there is no way an IPO in the next year is going to increase that value to some ridiculous number like $75B.

    You can’t just throw around billions of dollars without being specific. Unless you’re the US government.

  • Anonymous

    Im giving Facebook 4 more years, then something else will take it’s place. These types of companies rise and fall all the time.

  • Anonymous

    Im giving Facebook 4 more years, then something else will take it’s place. These types of companies rise and fall all the time.

  • http://twitter.com/robertovalerio Roberto Valerio

    Fully agree on (1) and (2) – had the same thoughts yesterday. Cannot agree on (3): Mark Zuckerberg would not want his business bank to manage his private wealth as well. As long as you don´t have to, don´t do it..

  • http://twitter.com/robertovalerio Roberto Valerio

    Fully agree on (1) and (2) – had the same thoughts yesterday. Cannot agree on (3): Mark Zuckerberg would not want his business bank to manage his private wealth as well. As long as you don´t have to, don´t do it..

  • FJCruiser79

    Interesting take. I hadn’t thought through the effective valuation from Goldman’s perspective. Somewhere out there is a spreadsheet that probability weights each revenue opportunity and projects an effective implied valuation net of future fees.

    I wonder how how the internal GS fund (I think either GSPS or GSIP) looks at it? They invested $75 million at the $50 bn valuation…but won’t get the benefit of future fees. At the very least, their investment is a validifier for the PWM clients who are investing as part of the $1.5 billion round.

  • FJCruiser79

    Interesting take. I hadn’t thought through the effective valuation from Goldman’s perspective. Somewhere out there is a spreadsheet that probability weights each revenue opportunity and projects an effective implied valuation net of future fees.

    I wonder how how the internal GS fund (I think either GSPS or GSIP) looks at it? They invested $75 million at the $50 bn valuation…but won’t get the benefit of future fees. At the very least, their investment is a validifier for the PWM clients who are investing as part of the $1.5 billion round.

  • Anonymous

    Goldman wont get a 6% fee from underwriting the IPO. Probably something closer to 2%. This IPO will be highly competitive and every bank wants in…competition will drive the spread down. Just look at VISA and the upcoming GM IPOs.

  • Anonymous

    Goldman wont get a 6% fee from underwriting the IPO. Probably something closer to 2%. This IPO will be highly competitive and every bank wants in…competition will drive the spread down. Just look at VISA and the upcoming GM IPOs.