Finance: facebook financing

This Henry blodget blog entry covers the $150 million facebook just raised using the debt markets and why most start-ups don't raise cash via debt markets. The article sort of touches on the issue of whether or not Facebook is actually worth 15 billion.

In any event, now Facebook is taking on $100 million in debt to buy servers. Why is it borrowing the money instead of selling stock? The positive spin, brought to Spencer Ante at BusinessWeek by Facebook and debt lender TriplePoint, is that its a shame for exciting private companies to squander expensive equity on mundane stuff like servers. And that's true up to a point. (Start-up debt financing is a growing trend).

But the real reason you don't often see emerging private companies take on big debt-loads is that borrowing money is riskier than selling stock, and it also subordinates the existing equity holders. The owners of Facebook common stock, for example, now have at least $350 million of claims that have to be paid out of whatever Facebook is ultimately sold for before they get a dime. Given Facebook's current growth, this shouldn't ever be a factor, but you never know.

In any event, Google, Microsoft, Yahoo, eBay, et al, never borrowed money as private companies. And we suspect the real reason Facebook is doing so now is because it couldn't raise the rest of that $500 million round at that $15 billion valuation. Especially now, after the Beacon flop.

According to the numbers Mark Zuckerberg threw out on a conference call last fall, Facebook will burn at least $150 million of cash this year. Given the latest debt deal, we suspect the number is now expected to be considerably higher than that, and Facebook didn't want its cash balances to drop too low. It couldn't sell any more equity at $15 billion, and it didn't want to do a down round, so it turned to the debt markets.

The following Yahoo article covers the same issue - though the commentators are clearly far more upbeat on facebook's prospects.