Facebook: Friends with Money
Facebook is about to stuff more cash into its already full coffers. Having raised $360 million in the span of seven months, the social network has clinched another $100 million.
Palo Alto (Calif.)-based Facebook will raise the additional funds to purchase servers, powerful computers designed to ensure the site can handle a swiftly rising number of users and the dizzying array of whiz-bang applications people add to profile pages. "It will be used entirely for servers," Facebook Chief Financial Officer Gideon Yu says in an interview.
Best of all for Facebook's owners, the company will borrow the funds without having to give up equity. Typically, when startups raise money they have to give away part of the company. But Yu, formerly chief financial officer at Google's (GOOG) YouTube and a treasurer at Yahoo (YHOO), worked out a venture lending deal with TriplePoint Capital, a Menlo Park (Calif.)-based company that specializes in lending money to startups.
Venture lending peaked during the dot-com bubble of the late 1990s and early part of this decade, but is making a comeback as startups use debt to pay for computer servers, telecom gear, and software. "The last thing the entrepreneur wants to do is see those precious equity dollars flowing into equipment purchases," says TriplePoint CEO Jim Labe. "It's a very unproductive use of equity to plow it into fixed assets."
Computer Systems Arms Race
Few startups need gear as much as Facebook. Begun in 2004 by Mark Zuckerberg, Facebook is growing rapidly. In March, Facebook attracted just over 35 million users in the U.S., up 71% from nearly 21 million a year earlier, according to comScore (SCOR). Its worldwide total more than tripled to 109.2 million in the period, according to comScore. International expansion continues apace. Facebook recently launched sites in Spain and Germany, as well as a French-language site.
Facebook does not disclose the number of servers it operates. But research firm Data Center Knowledge puts the tally at about 10,000. The slug of cash will help Facebook buy approximately 50,000 more servers, giving the company "the kind of headroom they need in the next year or two," estimates Frank Gillett, a vice-president at Forrester Research (FORR).
Facebook's appetite for servers reflects the technology arms race among Internet companies that need to ensure rising user demands don't cripple the systems that support Web pages chockablock with graphics, photos, and videos. Users of the microblogging site Twitter have recently complained publicly about slowdowns and outages related to that site's fast growth.
Forrester Research's Gillett estimates that Google, owner of the world's biggest Web search engine, is buying half a million servers each year, while Microsoft's (MSFT) annual consumption is as much as 200,000 servers. "The single biggest factor for success is having available capital to build giant computing facilities," says Gillett. "It is a capital game for these guys who have gotten big and still have significant growth."
Hiring More and Expanding Abroad
Executives at Facebook declined to say which vendors will provide the servers. But the social network is already a big customer of Rackable Systems (RACK), which said in a recent financial statement that it derived $11.5 million, or 17% of $68 million in first-quarter revenue, from Facebook. The world's top server makers are IBM (IBM), Hewlett Packard (HPQ), Sun Microsystems (JAVA), and Dell (DELL).
Facebook has already raised loads of cash. In October, Microsoft invested $240 million in exchange for a 1.6% stake. Then in November and March, Hong Kong billionaire Li Ka-shing wrote two checks for a total of $120 million.
The company will no doubt use much of that financing on its overseas expansion and to broaden its employee base. Today it has 550 employees, but Facebook Chief Operating Officer Sheryl Sandberg says it will probably end the year with 700-800. Many of those workers are engineers who pull in high six-figure incomes.
Yu also says he is planning for a rainy day. "We're trying to put in place a mature capital structure for a growing company," says Yu. The executive has learned from past experience that it's always better to raise money when you don't need it. Yu became chief financial officer of NightFire Software in July, 2000, during a phase when many startups struggled to raise funds. "I tried to raise money during the bust," says Yu. "It was not fun. I will not let that happen to us."
TriplePoint's Biggest Deal
The TriplePoint lease has a degree of flexibility not offered by a traditional loan. For instance, Facebook can exchange or replace equipment during the term of the lease.
TriplePoint, started in July, 2005, by Labe, the former chief of venture leasing pioneer Comdisco Holding, has provided more than $500 million in leases and loans to more than 150 venture-backed companies, including YouTube and Slide.com. It works with startups backed by leading venture capital firms such as Kleiner Perkins Caufield & Byers, Mayfield Fund, and Sequoia Capital.
The deal with Facebook is TriplePoint's largest to date. Previously, it handled a number of transactions in the range of $30 million to $60 million. Recently, TriplePoint financed a $46 million deal with a green energy company backed by Kleiner Perkins that is in stealth mode, Labe says. "The business is on a nice upswing," he says. "The debt financing needs of these companies are increasing."