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                     RESEARCH REPORT 




                     Created:  3‐26‐10 
                     Authored by: NeXt Up!  

This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon Valley Partners under the Next Up
Research brand ("Next Up Research"), and any opinions contained herein are solely the opinions of Next Up Research.
Information contained herein, including but not limited to research, valuations, calculations, estimates and any other material or
sources, is believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past performance
is not indicative of future results. These materials are provided for informational purposes only and should not be used or
construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost, Inc. is not acting as nor is it registered as
an investment adviser.
                                                                  Investment Highlights

                                                                  Leader in Social Networking: Facebook has the highest
                                                                  number of monthly unique visitors, nearly 4x that of
                                                                  MySpace. The network effect should help Facebook

                                                                  remain in the growth phase for the next few years.

                                                                  Cash Flow Positive: Facebook, which turned profitable in

                                                                  Q2:09, is one of the few SNS to do so. We expect the
                                                                  company to derive significant margin leverage as it grows
                                                                  at a 32% CAGR over the next four years, significantly
                                                                  outpacing its rivals and the overall social networking

       Face of Next                                               Virtual R&D from over a million developers: Facebook
                                                                  has over 1 million registered developers – a support
       Generation Social                                          network that results in hundreds of millions of dollars in
                                                                  virtual R&D budget for the company. We believe none of
       Networking                                                 its direct competitors enjoy such enormous advantages.

                                                                  Valuation: We used two methods to arrive at an enterprise
                                                                  valuation of between $8.95 - $8.39B for Facebook, an
                                                                  estimated price per share of $18.97 - $20.23 for common
       NeXt Up!                                                   stock.

       March 26, 2010

       Investment Concerns

       Number of Users From Lucrative Markets Could Peak Over the Next Few Years: We estimate that
       nearly two-thirds of all internet users in the lucrative US and key European markets are already Facebook
       users.  We  expect  most  of  the  company’s  future  user  growth  to  come  from  emerging  economies,  the
       revenue potential of which are a small fraction of that offered by users from US or Western Europe.

       Emerging Economies Pose a Challenge: Among the SNSs in the BRIC countries, which constitute
       approximately  45%  of  the  world’s  population,  Facebook lags significantly. Even with meaningful
       penetration of these regions, near term monetization potential could be limited as the case with Orkut
       demonstrates. Facebook is blocked in China (but available in Honk Kong).

This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon Valley Partners under the Next Up Research brand
("Next Up Research"), and any opinions contained herein are solely the opinions of Next Up Research. Information contained herein, including
but not limited to research, valuations, calculations, estimates and any other material or sources, is believed to be reliable, however its accuracy
and completeness is not warranted or guaranteed, and past performance is not indicative of future results. These materials are provided for
informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost,
Inc. is not acting as nor is it registered as an investment adviser.
                          This report issued subject to important legal disclaimers contained on last page of report.
Investment Highlights

Leader in Social Networking: Facebook’s  unique  visitors  more  than  tripled to more than 490
million since March 2008, while most social networking sites have struggled. Even in comparison
to MySpace, one of the largest social networks, Facebook has almost four times as many unique
visitors. Only Twitter has grown at a faster rate since Facebook over this period though we note
that it has grown from a much smaller base.

Exhibit 1: Membership Evolution







        Mar-08      Jun-08   Sep-08     Dec-08    Mar-09      Jun-09    Sep-09      Dec-09

                 Facebook.com         MySpace              Hi5                   Friendster
                 Twitter              Orkut                LinkedIn

Source: comScore, NeXt Up Research Estimates

Cash Flow Positive: Facebook turned cash flow positive in 2Q09. This does not include the cash
from  Digital  Sky’s  investment in May 2009. It is one of the few social networking sites that are
profitable. We estimate that Facebook is currently burning through $200 - $300M of cash a year

NeXt Up!                                                                                         2
for its operational expenses and for capacity expansion. That Facebook is cash flow positive
presents a strong case for its business model.

Broad Demographic Appeal: Facebook has managed to attract one of the broadest
demographic profiles of all networking sites. In particular, Facebook continues to have one of the
lowest percentages of teen users (who tend to be more fickle and may not stay on as they get
older). Only LinkedIn, which is professional networking site and Twitter, the microblogging site,
have better demographic profiles than Facebook. With greater number of users belonging to the
working age group and hence with greater disposable income, Facebook has a greater chance to
monetize its virtual gifts business.

We attribute some of the share loss of MySpace to the fickleness of the younger adults. Over a
third of MySpace’s users are young adults despite its focus in the US market, where median age 
is over 40. For Orkut (Exhibit 2), the very high percentage of young adults is more a function of
the nations they are popular in. For instance, over 50% of Indians are below the age of 25.

Exhibit 2: Demographic Distribution of Unique Visitors

                                  13%                                                   9%
                                                             20%          23%
                                  18%                                                  20%
                                                             18%          15%

                                  28%          28%
                     28%                                     24%          35%          25%

                                  41%                        38%
                     37%                                                  41%          29%


    Facebook      Friendster      Hi5        LinkedIn     MySpace        Orkut        Twitter
                   Age: 15-24        Age: 25-34         Age: 35-44       Age: 45+

Source: comScore, NeXt Up Research Estimates

A Wide Network of Developers: Facebook has over 1 million registered developers. This results
in several hundred million dollars of virtual R&D budget – a figure few of its competitors can
match. With such a support base, Facebook’s application could quickly bring new applications to 
the market to target popular features from other sites.

NeXt Up!                                                                                        3
Another positive from the large base of application developers is an ensured stream of
advertisement revenues. Application developers like Zynga utilize part of their revenues to
advertise on Facebook to attract new members and drive viral expansion of their games and
applications. Zynga alone spends an estimated $5 - $8 million a month on advertisements on

Increasing importance of Facebook as an Advertisement and eCommerce Channel: With
more than 400 million active users, Facebook is emerging as an increasingly important medium
for brand imaging. Companies such as Coca-Cola and Procter & Gamble (P&G) already maintain
a fan page on Facebook and are trying new methods for customer engagement. Vitaminwater, a
Coca-Cola owned company, utilized its Facebook app to create a user generated flavor for a
beverage. Users could add the application in which they competed  to  create  the  company’s 
newest flavor (Exhibit 3).

Exhibit 3: Vitaminwater’s Flavorcreator app on Facebook

Source: Company Reports

NeXt Up!                                                                                   4
Procter & Gamble launched an e-commerce application on its Facebook Page for Pampers
Cruiser in February 2010. It sold out 1000 Cruiser diaper packs within an hour (Exhibit 4).
Department  stores  such  as  Macy’s,  Bloomingdale’s,  JC  Penney,  Kohl’s,  Nordstrom  and  Sears 
also have fan pages that allow them to communicate directly with their fans. The pages are
updated for deals, promotions and have become an important source of customer reviews.

Exhibit 4: P&G’s Pampers Facebook Page

Source: Company Reports

NeXt Up!                                                                                          5
As online retailers start utilizing social media such as Facebook and Twitter to communicate with
their customers, Facebook is seeing increasing adoption as a communication and an
advertisement channel (Exhibit 5).

Exhibit 5: % of US Online Retailers present on Social Media Sites






                0%    10%        20%       30%       40%        50%       60%

Source: eMarketer

Though Facebook currently does derive meaningful revenues through any sales that happen
through e-commerce applications on its Facebook Pages, the potential advertisement revenues
provide significant opportunity for Facebook. We estimate P&G spent $500k on its Pampers
product page. While the amount is insignificant, we believe these are early indicators of
Facebook’s potential in garnering more online ad dollars.

We expect the domestic social media marketing sector to grow to $3.1B by 2014, up from $700M
in 2009 representing a 34% CAGR. We expect Facebook to account for a significant share of the
media marketing sector and to grow at a 30% CAGR over the same period.

NeXt Up!                                                                                       6
Exhibit 6: US Social Media Marketing Segment



  $3.0                                   Other   Facebook






            2008         2009         2010        2011         2012        2013         2014

Source: Forrester, Next Up Research Estimates

Valuation: We used two methods – a) Steady-state EV/Revenue multiple, and b) Comparative
EV/Revenue multiple, to arrive at an enterprise valuation for Facebook.

    (a) Steady-state EV/Revenue multiple: $8.9 billion

    (b) Comparative EV/Revenue multiple: $8.4 billion

Investment Concerns

Number of Users From Lucrative Markets Could Peak Over the Next Few Years: We
estimate that nearly two-thirds of all internet users in the lucrative US and key European markets
are already Facebook users. We expect most of the company’s future user growth to come from 
emerging economies, which offer revenue potential that is a fraction of those offered by users
from US or Western Europe.

Emerging Economies Pose a Challenge: Among the SNSs in the BRIC countries, which
constitute  approximately  45%  of  the  world’s  population,  Facebook is ranked amongst the top 3
only in India and Brazil. Even with meaningful penetration of these regions, near term
monetization potential could be limited as the case with Orkut demonstrates. Facebook is blocked
in China (but available in Honk Kong).

NeXt Up!                                                                                         7
Exhibit 7: Top 3 SNSs in BRIC Countries

                                    1                       2                        3
           Brazil                 Orkut                 Facebook                 MySpace
           China                   QQ                       51                    Xiaonei
           India                  Orkut                 Facebook               Bharatstudent
           Russia              V kontakte                Mail.ru               Odnoklassniki
Source: comScore, Company Reports and NeXt Up Research Estimates

Growth Could Lead to Platform Reliability Issues: Facebook has more than doubled its
unique visitors from December 2008 to December 2009. Facebook Connect has grown to reach
more than 60 million users and is available on more than 80000 websites. Such widespread
adoption has lead to challenges in maintaining platform reliability. Facebook’s  platform  recently 
faced some uptime issues. As the case with Friendster shows, a large number of users can place
a significant strain on infrastructure resources, with possible impact on user experience.

NeXt Up!                                                                                          8
Evolution of Social Networking
The two most important driving forces behind any networking site’s growth has been the type of 
users already on the network and the user experience (fast load times and clean layout of the
site). Since features can usually added or removed with ease, such factors have not been a
determining cause for success or failure.

All failed social networking companies shared a common trait – attracting non-revenue producing
users while scrambling for capital to fund infrastructure expansion. Such expansion usually ended
up becoming prohibitively expensive not only as more members were added but also because
existing members placed exorbitant demands on the servers and storage of the site. Even with
plummeting storage and computing costs, it is not often that a popular site can stay abreast of
very rapid growth where millions of users are added a month. After a few years, such sites ended
up becoming literally a victim of their own success. Soon the members stopped using the site as
their user experience became poor due to slow loading times and limited features.

The history of social networking sites (SNSs) can be traced back to 1997, when SixDegrees.com
was founded. Launched in the days when storage and servers were expensive, SixDegrees
offered only a limited user experience, where members could find out how they were connected
or related to another member. The theory was that most people in the world can be related to a
particular person within six degrees of separation. SixDegrees fell victim to the same fate that
befell most failed social networking sites and closed in 2000.

The dot com bust and easy availability of unused servers and unemployed engineers heralded
the next stage. From 2002-05, a flurry of networking sites including Friendster, MySpace,
LinkedIn, Hi5, Orkut (owned by Google), Facebook and Bebo. These companies benefitted also
from dramatic increase in global Internet usage after the year 2000. Friendster remains a text
book example of how a company can fail despite soaring user base as its servers became
overloaded, leading to poor user experience.

By the time Friendster started to solve many of its problems, the users had already moved on to
MySpace. MySpace was launched in 2003, mimicking the features of Friendster. With abundant
server capacity (from eUniverse, now called Interix Media – which owned the site), MySpace
(now owned by Fox) had little trouble in vaulting to the lead of the pack, attracting millions of
users who were deserting Friendster.

Orkut which was available on an “invitation” basis only  ended up with a dwindling market in US
but with a very large following in Brazil (almost 50% of all Orkut users) and India (18% of users).
Some simply attribute this to the fact that the name is easier to pronounce in Portuguese. Today,
Brazil and India each  account  for  more  than  20%  of  Orkut’s  memberships.  The  invitation  only 
feature also turned away most first time users and resulted in the adverse selection process of
turning away new users while adding to the growth of users in a limited geographic area with
enthusiastic inviters.

By introducing local language (especially Spanish) versions, the San Francisco based Hi5
emerged as the largest networking site in Spanish language countries including most of Latin
America (with the notable exception of Brazil) and Europe. We note comScore data does not

NeXt Up!                                                                                             9
include internet cafes or mobile usage, which are the dominant means of computer usage in
emerging economies such as Latin America and Southeast Asia.

Bebo – which stands for “Blog early and blog often” is now owned by AOL, part of Time Warner. It 
remains as one of the most popular sites in United Kingdom and commonwealth nations such as
Canada, New Zealand and Australia. Regional sites such as CyWorld, Mixi and QQ became
popular in Korea, Japan and China respectively due to the same reasons as discussed above – a
user base that shared cultural traits.

Founded by Mark Zuckerberg in 2004, Facebook has witnessed almost exponential growth, and
surpassed MySpace as the most popular SNS in April 2008. Today, it has almost four times the
monthly unique visitors of MySpace.

Facebook deviated from the usual internet handle or avatar approach of identification for a user.
Most Facebook users use their real name, which made the site different from others such a
Friendster or Orkut where fake profiles were common. Facebook also offers a ‘cleaner’ look with 
limited advertisement, a platform to create third party applications and feature to upload unlimited
photographs. With hundreds of millions of users, Facebook faces the same challenges that have
dogged others – prodigious need for storage and servers with soaring user base.

Exhibit 8 lists the various networking sites. The list is by no means comprehensive.

Exhibit 8: Timeline of Prominent SNSs

 Year of
         SNS             Description                         Status/Owner
                       Among the first SNSs; based on six Closed; sold to YouthStream Media
                       degrees of separation concept        Networks in 2000 for $125M)
   1997                                                     Acquired in April 2008 along with its
                       An SNS dedicated to Asian            parent Community Connect and sister
                       Americans; 2M members                site BlackPlanet by Radio One for
                                                            Acquired in April 2008 along with its
                       An SNS dedicated to African
                                                            parent Community Connect and sister
   1999    BlackPlanet American; 18M members as of April
                                                            site Asian Avenue by Radio One for
                       Launched as virtual world site in
                       1999, the company started its SNS
                       in 2001; Korea’s largest SNS; 
           CyWorld                                          Owned by SK Communications
                       launched in China in 2005 and US in
   2001                2006; 21M uniques visitors as of
                       March 2009
                       First pure-play professional SNS;
           Ryze        has witnessed limited growth – 0.5M  Launched and owned by Adrian Scott
                       members so far

NeXt Up!                                                                                        10
 Year of
         SNS            Description                             Status/Owner
                        Failed in the US after becoming
                        popular for a while; still popular in   Investors include Kleiner Perkins
  2002     Friendster   SE Asian countries such as              Caufield & Byers, Benchmark Capital,
                        Philippines, Singapore, Malaysia        DAG Ventures, IDG Ventures
                        and Indonesia; 90M members
                                                                Investors include Greylock, Sequoia
                        First pure-play professional SNS
                                                                Capital, Bessemer Venture Partners,
           LinkedIn     with a worldwide focus; offered in 4
                                                                and the European Founders Fund;
                        languages; 40M members
                                                                latest post-money valuation ~$1B
                        Launched first in the US, but
                        became popular in Latin America      Investors include Mohr Davidow
           Hi5          and Europe; currently, third largest Ventures ($20M) and Hercules
                        SNS after Facebook and MySpace; Technology Growth Capital ($15M)
                        60M members
                        Pure-play professional SNS initially
           OpenBC/      focused on Germany; now, offers its Public company (XETRA); Market Cap:
           XING         applications in 16 different         $230M; 2008 Revenues: $52M
                        languages; 7M members
                        Largest SNS in the US; initially        Acquired in July 2005 by Rupert
           MySpace      benefited from alienated Friendster     Murdoch's News Corporation for
                        users                                   $580M
                        Apathy among the US users forced
                        it look beyond; became extremely
                                                              Owned by Google, and fully managed
                        popular in Brazil and India riding on
           Orkut                                              out of Brazil because of its exceptional
                        early-mover advantage at a time
                                                              popularity in the country
                        when Internet penetration was on
                        the rise
                                                                Investors include Peter Thiel, Accel
  2004                  Facebook, which remained
                        restricted to select groups until
                                                                Meritech Capital Partners,
           Facebook     2006, pipped MySpace as the most
                                                                The Founders Fund, Li Ka-shing,
                        popular SNS in 2008; 294M unique
                                                                Microsoft, European Founders Fund,
                        visitors in March 2009
                                                                TriplePoint Capital (total $516M)
                                                                Public company (Tokyo); Market Cap:
           Mixi         Largest SNS in Japan
                                                                $750M; 2009 Revenues: $120M
                                                                Acquired by Oak Pacific Interactive in
                        A China-focused SNS; quoted as
           Xiaonei                                              Oct 2006; raised $430M from SoftBank
                        Chinese clone of Facebook
                                                                and Joho Capital
  2005                  An acronym for Blog early, blog
                        often, Bebo is an SNS which offers
                                                                Acquired by AOL in March 2008 for
           Bebo         its application in seven different
                        languages; popular in the UK, New
                        Zealand and Australia
                                                     Investors include Union Square
                        A mobile SNS and micro-blogging
                                                     Ventures, Digital Garage, Spark
                        site; ranked as the fastest growing
  2006 Twitter                                       Capital, Bezos Expeditions,
                        site in the Member Communities
                                                     Institutional Venture Partners and
                        category in February 2009
                                                     Benchmark Capital; total ($57M)
Source: Company Reports and NeXt Up Research Estimates

NeXt Up!                                                                                            11
Social networking sites (SNS) primarily generate revenues from advertising. We expect the
market to grow to $3.5B in 2013, up from $2.3B in 2009 representing a 10% CAGR. We expect
domestic ad dollar market to expand from $1.15B in 2009 to $1.55B in 2013 - a CAGR of 8%. By
contrast, Facebook should grow at a 35% CAGR during the same period.

Exhibit 9: Advertisement spend on SNS worldwide

  $4       billions

                      Non US SNS Ad Spend     US SNS Ad Spend




             2007         2008       2009       2010E       2011E        2012E       2013E

Source: eMarketer, NextUp Research Estimates

The major players in the US market are Facebook and MySpace. MySpace earned almost 50%
of the total advertisement revenues on SNS in United States. But this is mainly due to Google’s 
deal which guarantees $900 million to MySpace over three years subject to certain traffic targets.
Without Google’s deal,  we believe MySpace  would have generated significantly lower revenues 
and Facebook’s share would have been much higher.

NeXt Up!                                                                                      12
Exhibit 10: Market share for US SNS advertisement revenues in 2009 and 2010

                       2009                                            2010E

                                Faceboo                                          Facebook
                                   k                                               39%
            MySpace               28%

                                                             15%         Other
           Widget's                                                      SNS's
             3%                                                           23%

Source: eMarketer and NeXt Up Research Estimates

In June 2009, News Corp, the owner of MySpace announced, that MySpace would not be
receiving approximately $100 million of the $300 million due that year from Google as it has fallen
short of traffic targets. Facebook on the other hand has seen increasing traffic and revenue over
the past year.

Almost 70% of total internet users in the world visit social networking sites as of December 2009.
Of the internet users who visit social networking sites, almost 50% are Facebook members. As of
December 2009, Facebook was the most popular SNS with more than 460 million unique visitors,
almost four times the number of unique visitors on the next most popular SNS, MySpace. While
Facebook, Twitter and LinkedIn have witnessed more than 100% growth in the number of unique
visitors and usage in minutes, older generation sites such as MySpace and Friendster have
stagnated. Facebook has gained popularity because of its cleaner look with limited
advertisement, and features which allow users to create third-party applications and upload
unlimited photographs. In addition to the above-mentioned social networking sites with global
presence, local networking sites in China, Japan and South Korea such as CyWorld, 51.com,
56.com and Xiaonei are also gaining popularity.

NeXt Up!                                                                                        13
Exhibit 11: Number of Unique Visitors on Global SNS







       Mar-08      Jun-08   Sep-08     Dec-08   Mar-09      Jun-09   Sep-09      Dec-09

                Facebook.com         MySpace             Hi5                  Friendster
                Twitter              Orkut               LinkedIn

Source: comScore

NeXt Up!                                                                                   14
Exhibit 12: Facebook’s share of Unique Visitors on Global SNS 











         Aug-08   Oct-08   Dec-08   Feb-09   Apr-09   Jun-09   Aug-09   Oct-09   Dec-09   Feb-10

                                     Non-Facebook     Facebook

Source: comScore

For 2010, we estimate that the entire SNS market will generate more $6B in revenues, of which
approximately $3.5 billion will be generated by Asian SNS such as Xiaonei, QQ, 51.com and
CyWorld. Facebook’s market share will be 17%.

NeXt Up!                                                                                     15
Exhibit 13: SNS Landscape (CY10E = $6 billion)

                      SNS, 6%         Others, 7%

                      Facebook, 17%

                                                            Asian SNS
                                                         (including QQ,
                         MySpace,                        Odnoklassnik) ,
                           6%                                  63%

Source: comScore, Company Reports and NeXt Up Research Estimates

NeXt Up!                                                                   16
Most social networking sites that have a user base of friends, family and relatives face lower
switching costs. Early mover advantage does not necessarily translate into long term success.
The decline of Friendster is a classic example. Most sites allow for free sign ups – allowing users
to try out new sites while retaining existing ones.

That being said, Facebook has worked diligently towards ensuring user retention. It has seen a
consistent increase in its usage compared to its competitors. Its market share among unique
visitors in the social networking space has more than doubled since December 2008.

Exhibit 14: Unique Visitors’ market share among social networks












                      Others    Twitter        Orkut    MySpace      Facebook

Source: comScore and NeXt Up Research

NeXt Up!                                                                                        17

MySpace was founded by Brad Greenspan, Chris DeWolfe, Josh Berman and Tom Anderson in
August 2003. It is the second most popular SNS after Facebook, in the US. The company is
headquartered in Beverly Hills, California, and employs over 1,000 professionals.

MySpace was initially started as a part time project at eUniverse, an internet marketing company,
by its founders. The site was officially launched in January 2004. By February 2004, the site had
reached 1 million registered users and by November 2004 the number crossed 5 million.

 In June 2005, MySpace was acquired by Rupert Murdoch’s News Corporation for $580 million.
MySpace had 20 million registered users by this time. In August 2006, Google and MySpace
reached an agreement through which Google would become the search engine and
advertisement provider for the site. Google agreed to pay MySpace $300 million a year, for three
years, subject to certain traffic targets. In 2009, Google announced that MySpace would not be
receiving approximately $100 million of the $300 million due that year from Google as it has fallen
short of traffic targets. The deal is set to expire in June 2010.

MySpace went through frequent redesigns in 2007 and 2008 as the company struggled in the
face of increasing competition from Facebook. In June 2008, Facebook surpassed MySpace in
terms of global unique visitors and a year later Facebook overtook MySpace in terms of US
unique visitors too. In April 2009, the senior management team at MySpace was restructured.
Chris DeWolfe, the then CEO, was replaced by Owen Van Natta, a former Facebook executive.
In February 2010, Owen Van Natta was replaced by co-Presidents Mike Jones and Jason

MySpace is now trying to position itself as an entertainment destination. The company made a
series of acquisitions in 2009 to this end. The company’s  acquisitions include  iLike, imeem and 
Slingshot Labs. The site is available in 15 different languages.


Hi5 was founded by Ramu Yalamanchu in 2003. Headquartered in San Francisco, California, Hi5
is the third most popular SNS after Facebook and MySpace.

The site helps users to connect with friends, interact with new members, share photos and play
games. Hi5 has a dedicated gaming portal with flash-based social games and virtual currency for
micro-transactions. The main sources of income for the site are advertising and virtual goods
revenues. Through the OpenSocial platform, the site also distributes third-party games on a
revenue sharing basis.

NeXt Up!                                                                                        18
Hi5 launched its virtual currency in December 2008. In February 2009, the company launched a
casual gaming portal as a part of its monetization strategy. In April 2009, Hi5 partnered with
PlaySpan to provide micropayment options for Hi5 users. Hi5 users can utilize  PlaySpan’s  pre-
paid game cards for online purchases.

Hi5 acquired Big Six, a social gaming site in February 2010 in a bid to develop commerce
platforms and payment processing solutions.

Gaming accounts for around a third of Hi5’s traffic. Micro transactions through games account for
more than 15% of Hi5’s revenues. The site is popular in non-Brazil Latin America and is available
in 50 different languages.


Orkut was released in January 2004 by Orkut Büyükkökten, a developer at Google. The site is
owned and operated by Google. Due to the site’s high popularity in Brazil, Orkut’s headquarters 
has been shifted from California to Belo Horizonte, Brazil. The site has more than 100 million
active users worldwide.

The site shares many features with other popular networking sites. Users can create profiles on
the site, upload photos and join communities based on common interests. The site has Google
Chat integrated into its features.

However, the site has steadily lost share to others such as Facebook due to limited functionality
offered by the platform for developers. In a bid to reverse the trend, Orkut has opened the
platform to developers. Developers can build games on the site, improving user interaction and

More  than  50%  of  Orkut’s  users  are  from  Brazil; India accounts for another 20% of total users.
The site is available in 48 different languages.


Headquartered in Mountain View, California, Friendster was launched in March 2002 by Jonathan
Abrams. After initial success in the US, the site failed to keep up the momentum because of its
inability to ramp up its IT infrastructure in the face of skyrocketing user growth. Ironically,
Friendster became a victim of its own success. Users started deserting the site due to poor user

NeXt Up!                                                                                           19
Friendster is still somewhat popular in East Asian countries including the Philippines, Singapore,
Malaysia and Indonesia. It is available in English, Tagalog, Malay, Vietnamese, Thai, Indonesian,
Traditional Chinese, Simplified Chinese, Korean, Japanese, and Spanish. Over 90% of its traffic
is from Asia. Friendster has more than 115 million users.

In December 2009, the company was purchased by MOL Global, a leading payments provider.


Twitter, headquartered in San Francisco, California, started as a small project at Odeo (a
podcasting company) in March 2006. In July 2006, the service was offered to the public. The
service is aimed at those who could  upload  their  status  by  answering  a  question  “What’s 
happening”  in  140  characters or less via web or SMS. These micro-blogs are referred to as

In September 2006, Obvious Corp (co-founded by Evan Williams, Biz Stone, and Jack Dorsey
with a few Odeo employees) bought out the interests of VC’s and other investors of Odeo. In April
2007, Obvious Corp spun off Twitter, with Jack Dorsey as its CEO. The remaining portion of
Odeo was sold to Sonic Mountain in May 2007. Evan Williams took over as CEO of Twitter from
Jack Dorsey in Oct 2008.

Since inception, Twitter has made three acquisitions and has raised capital through four rounds of
funding for a total of nearly $157M. The most recent funding round (in Sep 2009) had a post
money valuation of a $1.1 billion. Twitter had earlier rejected a Facebook’s offer of acquisition in 
Oct 2008. The firm has partnered with Microsoft, Google and Yahoo, giving them full access to
feed of public tweets, in return for licensing fee. During the period from November through
December 2009, Twitter added support to four European languages – Italian, French, Spanish
and German. We estimate that Twitter has about 147 employees, about five times what it had a
year back.


Conceived in 2002 and officially launched in May 2003, LinkedIn is a professional social
networking company which connects professionals from different fields across the globe. LinkedIn
is useful in locating and acquiring service providers, experts, business partners, employees and
potential customers. The five founders, Reid Hoffman, Allen Blue, Jean-Luc Vaillant, Eric Ly, and

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Konstantin Guericke, started to operate from the living room of Reid Hoffman in the fall of 2002.
By the end of its first month of operation, Linked in had 4,500 members in the network.

Towards the end of 2003, LinkedIn secured $4.7 million Series A financing from Sequoia Capital,
and closed the first calendar year of operation with 81,000 members and 14 employees.
Currently, LinkedIn has over 50 million members with 50% of them in North America.
Approximately 1.5-2.0 million professionals join LinkedIn every month. Recently, the company
opened its first European office in London and introduced its interface German language to make
inroads into Germany, where Xing AG is a dominant player. In addition to English and German,
the company offers its services in French and Spanish. So far the company has raised $103
million in five rounds of financing. It raised its most recent investment at a post-money valuation
of $1 billion.

In December 2007, emulating other SNSs, LinkedIn decided to open its application program
interfaces (APIs) to third-party developers. This facilitated the creation of widgets based on
LinkedIn’s data by third-parties for the benefit of users.


Hamburg, Germany

Formerly known as OpenBC, Xing is a professional social networking portal founded by Lars
Hinrichs and Bill Liaoin in August 2003. The platform was officially launched for the public on
November 1, 2003. Xing had its IPO on December 7, 2006. The company has a large presence in
Germany, Austria and Switzerland. Approximately 36% of its members are from these three

Subscription fees from premium accounts constitute 86% of the  company’s  overall  revenues. 
Additionally, the company generates revenues from advertising and e-commerce. Xing earns
about 46% of its revenues from Germany, while the rest of Europe and the Americas constitute
43% and 9% of its total revenues respectively. We expect the company to have $76M in
revenues for 2010. We estimate that Xing has about 8.5 million members, of which 660 thousand
were premium subscribers.

While basic membership at Xing is free, its premium monthly membership rates range from $5.95
to  $9.95,  much  lower  than  LinkedIn’s  $24.95  to  $499.95.  Xing’s  offerings  are  available in 16
languages including English, German, Spanish, Portuguese, Italian, French, Chinese, Japanese
and Russian.

Xing acquired two Spanish social networks- eConozco and Neurona in 2007. It also acquired a
Turkish social network – Cember in January 2008. All the members of acquired social networks
were migrated to Xing’s platform. Dr. Stefan Gross-Selbeck serves as firm’s CEO.

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Exhibit 15: M&A Activity in SNS Space

                                Date of
Acquirer      Target                                       Target’s Business
                                            Most popular SNS at the time of acquisition;
News Corp.    MySpace           Jun-05
                                            currently, second most popular after Facebook
Oak Pacific
              Xiaonei           Oct-06      A China-focused SNS
                                            A start-up which builds platform to bridge the gap
Facebook      Parakey           Jul-07
                                            between information on the web and the desktop

Microsoft     WebFives          Nov-07      A mobile-focused SNS

                                            An SNS popular in the UK, and commonwealth
AOL           Bebo              Mar-08
                                            nations such Australia and New Zealand
              BlackPlanet &
Radio One                       Apr-08      Minority-focused SNSs

Twitter       Summize           Jul-08      Provider of reviews on music, movies, books, etc.

Hi5           PixVerse          Jul-08      Creator of Pix Chat and Pix Wall applications

Twitter       Values of n       Nov-08      Creator of Stikkit and I Want Sandy applications

                                            iLike helps people share music recommendations,
MySpace       iLike             Aug-09
                                            playlists and concert alerts
                                            FriendFeed is real-time feed aggregator. It was
Facebook      FriendFeed        Aug-09      acquired for $15 million in cash and $32.5 million
                                            in Facebook stock
                                            Friendster was one of the first SNS. It was
MOL Global    Friendster        Dec-09      founded in 2001. It has more than 50 million users
                                            Big Six is a social gaming firm. hi5 acquired the
hi5           Big Six           Feb-10      company in abid to increase its social gaming and
                                            entertainment business.
                                            Octazen is a Malaysian company that provides
Facebook      Octazen           Feb-10      scripts to import a user's conacts. The deal was
                                            more of an talent acquisition.

Source: NeXt Up Research

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Facebook was founded by Mark Zuckerberg, Dustin Moskovitz and Chris Hughes while they were
majoring in Computer Science at Harvard University in 2004. Before completing their graduation
they moved to California, and established their headquarters in Palo Alto. Facebook membership
was initially restricted to Harvard University students, and later opened to other select

During this time, Facebook rejected a $10 million acquisition offer from Friendster. By the end of
2004, Facebook had around 1 million members. In 2005, Facebook became accessible to
members’  friends  through  invitation,  irrespective  of  their  school’s  presence/absence  on 
Facebook. This led to Facebook’s membership soaring to 5.5 million by the end of 2005. In 2006, 
Facebook was opened to everyone, pushing the membership to 12 million. Viacom (March 2006)
and Yahoo (July 2006) made unsuccessful attempts to acquire the company for $800 million and
$1 billion respectively.

In May 24, 2007, the company launched the Facebook Platform, which provided a framework to
developers to create applications on its interface. In 2008, Facebook became the most popular
SNS,  surpassing  MySpace’s  member  base.  By 2010, the company had more than 400 million
active users.

In February 2010, Facebook signed an advertising deal with Cairo, Egypt based Connect Ads.
Connect Ads provides advertisements that confirm with the conservative culture in Middle-East
countries. In March 2010, Facebook partnered with mobile operators in Africa and the Middle-
East to target markets with low landline internet usage. Facebook and Omniture, a web analytics
company expanded their partnership in March 2010. They will offer advertisers and marketers
optimization solutions to effectively utilize Facebook as an online marketing channel.

Facebook has over 1000 employees across its offices in Palo Alto (Headquarter), Atlanta,
Chicago, Dallas, Detroit, New York, Venice Beach (California), Dublin, London and Paris. Mark
Zuckerberg has announced that Facebook plans to expand its staff by almost 50 percent by the
end of 2010. The company has also announced plans to open offices in Hamburg, Germany,
Texas, Austin and Hyderabad, India. Facebook broke ground at its first custom data center at
Prineville, Oregon in January 2010. The data center is expected to be completed by June 2011.

Facebook has made a few small acquisitions. In August 2009, it acquired FriendFeed, a real-time
feed aggregator, for $15 million in cash and $32.5 million in Facebook stock. In February 2010,
Facebook acquired Octazen, a Malaysian startup, for an insignificant amount.

So far Facebook has raised over $600 million in five rounds of funding from various investors
including $500K from angel investor Peter Thiel, some debt from Triple Point Capital, $240 million
from Microsoft and $120 million from Li Ka-Shing. On May 26, 2009, Facebook announced $200
million  capital  infusion  from  Russia’s  Digital  Sky  Technologies,  which  “valued”  the  company  at 
$10 billion (but based on preferred shares). In addition to the preferred stock, Digital Sky
purchased approximately $200M of common shares of Facebook’s common stock at a valuation 
of $6.5 billion from Facebook employees. In 2008 and 2009, we estimate that Facebook recorded
revenues of $275 million and $666 million respectively.

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Exhibit 16: Facebook Timeline

              Mark Zuckerberg starts
              Facebook at Harvard. It        2004
              reaches 1 M active users
              by December

                                              Company raises
                                              $12.7M f rom Accel
                                 2005         Partners. Reaches 5.5
                                              M active users

                Facebook raises
                $27.5M f rom Greylock.
                Reaches 12M active
                users. Microsof t and      2006
                Facebook f orm ad

                                             Virtual gif t shop
                                             launched. Microsof t
                                    2007     invests $240M in
                                             Facebook. Active users
                                             reach 50M. Facebook
                                             ads launched.
                Facebook launches in
                24 additional
                languages. Facebook
                Chat launched. Active
                users reach 100M.
                Facebook Connect
                                             Digital Sky makes
                                             $200M investment.
                                             Facebook acquires
                                             FriendFeed. Active
                                    2009     users cross 300M.
                                             Becomes cash f low

                Facebook acquires
                Octazen. It crosses
                400M active users.         2010
                Launches its payment
                platf orm.

Source: Company Reports

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Facebook users primarily interact with their friends through their profile page. Feeds regarding
their friends’ activities and from various applications appear on their Wall.

Exhibit 17: Mark Zuckerberg’s profile on Facebook

Source: Company Reports

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Exhibit 18: Facebook’s Products 

Product                                              Overview

Facebook Chat        Enables real-time communication with friends/contacts on Facebook

Updated Privacy      Offers controls in sharing of information on Facebook through
Controls             standardized privacy interface which can be customized

                     Allows businesses to disseminate information among the targeted
Facebook Ads
                     audiences; two elements: Facebook Pages and Social Ads
                     Offers networks based around a region, workplace or school, which allow
Networks             users to view most of the profiles and join most of the groups in that
                     Details all the information that an user wants to share about

                     Allows organizations to facilitate interaction with/among the fans of that
                     organization by creating presence on Facebook

                     Enables private communication between a sender and a recipient through
                     messages, akin to email communication

                     Allows users to find information and updates about Facebook friends on
                     the Friends page
Source: Company Reports

Exhibit 19: Facebook’s Applications

Application                                          Overview
                     Allows users to upload unlimited photos and create photo albums of 60
Photos               photos each; users can customize privacy settings for each album, tag
                     their friends in the photograph and allow friends to post comments

                     Enables users to publish their blogs or share their lives through writings;
                     Notes page also allows users to view their friends' notes.
                     Allows users to join and create gorups, and also navigate through his or
                     his friends's groups
                     Allows the creation of new events such as social gatherings, and track
                     upcoming events and view past events concerning him and his friends
                     Allows users to post and share websites, profiles, blogs, videos, songs,
Posted Items
                     photos, notes, groups and events
                     Enables users to upload video files, send video messages, and view
                     videos of their friends or made by their friends
                     Allows users to browse through or list items they want to buy, or post
                     items for sale, housing for rent, jobs available, etc.
Gifts                Allows users to purchase $1-virtual gifts and send them to their friends
Source: Company Reports

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Exhibit 20: Facebook’s Features

Features                                               Overview

                     Lists down news stories about users’ friends' activities on the homepage 
News Feed            of Facebook; e.g. the news that one of the friends of an user has
                     uploaded new photo albums will be displayed on the user's homepages
                     It provides a quick wrap of users' friends' activities; on the profile of an
Mini Feed            user, the live feed essentially lists down the most recent Facebook
                     actions carried out by him
                     Share buttons allow users to share news by either posting links to their
                     profiles or sending contents through messages to his friends' inbox
                     This mode of communication allows users' friends to post comments
                     about the user on latter's 'wall'; the user may delete the comment at his
                     discretion; the user may also turn off the wall or, using privacy settings,
                     let it be visible only to select friends
                     Enables users to follow language trends across Facebook by tracking the
                     usage of words and phrases on profile, group and event Walls
                     Allows users to access Facebook on mobile, upload photos and notes on
Mobile               Facebook, and communicate with Facebook friends through text
                     Without requiring someone to log on to Facebook, this feature displays
Purchase Search
                     limited information (name and profile picture) about Facebook users who
                     have set their search privacy settings set to 'Everyone'
                     Enables Facebook developers to extend their applications on moblie
Facebook Platform
                     phones; this will allow users to interact with applications akin to their
for Mobile
                     interaction on Facebook

Source: Company Reports

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Advertising: Facebook generates a substantial portion of its revenues through Facebook Ads,
the  company’s  advertising  product.  Facebook  offers  two products under Facebook Ads:
Facebook Pages, Self service ads. Facebook Pages is free of cost, and allows companies to
create a presence, similar to the profile of individuals. These profiles are customized for
businesses and brands, and enable efficient interaction and communication with users.

Exhibit 21: Screenshot of Coca-Cola’s Page on Facebook

Source: Company Reports and NeXt Up Research

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Self service ads are auction-based advertising. Any user can create their own ad and target the
ad  based  on  target  audience’s  country,  age,  sex,  marital  status  and  interests.  Based on the
companies’  bid  (on  a  CPC  or  CPM  basis)  and  relevancy,  ads  are  selected  for the targeted

Exhibit 22: Screenshot of ad creation on Facebook

Source: Company Reports and NeXt Up Research

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Exhibit 23: Targeting can be done by location, age, education and interests

Source: Company Reports and NeXt Up Research

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Exhibit 24: Pricing is in CPC or CPM

Source: Company Reports and NeXt Up Research

Virtual Gifts: Facebook earns a part of its revenues by selling virtual gifts worth 10 credits
(equivalent to $1) for  different  purposes.  One  can  send  such  gifts  to  one’s  friends  along  with 
personalized messages. Facebook recently launched Music gifts (US only) Sport gifts and Gifts
for good in October 2009. Users can purchase songs as gifts for their friends. Web songs cost 1
credit each while full, downloadable and digital rights management free MP3s cost 9 credits each.
Sports gifts are officially licensed from US National Basketball Association (NBA) and US Major
League Soccer (MLS). Brands can also launch branded gifts. Examples of such brands include
Budlight, Sephora beauty products, Dell, eBay and Sierra Mist.

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Exhibit 25: Virtual Gifts on Facebook

Source: insidefacebook.com and NeXt Up Research

Exhibit 26: Music Gifts on Facebook

Source: insidefacebook.com and NeXt Up Research

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Pay with Facebook: Facebook had introduced its Facebook Payment platform in May 2009.
The Pay with Facebook option is placed first among the available payment options including VISA
and MasterCard. Customers can buy Facebook credits which can then be utilized to buy virtual
goods available in a variety of apps.

With an estimated $500 million transaction of applications in 2009, this stream is expected to
contribute a few millions to the revenues. Facebook currently takes a 30% cut in transaction
revenues through its payment platform. In February 2010, PayPal partnered with Facebook as
another payment platform. Users can utilize PayPal to buy Facebook credits and advertisers can
utilize PayPal to pay Facebook. Facebook credits can currently be bought in 15 different

Exhibit 27: Pay with Facebook Interface

Source: Company Reports and NeXt Up Research

Facebook Lite: In August 2009, Facebook released a less data-intensive version of its site,
called Facebook Lite. This version offers limited services and excludes most applications. This is

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primarily aimed at users from countries with low bandwidth speeds. Currently this version is only
available in US, Canada and India.

Exhibit 28: Facebook Lite

Source: Company Reports and NeXt Up Research

Facebook Platform

The Facebook Platform is a set of tools that enables independent developers to build applications
for Facebook. It consists of three components: Facebook Application Programming Interface
(API), Facebook Query Language (FQL) and Facebook Markup Language (FBML). A number of
application developers are currently developing applications and widgets for Facebook.

Exhibit 29: Facebook Platform Participants

  Large Integrated       Independent & Corporate        App. Advertising     Facebook-focused
  App. Publishers            App. Developers               Networks              VC Funds
        Zynga                Black Commagere               SocialMedia         Altura Ventures
       RockYou!                    Redbull                   Lookery            Bay Partners
        Playfish               Project Agape              Peanut Labs              fbFund

Source: Company Reports and NeXt Up Research

In May 2008, Facebook launched its second generation platform, Facebook Connect. Facebook
Connect enables its users to:

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   1. allow third-party websites to extract their information from Facebook while registering for
      the first time on those  websites. They simply need to click the ‘Connect  with Facebook’ 
      button to set up an account with third-party websites.
   2. interact with their Facebook friends on third-party websites once they are logged into
      those sites.
   3. publish on Facebook as news feeds their activities performed on third party websites.

Facebook Connect has now been implemented on over 80,000 websites and more than 60
million users utilizes Facebook Connect.

Exhibit 30: Number of Applications and Developers

Number in thousands                  Jan-08                Oct-09                Mar-10
Applications                           13                   350                   500
Developers                            100                   1000                  1000

Source: NeXt Up Research

Exhibit 31: Top Applications on Facebook

              Application                                             Total Users

              FarmVille                                                 82,540,257
              Birthday Cards                                            41,596,628
              Café World                                                30,192,966
              Facebook for iPhone                                       29,799,188
              Texaz HoldEm Poker                                        28,551,259
              Mafia Wars                                                25,225,060
              Happy Aquarium                                            24,696,484
              Causes                                                    24,347,036
              Fishville                                                 23,203,060
              Slide FunSpace                                            21,752,427

              MindJolt Games                                            21,483,012

              iHeart                                                    21,096,054
              Petville                                                  20,234,240
              Pet Society                                               19,319,553
              Zoo World                                                 19,197,456

Source: Appdata

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Although Facebook is experimenting on several sources of revenues, the prime revenues
streams in 2009 were advertising and virtual gifts. In November 2008 and May 2009, the
company launched two more streams of revenues: App Verification and Pay with Facebook,
respectively. But subsequently, in October 2009, Facebook announced that it would be closing
down app verification.

Exhibit 32: Facebook’s Revenues







           2005   2006    2007   2008    2009 2010E 2011E 2012E 2013E 2014E 2015E

Source: Company Reports and NeXt Up Research

Exhibit 33: Facebook’s Revenues 

              2008       2009    2010E      2011E    2012E     2013E      2014E     2015E

Revenues ($,M)$275        $666    $1,023    $1,332    $1,661    $2,044    $2,474    $2,849

%y/y growth               142%      54%       30%        25%       23%       21%       15%

Source: Company Reports and NeXt Up Research

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We use the following methods, a) Target EV based on steady state revenues, normalized net
margins, and a growth multiple and b) Multiple of EV/Revenue to arrive at an approximate
valuation for Facebook.

A. Steady State Method:

For the purpose of our report, we are basing our valuation off the year 2010.

Exhibit 34: Valuations off Various Calendar Years Discounted to 2010








             2010E          2011E          2012E         2013E          2014E   2015E

Source: NeXt Up Research Estimates

We calculate target EV based on the following formula (please refer to Appendix A for a
description on why we choose a particular multiple)

Target EV = Steady State Revenues * Normalized Margins* Growth Multiple

Target Market Cap = Target EV + Net Cash

Target Price = Target Market Cap/Diluted Shares Outstanding

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Assuming steady state revenues of $2474 million in 2014, normalized net margins of 30%, a
growth multiple of 25x, and discounting to 2010 at a discount rate of 20%, we arrive at a target
2010 enterprise value of $8.95 billion.

Comparative Valuation

To arrive at approximate estimates, we have used a similar group of companies as a proxy for
Facebook. The 2011 median EV/Revenue multiple for the group is 5.6x (Exhibit 34). We believe
that this universe will provide a conservative estimate for Facebook’s valuation. 

We believe that Facebook can achieve a secular growth rate of 25% and EBITDA margins of
50%. With a multiple of 6.3x (Exhibit A3), we estimate Facebook’s  target  EV  at  $8.4 billion,
assuming the company’s revenue to be $1.3 billion in 2011.

Exhibit 35: Comparables for Search Engines and SNSs

$, millions                                      Revenues      EV/Revenues Secular     EBITDA
                   Ticker                                                  Growth      Margin
Company Name                  Value       CY10E       CY11E    CY10E CY11E  (Est)       (Est)
Google             GOOG        154,442    20,786      23,994     7.4    6.4     25%     60%
Yahoo!             YHOO          19,685    4,889      5,108      4.0    3.9     20%     30%

Xing                O1BC            157      75        91        2.1    1.7     25%     30%
Tencent              700         34,543    2,563      3,319     13.5    10.4    35%     45%

Mixi                2121            905     180        210       5.0    4.3     35%     35%
Baidu               BIDU         19,792     972       1,414     20.4    14.0    37%     35%

Sohu                SOHU          1,468     591        718       2.5    2.0     25%     35%

                                                      MEAN       7.8    6.1     29%     39%

                                                     MEDIAN      5.0    4.3     25%     35%

Source: Capital IQ, Next Up Research Estimates

Exhibit 36: Valuation Summary

               Methodology                            Enterprise Value ($, M)

Steady State Revenue Methodology                               $8,950

Comparison to Peers                                            $8,392

Source: Next Up Research Estimates

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Exhibit 37: Payoff Chart for an IPO

               $22                           IPO Bear Case        IPO Bull Case
               $20                                           Series D,E
                                                             convert @
               $19                                           $18.95*
 Share Price

                                                                                                  Series D ,
               $14                                                                                Series E
                                                                                                  convert @
               $13                                                                                $20.21*
                $8          Series C                                                              Bull Case
                            converts@                                                             Valuation
                $7          $1.43                                     Bear Case                   @ $8.95
                                                                      Valuation @                 B
                                                                      $8.39 B
                $3                        Series A
                $2                        converts@ $0.02
                                          and Series B
                $1                        converts @0.28

                     $0.0   $1.0   $2.0   $3.0   $4.0   $5.0     $6.0     $7.0      $8.0   $9.0     $10.0
                                                   Valuation ($, B)

Source: NeXt Up Research Estimates

Note: Series D&E are forced to convert at the IPO issue price. The actual conversion price of
Series D is $37.06 per share and Series E is $22.71 per share

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Exhibit 38: Facebook’s Capitalization Structure

                          Round 1       Round 2       Round 3      Round 4      Round 5       IPO       M&A

  Type                        A            B             C            D             E

  Date                    Apr-2005      Apr-2005      Apr-2006     Nov-2007     May-2009       NA        NA

  Diluted Shares
                            197.0        306.2         365.7        394.6         433.6      442.8     423.9
  Estimated (M)
  Preferred Shares
                            21.7          44.6          17.4         10.1          8.8
  Issued (M)
                         Conventional Conventional Conventional Conventional Conventional
  Type of Preferred
                          Convertible Convertible Convertible Convertible Convertible

  Liquidation Multiple       1x            1x            1x           1x           1x

  Anti-Dilution           Weighted     Weighted      Weighted     Weighted      Weighted
  Provisions              Average      Average       Average      Average       Average
  Pay to Play
                            None         None          None         None          None
  Conversion Rate
  (Preferred to             1 to 1     1 to 1.0049 1 to 1.0049    1 to 1.0126     1 to 1
                                                                                             $18.95-   $18.44-
  Issue Price/Share         $0.02        $0.29         $1.44       $37.06        $22.71
                                                                                             $20.21    $19.76
  Dividend Rate (Non
                            8.0%         8.0%          8.0%         8.0%          8.0%
  Amount of Funding
                            $0.5         $12.7         $25.0        $375.0       $200.0
  Pre- Money
                            $4.5         $87.3         $525.0     $14,624.6     $9,845.9
  Estimate (M)
  Post Money                                                                                 $8392-    $8392-
                             $5           $100          $550       $15,000       $10,046
  Estimate (M)                                                                               $8950     $8950

                                                       Accel,    Microsoft, La
                                                     Greylock,    Ka Shing,
  Investors              Peter Thiel    Partners,                              Digital Sky
                                                     Meritech,     Samwer
                                       Peter Thiel
                                                     Peter Thiel   Brothers

Source: NeXt Up Research

Note: In the case of an M&A transaction, Series D and Series E shareholders would not convert their shares
to common shares at the given valuations.

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Exhibit 39: Liquidation Preference for Facebook’s Investors

              Shares Conversion Investment Liquidation    Accrued               Dividend
   Round                                                             Dividend                 Value
                (M)    Price        (M)      Multiple        but                  Rate
                                                                                              ($, M)
  Series A
               21.72     0.02       $0.5         1x           -       $0.00       8%          $0.5
  Series B
               44.56     0.28       $12.6        1x           -       $0.02       8%          $12.6
  Series C
               17.41     1.43       $24.9        1x           -       $0.11       8%          $24.9
  Series D
               10.12    36.60      $370.3        1x           -       $2.97       8%         $370.3
  Series E
               8.81     22.71      $200.0        1x           -        $1.8       8%         $200.0

                                                                                  Total     $608.36

Source: Amendments to Incorporation of Facebook; Next Up Research Estimates

Liquidation Scenarios: Facebook has raised funding through five rounds of funding. Series E
preferred shareholders have seniority over other preferred shareholders. Series D preferred
shareholders are senior to Series C, B and A preferred shareholders. Series C preferred
shareholders are senior to Series B and A preferred shareholders. Series B preferred
shareholders are senior to Series A preferred shareholders and Series A preferred shareholders
are senior to common shareholders.

Scenario 1: Exit Valuation less than or equal to $621M: In this case, preferred shareholders
receive proceeds on a pro-rata basis. Any remaining proceeds are distributed among common

Scenario 2: Exit Valuation between $621M to $715M

In this case, Series A preferred shareholders convert to common shareholders. Series B, C, D
and E shareholders receive their investment amount. The remaining proceeds are distributed
among common shareholders.

Scenario 3: Exit Valuation between $715M and $1180M

In this case, Series A and Series B preferred shareholders convert to common shareholders.
Series C, D and E shareholders receive their investment amount. The remaining proceeds are
distributed among common shareholders.

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Scenario 4: Exit Valuation between $1180M and $10198M

In this case, Series A, Series B and Series C preferred shareholders convert to common
shareholders. Series D and E shareholders receive their investment amount. The remaining
proceeds are distributed among common shareholders.

Scenario 5: Exit Valuation between $10.2B and $16.2B

In this case, Series A, Series B, Series C and Series D preferred shareholders convert to
common shareholders. Series E shareholders receive their investment amount. The remaining
proceeds are distributed among common shareholders.

Scenario 6: Exit Valuation above $16.2B

In this case, all preferred shareholders convert into common shareholders. The proceeds are
distributed among common shareholders on a pro rata basis.

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Exhibit 40: Estimated Stock Price Per Share as a Function of Exit Valuation

                                            Common Shares
                                            Series A
                                            Series B
                                            Series C
                                            Series D
                                            Series E
  Share Price




                                                                                                      Bull Case
                              Series C                                    Bear Case                   @ $8.95 B
                              converts@                                   Valuation @
                              $1.43                                       $8.39 B

                 $5                        Series A
                                           converts@ $0.02
                                           and Series B
                                           converts @0.28

                      $0.0   $1.0   $2.0   $3.0   $4.0      $5.0    $6.0     $7.0       $8.0   $9.0     $10.0
                                                       Valuation ($, B)

Source: Amendments to Incorporation of Facebook; Next Up Research Estimates

Note: In the M&A case, Series D and Series E shareholders will not convert for the given valuations. Given
that Facebook has rejected earlier bids for the company, we believe that the M&A case is unlikely to occur.

NeXt Up!                                                                                                        43
Mark Zuckerberg, Founder & Chief Executive Officer

Mark Zuckerberg is one of the co-founders of Facebook. He launched Facebook in 2004 while he
was studying computer science at Harvard University, and later moved to Palo Alto, California,
with Dustin Moskovitz (one of the co-founders) and some friends. Mark spearheads the design of
Facebook's service, and development of its core technology and infrastructure. He has been
named in ‘The World's Most Influential People of 2008’ by Time Magazine, and is the youngest
person to figure on the Forbes 400.

Christopher Cox, VP of Product

Christopher Cox spearheads Facebook’s product strategy, and administers the product
management and design functions. Christopher joined Facebook as a Software Engineer, and
drove the implementation of first versions of key Facebook features. Before becoming the VP of
Product, Christopher also served Facebook as the Director of Human Resources. Christopher
graduated from Stanford University with bachelor’s  degree  in  symbolic  systems  and a
concentration in artificial intelligence.

David Ebersman, Chief Financial Officer

David Ebersman joined Facebook as its CFO in 2009. Prior to joining Facebook, he served at
Genentech, a biotechnology company as its CFO and Executive VP. In his fifteen year tenure at
Genentech, David held several positions including that of Senior VP of Product Operations, VP
Product Development and Director of Business Development. Prior to Genentech, David served
as a Research Analyst at Oppenheimer & Company. David has  a  Bachelor’s  degree  in 
economics and international relations from Brown University.

Lori Goler, VP of Human Resources and Recruiting

Lori  Goler  is  responsible  for  Facebook’s  people  strategy.  Prior to Facebook, Lori served Stores
business and consumer marketing function at eBay for five years. Before that, Lori was among
founding executives at babystyle.com, she spearheaded the roll-out of babystyle.com. Lori began
her career with the strategy and business planning function at The Walt Disney Company. She
holds  a  bachelor’s  degree from Yale University, an MBA from Harvard Business School and a
master’s degree in public policy from the Kennedy School of Government. 

NeXt Up!                                                                                            44
Chamath Palihapitiya, VP of Growth, Mobile and International

Chamath Palihapitiya spearheads the adoption of Facebook through new growth initiatives,
mobile strategy and internationalization. Chamath has also managed Facebook’s  Platform, and
was instrumental in the launching  Facebook’s  online  advertising  channel.  Prior to Facebook,
Chamath focused on consumer Internet, advertising and technology investments at The Mayfield
Fund. Chamath has also served as the Vice President and General Manager of AIM and ICQ at
AOL. Chamath holds a degree in electrical engineering from the University of Waterloo.

Jonathan Heiliger, VP of Technical Operations

Jonathan Heiliger is responsible for global infrastructure, site architecture and IT. Previously, he
has served Index Ventures and Sequoia Capital as a technology advisor to early-stage
companies. Prior to that, he led the engineering team at Walmart.com in building infrastructure
and scalable systems. He has also served Loudcloud as the CEO and Frontier GlobalCenter as
the CTO. Jonathan also founded the corporate venture capital group Global Crossing.

Mike Murphy, VP of Global Sales

Mike Murphy is responsible for media strategy, advertising sales and account management at
Facebook. Previously, he has served Yahoo!, as the Vice President of Media Sales for the
Western region. Mike was also the founder of TAG, a company which provided sales, marketing
and business development services to technology and early-stage start-up companies. Mike has
also served Ziff-Davis Publishing and CMP Media in different capacities. Mike has graduated
from the University of North Texas.

Dan Rose, VP of Business Development and Monetization

Dan Rose spearheads Facebook’s strategic partnerships and M&A, and marketing strategy for its
innovative advertising products. Prior to that, he was responsible for business development and
general management at Amazon.com, and contributed to the development of the Amazon Kindle.
Dan holds a bachelor’s degree from Harvard University.

Sheryl Sandberg, Chief Operating Officer

Sheryl Sandberg is  responsible  for  Facebook’s business operations including sales, marketing,
business development, human resources, public policy and communications. Before Facebook,
Sheryl served Google as the Vice President of Global Online Sales and Operations, and
contributed to the launch of Google.org, Google’s philanthropic arm. Under President Bill Clinton,
she has served as Chief of Staff for the United States Treasury Department. Sheryl has worked

NeXt Up!                                                                                         45
as a management consultant at McKinsey & Company and an economist at the World Bank. She
is also a member on the boards of Starbuck, the Brookings Institution, Women for Women
International, V-Day, and the Ad Council. Sheryl holds a B.A. summa cum laude in Economics
from Harvard University and an MBA with highest distinction from the Harvard Business School.
In 2007, Sheryl was named as one of the 50 Most Powerful Women in Business by Fortune. She
has also been named in the 50 Women to Watch by The Wall Street Journal.

Elliot Schrage, VP of Global Communications, Marketing and Public Policy

Elliot Schrage spearheads the development and communication of key messages about
products, corporate business and partnerships, and manages the  company’s  public  policy 
strategy worldwide. Prior to Facebook, Elliot was the Vice President of Communications and
Public Affairs at Google. He has also served as the Bernard L. Schwarz Senior Fellow in
business and foreign policy at the New York-based Council on Foreign Relations. Elliot has
worked as the Senior Vice President of Global Affairs for Gap Inc., and an adjunct professor at
Columbia University and Columbia Law School. Elliot earned his bachelor’s degree from Harvard
University, master’s  degree  in  public  policy  from  the  Kennedy School of Government and J.D.
from Harvard Law School.

Mike Schroepfer, VP of Engineering

Mike Schroepfer is responsible for nurturing creativity at the organization to enable the
development of products, services and infrastructure for users, developers and partners
worldwide. Prior to Facebook, Mike has served as the Vice President of Engineering at Mozilla
Corporation and Chief Technology Officer for the data center automation division at Sun
Microsystems. Mike also founded CenterRun, and served it as the Chief Architect and Director of
Engineering. Mike earned his bachelor's degree and master's degrees in computer science from
Stanford University.

Ted Ullyot, VP and General Counsel

Ted Ullyot leads Facebook’s  legal  team.  Previously, Ted served the Washington DC office of
Kirkland & Ellis LLP as a litigation partner. Before that, Ted was EVP and General Counsel of
ESL Investments, Inc., and SVP and General Counsel of AOL Time Warner Europe. Ted has also
held positions in the Federal government including serving Deputy Assistant to President George
W. Bush in the White House and Chief of Staff at the Justice Department. Ted earned his
bachelor’s degree from Harvard College and J.D. from the University of Chicago Law School.

NeXt Up!                                                                                      46
In addition to Mark Zuckerberg (CEO), Jim Breyer, Peter Thiel, Marc Andreessen and Donald E.
Graham are on the Board of Directors of Facebook.

Jim Breyer

Jim Bayer serves the Board of Directors of Wal-Mart Stores (Lead/Presiding Independent
Director, and Chairman of the Strategic Planning and Finance Committee), Marvel Entertainment
(Chairman of the Strategic Planning and Finance Committee) and RealNetworks (Lead/Presiding
Independent Director). He is also an Investor/Board Member of private companies including BBN
Technologies, Brightcove, Etsy, Global Grind Digital, ModelN, and Prosper.com. Additionally, Jim
serves the Strategic Investment Committee/Board of Accel-KKR, IDG-Accel China Fund, the
Mailroom Fund (a joint venture with entertainment leader William Morris Agency), and Facebook
Seed Fund. Previously, Jim worked as a management consultant at McKinsey & Co., and in
product marketing and management role at Apple Computer and Hewlett Packard. Jim has been
an investor in over 30 successfully liquidated Internet, media and technology companies. He
holds a B.S. with highest distinction from Stanford University and an MBA (Baker Scholar) from
Harvard University.

Peter Thiel

Peter Thiel is a Managing Partner at The Founders Fund, and Founder and President of Clarium
Capital Management, LLC. He is also an angel investor in LinkedIn. Prior to that, Peter co-
founded PayPal, and served the company as its Chairman. He also serves the Board of the
Pacific Research Institute and the Board of Visitors of Stanford Law School. He holds a BA in
Philosophy and JD from Stanford University.

Marc Andreessen

Marc Andreessen is one of the co-founders, and chairman of Ning. Prior to that, Marc developed
Netscape Navigator (formerly known as Mosaic) and co-founded Netscape. He is also an investor
in several startups including Digg, Plazes, and Twitter. Marc has served as Chairman of Opsware
and Chief Technology Officer of AOL after AOL’s acquisition of Netscape. He holds a bachelor’s 
degree in computer science from University of Illinois at Urbana-Champaign.

Donald E. Graham

Donald Graham is the CEO and Chairman of the Board of The Washington Post. Donald Graham
has also served the company as President. Between 1979 and 2000, he was the Publisher of The
Washington Post. Donald is also a Trustee of the Federal City Council and the Philip L. Graham
Fund. He is also the Chairman and a Director of DC College Access Program, a Director of The

NeXt Up!                                                                                     47
Summit Fund of Washington, the College Success Foundation and KIPP-DC. Donald has
graduated from St. Albans School and Harvard College.

Additionally, David Sze (General Partner at Greylock) and Paul Madera (Managing Director at
Meritech Capital) act as the Observer to Board of Directors.

NeXt Up!                                                                                48
                             Appendix A: What Multiple?

It becomes very difficult to value companies while they are on a high growth trajectory. Not only
do the revenues grow rapidly but the profitability starts to expand as well. Under such a rapid
growth scenario, any valuation attempt could lead to significant errors due to timing of estimates.

A better approach is to focus on a year when growth rate is slow enough, that small shifts in time
period do not sufficiently alter the valuation and then discount the value to the present assuming
a cost of capital and risk premium that is in line with a slower growth steady state mode.

Due to law of large numbers, any growth company will moderate to a slower growth rate of 10 -
20% a year (or less) in a finite number of years. For the purposes of our report, we are assuming
that subject companies will reach that “steady state” level in 2 – 5 years.

Exhibit A1: Hypothetical Revenue Growth Pattern of a Firm since Inception

                                                     Steady State Growth
         0      2        4        6        8       10       12       14       16

Source: NeXt Up Research

At 20% or lower growth rate, the market multiple (Exhibit A2) is then determined primarily by the
yield on ten year notes. Accordingly, we are assigning a growth multiple as dictated by Exhibit

Most companies tend to focus on growth at the expense of profitability during early stages of
growth. Normalized net margins are the maximum profitability that a company could potentially
achieve at any revenue level. This could vary dramatically from actual net margins.

Target EV = Steady State Revenues * Normalized Margins* Growth Multiple

Target Market Cap = Target EV + Net Cash

NeXt Up!                                                                                        49
Target Price = Target Market Cap/Diluted Shares Outstanding

Exhibit A2: Valuation as a Function of T-bill Rate and Revenue Growth

                                                                                    T Bill Rate

                          2.0%          2.5%          3.0%         3.5%          4.0%          4.5%         5.0%         5.5%     6.0%        6.5%

         5%                34x           27x           22x          19x             17x        15x           13x          12x     11x         10x

        10%                41x           32x           19x          23x             19x        17x           16x         174x     13x         12x

        15%                50x           39x           32x          27x             23x        20x           18x          16x     15x         13x

        20%                60x           47x           38x          32x             27x        24x           21x          19x     17x         15x

        25%                72x           56x           45x          38x             32x        28x           24x          22x     19x         17x

        30%                86x           66x           54x          44x             38x        32x           28x          25x     22x         19x

        35%               102x           78x           63x          52x             44x        38x           33x          29x     25x         21x

        40%               120x           92x           74x          61x             51x        43x           37x          33x     29x         24x

        45%               141x          108x           86x          70x             59x        50x           43x          37x     32x         28x

        50%               165x          125x           99x          81x             67x        57x           49x          42x     36x         31x

P/E=(1-(g/ROEhg) x (1+g) x (1-((1+g)^n)/(1+khg)^n)/(khg-g)) + ((1-(gn/ROEst) x (1+ g)^n x (1+g)^n x (1+gn))/(kst-gn)x(1+khg)^n)

Beta - 1

ROEhg – return on equity in the high growth period, made assumption that it’s 30%

ROEst – “ “ in the stable period, made assumption that it’s 10%

gn – growth in the stable period, made assumption that it’s 4%

Cost of equity khg=risk free rate (T-Bill)+ B (changed to 1.5 and 1) x (equity risk premium) (assumed 4%)

Source: Benjamin Graham, Security Analysis (1951), McGraw Hill

We are providing our methodology as a framework. Investors can change any of our variables to
arrive at their own metrics.

In our valuation methodology, we also have tried to look at comparable group of companies and
estimate their EV/Revenue multiple. We believe that adjusting for risk, the EV/Revenue multiple is
a function of growth rate (over the subsequent 2 – 3 years from our reference year) and EBITDA
margins. We may attribute a higher or lower multiple than peer group based on these two
variables as outlined in Exhibit A3.

NeXt Up!                                                                                                                                 50
Exhibit A3: Valuation as a Function of EBITDA Margins and Revenue Growth

                                             Revenue Growth

               0%     5%     10%    15%    20%     25%    30%    35%       40%    45%     50%

     50%      2.5x    3.3x   4.0x   4.8x   5.6x    6.3x   7.1x   7.9x      8.7x   9.4x    10.2x

     45%      2.3x    2.9x   3.6x   4.3x   5.0x    5.7x   6.4x   7.1x      7.8x   8.5x    9.0x

     40%      2.0x    2.6x   3.2x   3.8x   4.5x    5.1x   5.7x   6.3x      6.9x   7.5x    8.2x

     35%      1.8x    2.3x   2.8x   3.4x   3.9x    4.4x   5.0x   5.5x      6.1x   6.6x    7.1x

     30%      1.5x    2.0x   2.4x   2.9x   3.3x    3.8x   4.3x   4.7x      5.2x   5.7x    6.1x

     25%      1.3x    1.6x   2.0x   2.4x   2.8x    3.2x   3.6x   3.9x      4.3x   4.7x    5.1x

     20%      1.0x    1.3x   1.6x   1.9x   2.2x    2.5x   2.8x   3.2x      3.5x   3.8x    3.1x

     15%      0.8x    1.0x   1.2x   1.4x   1.7x    1.9x   2.1x   2.4x      2.6x   2.8x    3.1x

     10%      0.5x    0.7x   0.8x   1.0x   1.1x    1.3x   1.4x   1.6x      1.7x   1.9x    2.0x

      5%      0.3x    0.3x   0.4x   0.5x   0.6x    0.6x   0.7x   0.8x      0.9x   0.9x    1.0x

Source: NeXt Up Research

NeXt Up!                                                                             51
Appendix B: Social Networking Sites
Exhibit B1: Social Networking Sites

Business Networking Family                   Friends          Students
AdvisorGarage              Amiglia           43 Things        AlumWire
ArtBreak                   CafeMom           Amitize.com      B4Class
Blogtronix                 Cingo             aSmallWorld      Campusbug
Commutal                   CommonGate        Badoo.Com        CampusRank
CompanyLoop                Family 2.0        Bebo             College.com
ConnectBeam                Famiva            Eons             CollegeMedium

Decorati                   Famster           Facebook.com     College Tonight
DoMyStuff                  Geni.com          Faceparty        DormItem.com
Doostang                   Genoom            Flingr           Graduates.com
Fast Pitch                 Kincafe           Friendster       Half.com
HooversConnect             Kinzin            hi5              iHipo
iKarma Inc.                MayasMoM          Lovento          LocalSchools
ImageKind                  Minti             Multiply.com     Pazap.com
Jambo                      MomJunction       Mycool           Quizilla
Jigsaw                     MothersClick      MySpace.com      RateMyProfessor
Konnects                   myfamily.com      NetFriendships   Student.com
Lawyrs                     OneGreatFamily    Netlog           Studentbid.com
Linkedin                   OurStory.com      Orkut            StudentSN.com
mediabistro.com            Parentography     Passado          Uloop.com
Pairup.com                 The Family Post   Piczo
Ryze.com                                     Plazes
Spoke.com                                    Pownce.com
Viadeo                                       ProfileHeaven
WebCrossing                                  reunion.com
XING                                         Vox.com
Source: NeXt Up Research

NeXt Up!                                                                        52

This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon
Valley Partners under the Next Up Research brand ("Next Up Research"). The views expressed
in this report correspond to our subjective views on the subject securities and issuers. This report
does not purport to be a complete statement of all material facts related to any company,
industry, or security mentioned. The information provided, while not guaranteed as to accuracy or
completeness, has been obtained from sources believed to be reliable.

This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there
be any sale of these securities in any state in which said offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws of any such state.

Neither Next Up Research nor any of its employees own a direct or indirect long or short position
in any of the companies mentioned in this report.

The opinions expressed reflect our judgment at this time and are subject to change without notice
and may or may not be updated. Past performance should not be taken as an indication or
guarantee of future performance, and no representation or warranty, express or implied, is made
regarding future performance.

This research report was intended to provide background information for accredited or
institutional investors. Recipients who are not market professionals or institutional investors
should seek the advice of their personal financial advisor before making any investment decisions
based on this report.

Email research@nextupresearch.com for further information.

NeXt Up!                                                                                              53

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