Facebook: Silicon Valley Winner or Pyramid Scheme
We can all agree that Facebook is one of the winners in Silicon Valley. What surprised me was talking with some friends and doing a Google search the truth is very different.
Search for most profitable startups and you see revenue numbers but no numbers for profits. Why? Because there are none. Facebook is a great example. The graph at the beginning of the article looks like they have been making money in great quantities for ten years. So let's run some numbers.
Facebook raised $2.3 billion dollars in funding and $18.4 billion in there IPO. When you also subtract the money lost in the early days, about $194 million dollars. When you put it all together they were on the losing end of profits until 2017. This is one of the successful startups. Others like Uber which are highly successful are still losing money.
The truth is your uber rides are being subsidized to put the taxi companies out of business so they can replace the drivers with self-driving cars. Self-driving cars are the only way Uber can make money without increasing prices.
So the first thought is who would fund these if they lose so much money. This is where it gets interesting. They make big money from our retirement savings and from stockholders that foot the bill. The venture capitalists that funded Facebook put in some $2.3 billion and when the Facebook IPO paid out the investors got $10 billion or more in stock. They were able to double their money because of the way Goldman Sachs set up the sale of the stocks. So the investors made well over ten times their money in the first week. For a few that held on to the stock for a few years, they were able to multiply that by another ten times. Put two billion in and get two hundred billion in ten years. It doesn’t take a genius to understand why people fund startups.
The real truth is most Silicon Valley startups are not like Facebook. Very few make it to that level. Many never go positive. Silicon Valley is a great way to make money for investors and founders from a company that makes no real money in the end.
