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It's a problem many would love to have, but social networking upstart Facebook Inc. might soon have to figure out what it will do with an extra $500 million in its pocketbook. Rumors that Microsoft Corp. or even Google Inc. could invest anywhere from $300 million to $500 million for a 5% stake in Facebook surfaced last week. If a deal materializes, the investment would value Facebook at $10 billion, a valuation Facebook investor Peter Thiel put forth in an interview with The Deal in July. The cash infusion is necessary in part because of everyday expenses at Facebook, which is a growing and flourishing company but expected to post only $150 million in 2007 revenues. "My first hunch would be to finance the growth of the business," said Karsten Weide, program director of digital media and entertainment at IT advisory firm IDC. "They only have 300 employees, so I would expect them to ramp up the business significantly on sales, software development and infrastructure." Some speculation has Facebook using the money to build out its own advertising platform. Thiel said in July the company was set to roll out several revenue initiatives over the next few months that included targeted advertising, local advertising and a classified marketplace. "The things that would make the most sense for them to acquire would all concern revenue," said David Hornik, a general partner with August Capital. "If there are companies that can help them get more advertising dollars or repeatable revenue from hosted services, they would be well-served to consider buying those things first." However, it would make more sense for the company to wait until it has stock to use on acquisitions, he added. "They would be far better off taking the company public and using their public currency to acquire companies than to use the pre-IPO cash for that," Hornik said. Brad Greenspan, the founder of Intermix Media, the parent company (now owned by News Corp.) of Facebook competitor MySpace.com, said Facebook could acquire a behavioral advertising firm much like Fox Interactive did in February, when it picked up Strategic Data Corp. Greenspan, now CEO of LiveUniverse Inc., a network of video, entertainment and social networking properties, said the funds would give Facebook the "peace of mind" to ramp up its operations, and "if they want to go into an aggressive growth spurt for marketing and advertising, they have the money to do that." Though Facebook is still developing revenue streams, the popularity of its site has it competing with some of the deepest pockets on the Web, so securing funds to better battle with its foes is imperative. Facebook's chief rival in social networking is MySpace.com. News Corp. has poured significant amounts of money into the property, for which it paid $580 million in 2005. According to comScore Media Metrix, MySpace was the most popular social networking site in August with 68.4 million unique visitors, more than double Facebook's 33.7 million visitors. But Ashkan Karbasfrooshan, president of WatchMojo.com, a blog that covers advertising, finance and technology, said he believes Google poses an even greater threat to Facebook than MySpace. "When you ask if Google is going to become a portal, you're stuck in a 1990s mentality," he said. "The real question is, is Google going to be a social network?" Karbasfrooshan said the pieces are in place for Google to be viewed as far more than a search engine when one considers its other offerings, beginning with its Gmail. "When you think about what is a social network, e-mail is the killer app in social networks because everyone uses e-mail," he said. Google in 2004 launched a social networking site, Orkut, though it is more popular in foreign countries such as Brazil and in the Asia-Pacific region than in the U.S. It also owns a photo-sharing Web site, Picasa, that it acquired in 2004, and has other social networking features in its stable, including video-sharing site YouTube and blog publishing site Blogger.com. "Google doesn't like any other company to suck traffic out of the Web ecosystem," Karbasfrooshan said. "So if you connect the dots, Facebook is clearly in Google's crosshairs. And Facebook realizes that Google is gunning for it so they need more resources to scale." To put it on better footing with Google--and because Facebook is a closed network with little contact to the Web outside of its platform--Karbasfrooshan speculated that Facebook could acquire a search technology company and find other small, technology plays to better serve its user base. But he said he doesn't expect the company to go on a buying binge. "Ultimately, Facebook won't have the time to invent new bells and whistles, so they'll have other people develop them for them," he said. "But I don't expect a 'Hail Mary' strategy where they're going to go and buy 15 different companies." IDC's Weide said with rich media advertising poised to take off, Facebook could also acquire a video sharing site. He mentioned one of the most popular independent video sites, Metacafe Inc. as a possibility. "I think it would be a natural fit," Weide said. "What really drives social networking is for people to put stuff up." Facebook also may need some money to pay its growing stable of lawyers. On Sept. 25 New York Attorney General Andrew Cuomo said his office is investigating Facebook about safety measures it has in place to protect users from sexual predators. According to a statement from Cuomo's office, investigators posing as underage users were repeatedly solicited by adult sexual predators and could easily access a wide range of pornographic images and videos. In addition, Facebook either did not respond or was slow to respond to complaints lodged by investigators posing as parents, Cuomo's office alleged.  Deal Video
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