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Oh For $30 million in Google Stock, Circa 2003

By - October 15, 2006

The Times does the Friendster tick tock. Biggest ouch:

Mr. Abrams spurned Google’s advances and charted his own course. In retrospect, he should have taken the $30 million. If Google had paid him in stock, Mr. Abrams would easily be worth $1 billion today, according to one person close to Google.


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3 thoughts on “Oh For $30 million in Google Stock, Circa 2003

  1. The Times reporter let some sloppy math into his story here…

    If a $30 mm buy-out were to be worth $1bn today, that’s a 33x return, or, working backwards from Google’s market cap of $130bn, about $4bn total market cap for Google. If Abrams’ stake was 50% or so, then Google’s market cap would have needed to be $2bn in order to make Abrams’ missed stake worth $1bn or more. (Actually, even less due to dilution from GOOG’s equity offerings.)

    Contemporaneous accounts put their valuation at $10 – $25 bn:

    http://www.businessweek.com/technology/content/oct2003/tc20031030_7074_tc024.htm

    or Abrams’ missed stake at $75 – $200 mm maximum based on these numbers.

  2. Gary Rivlin says:

    Actually, bad assumption on your part. Abrams owned roughly 80 percent of Friendster, not 50 percent. And whatever Biz Week’s best guess back when, my source — a Google insider privvy to the negotiations — said the internal valuation GOOG using back then closer to $2 billion. Recalculate and you’ll see I erred on the conservative side.

  3. Well thanks for noticing my comment. I’d like to understand more about why you say bad assumption on my part, as I believe the publicly available data strongly indicate that it is unlikely that Abrams would be a Google billionaire had he taken their offer…

    Issue at hand
    It is highly unlikely that GOOG was valued at $2 bn in fall 2003; if, in fact, it was, GOOG was trading at 1/10th the relative valuation of YHOO contemporaneously, and valuing itself with the industrial sector rather than the online sector, which would seem an unusual choice for a Kleiner backed company.

    To wit:

    A $2bn valuation would have required unusually low implied valuation multiples for Google
    – GOOG’s 2003 revenues were $1.5 bn, and at 9/30/03, TTM revenues were north of $1 bn
    – GOOG’s 2003 EBIT came in at $342 mm, and at 9/30/03, TTM EBIT was north of $300 mm
    – For GOOG to be valued at $2bn, GOOG’s revenue multiple would have had to have been less than 2; it’s EBIT multiple, less than 7, valuations more in line with industrial, low-growth manufacturers: http://biz.yahoo.com/p/6conameu.html

    A $2bn valuation would have valued GOOG at a 90% discount to YHOO, its closest peer
    – YHOO, on 10/3/03 was trading at a valuation about 20% less than it is today, so let’s say $25 bn, against what would turn out to be a $1.6 bn revenue line and $300 mm EBIT line, in 2003.
    – Google, with substantially similar operating performance, could expect a similar valuation (though contemporaneously the conventional wisdom had ‘unproven newcomer’ Google needing to take a 10 or 20 percent discount because of perceived lower quality.)

    My sources at GOOG contemporanesously had mentioned valuations in the $10 to $30 bn range
    While revenues remained a secret until the S-1 was filed in the spring of 2004, Google employees begain whispering about high valuations in 2003.
    My contacts at Google mentioned substantially higher numbers than your contact – closer to the $30 bn range.
    The New York Times reported valuation rumors as high as $25 bn on December 1, 2003: http://select.nytimes.com/search/restricted/article?res=F00A14F63B5E0C728CDDAB0994DB404482
    It seems unlikely, given subsequent events, that Google’s management would have pegged a very low valuation on GOOG given the belief in the marketplace, among its own employees, and among the press, that its equity was worth 10x more.

    In the summer of 2004, GOG’s IPO valued it inline with its peers
    If Google did indeed value itself at a deep discount to its peers in fall 2003, Google’s management went through a substantial rethinking over the suqsequent months to eliminate this discount. Why?
    In order for the counter-thesis to be right, Google’s valuation would have had to increase 10x between fall ’03 and summer ’04, at a time when its revenues increased only ~3x. Why?

    It is unusual for a start-up CEO to retain 80% ownership after venture funding
    Actually, on this one, *my* math is indeed incorrect, and Gary’s right. I was (incorrectly) assuming that the VCs already owned the typical 30% or so. Of course, given that the subject of the story, and the crux of this discussion, is what Abrams could have had done *before* he took the VC dough, I’m wrong here. So 80% is likely the more correct number to use.

    Conclusion
    So, given the data available on the public record, and the reasonable assumptions one can drawn from them, I don’t believe the math supports the claim that Jonathan Abrams would’ve been a Google billionaire had he accepted Google’s offer to acquire Friendster in the fall of 2003 for $30 mm.

    My best guess
    80% times $30mm times a missed upside of 6x. At $150 mm, still a hefty sum to have had slip through your fingers.