Banks Are Killing the Next Big Thing

Bank of America (NYSE: BAC  ) isn't killing Facebook, but it isn't helping, either.

BusinessWeek is reporting that the social media superstar, struggling to maintain a billion-dollar valuation, is seeking $100 million in new debt financing to expand its data center operations. Bank of America is its primary commercial lender and has thus far refused to open its coffers, the magazine reports.

Is this the end of the Next Big Thing?
Color me concerned. It's one thing to see a troubled business like Sirius XM Radio (Nasdaq: SIRI  ) suffer usurious terms to get credit. It's another when Facebook can't get a loan. Just how creditworthy does a business have to be?

It's tough to tell. All we know for sure is that commercial lending is well below historic norms. The Small Business Administration (SBA) is on track to guarantee less than $10 billion in new business loans this year, the Los Angeles Times reports, down from $20 billion in a typical year.

Ailing balance sheets are a big part of the problem. Enough so that Treasury Secretary Tim Geithner last week unveiled a plan to relieve JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , and other large lenders of toxic assets to jump-start legitimate lending in other areas. Commercial lending, for example.

And yet his proposal has issues. "While the plan is a step in the right direction, I'm hesitant to think the Treasury can uncover gold where private capital sees dirt," wrote my Foolish colleague Morgan Housel. "Maybe I'm just discounting Geithner's alchemy skills. Then again, probably not."

Therein lies the problem. Who cares if Treasury wants to jump-start lending if banks and their private equity peers see nothing worth investing in? Not even a superior growth business like Facebook?

The Next Big Thing ... begging for a bailout
CEO Mark Zuckerberg has plenty to crow about. Not only is his Facebook nation bigger than France, it's now bigger than France, Germany, the U.K. and, on a global basis, News Corp.'s (NYSE: NWS  ) MySpace. Roughly 275 million users populate the service, up from 100 million in August.

Few companies not named Apple (Nasdaq: AAPL  ) have ever seen such massive growth. Advertising revenue has blossomed as a result. "We are growing our revenue. We are growing our advertising," Facebook Chief Operating Officer Sheryl Sandberg told News.com in a recent interview.

How is it that this business can't find new financing?

To be fair, and as BusinessWeek points out, Facebook has already raised $500 million in equity and debt financing without producing a profit. Lenders have every right to demand conservative capital management and it's entirely possible that Facebook isn't being as careful as it should be.

Possible, but I doubt it. Venture capital is suffering right alongside commercial lenders. In a recent survey, law firm Fenwick & West found that, of 128 companies that received venture funding last quarter, one-third had to accept new money at a lower valuation. The rub? VCs are too pinched to take chances.

And they're being more conservative in how they report holdings. VC firm Harris & Harris (Nasdaq: TINY  ) , for example, earlier this month reported that net asset value (NAV) fell once again, to $4.24 per share.

Someone find a priest, quick!
There are legitimate questions to ask when it comes to Facebook's real capital needs. Even so, top creditor TriplePoint Capital told BusinessWeek that it intends to keep working with Facebook.

There are also private equity success stories. Twitter is a fine example. In January, the microblogger closed a round of funding at a $250 million valuation, up $100 million from the month before. VCs, apparently, see the same billion-dollar opportunity that I do.

Trouble is, these stories are rare, and they'll only get rarer if banks won't open their wallets to bankable ideas like Facebook. The Next Big Thing isn't dead, Fool. But it is suffering.

Harris & Harris is a Rule Breakers recommendation. Apple is a Stock Advisor selection. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Tim is a member of the market-beating Rule Breakers team. He had stock and options positions in Apple and a stock position in Harris & Harris at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has been waiting for the Next Big Thing for 15 years. It's still waiting.


Read/Post Comments (7) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2009, at 12:38 PM, iamnik77 wrote:

    Should a company really be spending a tenth of its valuation to build a data headquarters? And it needs this money after already raising 500 million in equity and debt financing? All for a website? There are many business and tech savvy individuals in this world who can do the same thing with just a rented office and a dozen or so good employees!

  • Report this Comment On March 30, 2009, at 12:43 PM, pondee619 wrote:

    "We are growing our revenue. We are growing our advertising,"

    "How is it that this business can't find new financing?"

    "Facebook has already raised $500 million in equity and debt financing without producing a profit"

    Asked and answered. We are growing our revenue, we are growing our advertising, we are growing our debt we are not earning a profit.

  • Report this Comment On March 30, 2009, at 12:52 PM, sergeant725 wrote:

    Everybody will make a profit SOMEDAY. Sat rad, online news, social networking sites, they all say TRUST US. It's really economics 101. How irreplaceable are you, and what are the barriers to entry into your business? In the case of internet sites: music, news, video and networking, are infinitely fungible. The banks aren't responsible for this particular Jonestown. It's been going on for years!

  • Report this Comment On March 30, 2009, at 12:54 PM, sergeant725 wrote:

    Internet music, news, video and networking are infinitely fungible, so when these companies say we're so CLOSE to profitability, better cover up your wallet!

  • Report this Comment On March 30, 2009, at 1:11 PM, NightBengal wrote:

    iamnik, I can only assume you don't work in the IT field. It takes a lot more than a dozen or so good employees to run, maintain, and especially develop and improve a site the size of Facebook. The amount of server space and firepower needed to keep 275 million users running at a good clip with minimal interruption is phenomenal (just as Google!).

    If so many people could have done it easier and cheaper and maintained the same level of service, why hasn't it happened yet? You can question their allocation of capital, to be sure, but building something like Facebook takes much more than you may first think.

    Cheers,

    NightBengal

  • Report this Comment On March 30, 2009, at 1:14 PM, NightBengal wrote:

    ... should have read "(just ASK Google!)" up there... that's what I get for not proofreading...

  • Report this Comment On March 30, 2009, at 2:04 PM, wtfdidyousay wrote:

    go ahead, tim. throw in SIRI in your article again to get more clicks. so pathetic, and it takes away any validity your article MIGHT have had.....

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