Facebook Investors: HYPE Fades as Reality Becomes More Clear

Facebook (NASDAQ:FB) bulls, there’s a huge difference between hope and scaling.

After two weeks of reading comments about Facebook’s (NASDAQ:FB) stock valuation, I’m starting to recognize a major misunderstanding on the behalf of the bulls. If you’ve ever built a business, you have a very deep understanding of the distinction between scaling a predictable and profitable business model versus hope or ideas about growing your business.

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The first case means the business has discovered the business model, proven the business model, and merely needs to increase staff and/or resources in order to grow more of the same business model. This is the point where the business asks investors for capital in order to grow a scientifically proven business model — in other words, the business has reached the point at which increasing inputs proportionately increases monetary outputs.

The second case is one in which the business may have discovered a prospective class of customers, but a business model for making money from those customers has not been proven. Believe it or not, this is the situation in which Facebook (NASDAQ:FB) finds itself. The company is making some advertising money against its monster user base, but raising more money from the public markets does not mean the company is able to scale these exact monetization efforts.

Instead, Facebook needs to expand its monetization opportunities into new business models that have yet to be discovered or proven scientifically. DOS, the money Facebook has raised is going into what I would consider the research and development of possible monetization opportunities. Compare this with the much less risky and proven phenomenon of raising money to simply expand an already proven and repeatable way to extract money from customers.

The difference between these two phases in the life cycle of the business is enormous. However, apparently it’s a more subtle distinction for un-savvy investors, or those who have never built a business.

Unfortunately, this misunderstanding of business science is exactly why successful investors and business builders find Facebook’s valuation to be extremely outrageous, but the general public and Facebook users are willing to buy the stock on hope and hype.

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