A closer look at the Facebook/FriendFeed deal

Facebook announced today that it acquired FriendFeed for about $47.5 million ($15 million cash / $32.5 million stock) in a deal that values Facebook at $6.5 billion.  While this is down from the $10 billion or $15 billion valuations that have been talked about in recent months, it still represents a rough valuation of 13x revenue, which the company expects will be around $500 million for 2009.  FriendFeed had no revenue, but it had lots of good ideas:  Facebook has been implementing several FriendFeed innovations  on its own site this year, and the founders of FriendFeed were the guys responsible for G-mail and Google Maps.

This was a preventative acquisition.  Facebook perceived a hole in its offering and moved to patch it up before someone else exploited the problem.  FriendFeed has no real revenue, but it offered something that Facebook didn’t, and Facebook didn’t want anyone else to buy it first.  The FriendFeed team didn’t waste any time transitioning, because apparently they had vacated their old office and were set up in Facebook’s space before the end of the day.  If the technology is good, and you don’t have it, you better get it quickly.

Deals like this are going to happen more and more frequently over the next 24-36 months in the social media space.  There is a land grab opportunity, plain and simple.  He who gets there first and establishes a position early on tends to have an excellent chance of being snapped up by a bigger player in a neighboring area.  Eventually the universe is fully populated and developed further, but the rewards typically go to those who had a clear vision of where technology was going very early on, and were able to move quickly to establish a position with a viable offering that people need.  Facebook is a mighty powerful force right now, but it certainly hasn’t cornered the market on good ideas, and buying the good ideas is a lot easier than trying to create them.

So how can we predict these deals over the next 2-3 years?  Start with where the people are now and where they will likely be in the not so distant future.  Then look at all the cool things that niche players are doing that aren’t happening yet at the bigger sites.  The only way to remain relevant is to keep improving content, improving user interaction, and improving stickiness.  The companies that provide these things are buyout candidates.

Next, look at big businesses, which have largely remained on the sidelines as they grapple with understanding how fully they will have to retool their marketing efforts.  Their early efforts in the space have largely been weak and ineffective, but they know where they have to go to meet the consumers on the new turf.  Companies that are able to bridge the gap between big brands and social media are also excellent targets.  These are the players who are going to put big businesses on Facebook, MySpace, and 20 other social networks.  They will develop apps to engage the consumers and have them interact with the brands. And the deals that happen will be a lot bigger than $47.5 million.

Should be interesting!  There will be plenty more deals like this before the end of 2009.