Q&A with David Sze: The $250MM Difference in Facebook's Valuation

I had the honor of conducting an interview with David Sze, the venture capitalist who led Greylock’s early investments in Facebook as well as LinkedIn, during a fireside chat. One anecdote he shared that really stuck with me was about Facebook’s Series B round.

At the time, Facebook had traction among college students and was starting to with a younger generation but there were was a lot of doubt about its future. Sze heard about Facebook from Matt Cohler whom he knew from his investment in LinkedIn and became convinced Facebook could be big – at least $1 or 2 billion big but no one had certainty it would end up being $50-100 billion+ big. 

Greylock wanted to invest but Facebook didn’t think they would actually do it at a amazing valuation. It was actually hard just getting the meeting  and being taken seriously – this is when you want to give someone tens of millions of dollars! 

Sze emphasized that it was clear all the reasons why Facebook might fail: (a) kids move on to the next thing; (b) never make it to mass market, etc. However, you really need to have the strength of your conviction to stand up to others and say you know that but you’re willing to bet on it and potentially look very stupid if you’re wrong. It was incredible hearing how difficult it was to get professional investors to bet on Facebook in its early days – which later turned out to be the biggest tech IPOs of all time. 

Sze claimed they did have a hard cap on valuation but they willing to do the deal at $500MM which was pretty high at the time. There was certainly differing opinions even within the firm around this decision. The consensus ultimately was that there is a pretty good chance the company could get to $1-2 billion but if the valuation got any higher, then it would be a lot harder to justify the risk.

Viacom and other parties were talking to Facebook about valuations of $750MM+ at that time. That’s a $250,000,000 gap or an offer 50% higher than what Sze could do or what at least his firm thought was prudent.

In the end, Sze “hanged around the hoop” while Facebook was getting higher offers. He provided intros, insights, and anything that could be of value to show he could be useful if they went with him. Facebook ended up taking the lower valuation offer from Greylock and the rest is history.

The story is remarkable to me. It’s a reminder that big opportunities aren’t actually so obvious and you really have to muster the conviction to be successful in the face of clear risks. It’s also a reminder that the best price doesn’t always win. It’s incredibly valuable to be able to win on other dimensions than price. In this case, it saved the investors $250MM off the valuation!