Kenneth Woods Portfolio Management Program

Facebook Inc. (NASDAQ: FB) Pierre Cosquer, Fund Manager [email protected] Investment Report 438-777-3229

Dinos Papoulias, Research Associate August 12, 2012 [email protected]

Historic IPO, Short-lived

Company?

Event:

The IPO of will probably be remembered as

the most awaited IPO of this decade, for good and bad

reasons. The importance of this company for the

technology industry as well as the interest shown by

members of the Kenneth Woods Portfolio Management

Program‟s Client Committee have given us strong

incentives to write about Facebook. This report will

outline what we think of Facebook and the social

networking site industry in general.

Rationale:

 Facebook has developed a strategy that revolves around three axes: attracting and retaining customers, opening the platform to third-party developers and creating a symbiotic relationship with the advertising industry.

 Several rounds of private investments have enabled

the company to grow with sufficient capital but

have also pushed its valuation beyond reason.

 Very high investor expectations and limited Company description

investment opportunities have created the perfect

mix for a market mispricing, which overvalues Facebook, Inc. operates as a social networking

shares by 8% based on a combination of DCF and company worldwide. The company builds

comparable multiples analysis. tools that enable users to connect, share, discover, and communicate with each other;  The social networking site industry is at an early enables developers to build social applications stage of growth and is headed toward further on Facebook or to integrate their Websites segmentation. Facebook, by far the leading with Facebook; and offers products that company in this industry, will eventually be enable advertisers and marketers to engage threatened by the emergence of local social with its users. As of February 2, 2012, it had networking sites and by the appearance of 845 million monthly users and 443 million generational gaps. daily users. The company was founded in 2004 and is headquartered in Menlo Park,  Facebook‟s dominant positioning as well as recurrent privacy issues will lead to an increase in .

regulation and government oversight, which could Source: finance.yahoo.com weaken Facebook‟s quasi monopoly.

Table of Contents

Tumultuous first few years ...... 3 Facebook has a strategy ...... 4 Focused on user experience… ...... 4 Made for developers… ...... 5 And Loved by advertisers ...... 6 How has the company raised capital? ...... 7 A few words on the IPO debacle ...... 8 Industry Analysis ...... 10 Industry classification ...... 10 Customers reign ...... 11 Low initial capital requirements but scale is everything ...... 11 Low switching cost for customers ...... 12 Major drivers ...... 12 Key success factors ...... 12 Industry specific metrics ...... 13 Facebook within the industry ...... 15 Financial analysis and valuation ...... 18 Summary of key financial data ...... 18 Facebook Valuation Summary ...... 18 Comparable Multiples ...... 19 Discounted Cash Flow Analysis ...... 20 Share price performance and market value ...... 20 What are the risks? ...... 21 Conclusion ...... 22

Appendix A: Key Shareholders...... 23 Appendix B: Board & Committees ...... 25 Appendix C: Key Executives ...... 27 Appendix D: Zuckerberg’s Circle of Advisors ...... 31

Tumultuous first few years

An economic moat, coined and popularized by Warren Buffett, describes a series of competitive advantages that surrounds any business and defines its long-term ability to maintain profits and strong market presence. This term has been thrown around in almost any situation or industry imaginable in modern literature. The recent IPO of Facebook exemplifies how a strong moat can take precedence over company fundamentals and sound financial valuation and dictated the eventual 100 billion dollar valuation it would receive at its IPO. To fully understand the hype and excitement over this IPO, we must first take a look at its humble beginnings.

In October 2003, 19-year old Harvard Student created Facemash, an internet site that would allow users to rate a random set of pictures appearing on the screen. Photos of Harvard Students were illegally obtained through hacking the university's network, and Mark was nearly expelled for his effort. After the incident, Mark decided to focus his efforts into various personal projects, one of which was a 'Facemash' inspired project that would allow the students of Harvard to be connected through social interaction over the internet. In the Harvard Crimson, a student-run newspaper, he is quoted as saying "It is clear that the technology needed to create a centralized website is readily available [… and] the benefits are many." The project would take the name as thefacebook, stemming from the lack of a universal facebook of student pictures within Harvard. Thefacebook.com was officially operational on February 4th 2004. By the end of the first day of operation, it was reported that between 1200 and 1500 students had registered. The instant success of thefacebook.com would be even more apparent a month later, when half the Harvard population had signed up and immediate plans to expand to adjacent schools had commenced. Before he knew it, Mark Zuckerberg was joined by two other fellow Harvard-students – (programmer) and – to help him grow the site to the next level. (business development) was also the first to make a financial investment in the start-up, in the tune of 15,000$. Andrew McCollum (graphic artist) soon joined to help promote the website as well. In March 2004, Facebook expanded to Stanford, Columbia and Yale, and soon thereafter expanded to all Ivy League and Boston-area schools. It gradually reached most universities in Canada and the . Facebook was incorporated in the summer of 2004, and entrepreneur , who had been informally advising Zuckerberg, became the company's president. In June 2004, Facebook moved its base of operations to Palo Alto, California. The company dropped „The‟ from its name after purchasing the domain name facebook.com in 2005 for $200,000. That same month, made an initial $500 million investment in the company and will be remembered as the birth of Facebook as we know it today. Several investment firms followed Mr. Thiel and made increasingly large investments in the company which was continuing to introduce new services and working on a business strategy.

Facebook has a strategy

The strategy at Facebook has been very simple from the start: create an engaging interpersonal relationship through the internet that will build and maintain connections. This engagement of personal connections has been successful and has offered marketers and advertisers a unique combination of reach, relevance, and social context to reach out to potential customers. The reality is that every person‟s Facebook experience is unique and completely personalized. As of June 2012, Facebook counted over 845M monthly active users, with over half of them being daily active users. Astonishingly, 488M users used Facebook‟s mobile products (through web or app). Looking forward, the monetization of this platform will remain one of the main focuses of the company as it represents a huge opportunity for growth and profit.

Focused on user experience…

FRIENDS Adding friends is synonymous with Facebook‟s core offering. To stay connected and build new connections, users must add each other to be able to interact. Recently, after numerous privacy concerns and subsequent lawsuits, users may appear invisible to non-friends and hide many of their personal information and page contact to friends.

WALL / TIMELINE The wall was the original feature of Facebook that allowed users to interact with one another. Users were able to „post‟ comments on friends‟ walls, and reply to one another. Eventually, the wall became much more sophisticated, and included links to other sites (such as YouTube, articles, etc...) and check-ins to places through a mobile phone. In 2012, the Timeline was introduced, and organizes all of the users‟ historical content ever posted on Facebook in a big vertical timeline fashion.

CHAT A chatting feature became available in mid-2008. It was initially very choppy, with many users complaining about the decreased speed of navigation following its instauration. A second version of the chat was made available only a few weeks later, which brought a much more simplified interface and an increased speed of navigation. In 2012, the chat feature was fully merged with the inbox, where old messages and chat logs could be viewed in either features.

MESSAGES / INBOX While the inbox has been a predominant feature of Facebook since inception, it has gone through a lot of transformation. At the onset, it allowed fellow friends and strangers to send you a private message. Currently, it has as three purposes: the original message function, an integrated chat available through chat/app interaction, and the two-year old Facebook email (@facebook.com).

LIKE By clicking on the „like‟ button, Users are able to show approval for comments, pictures, and statuses. The is a true staple of the Facebook experience. While seemingly simple and with very little utility, it has truly become an inflexion point in advertisement. In 2009, liking was available on and off Facebook, thus opening up connections to millions of potential advertisers and businesses that wished to gain exposure through social networking.

STATUS "Status updates" (also called as a "status") allows users to post messages for their friends to read. In turn, friends can respond with their own comments, as well as clicking the "Like" button.

SMARTPHONES While the first mobile use of Facebook dates back to 2006, it is only recently that the website has truly taken off in this market. Reasons for this are simple: a booming smartphone market in the past few years, increased experience through the modern design of apps, and increased connectivity through features like “check-in”. This market represents a huge potential for Facebook, but questions remain if management will be able to properly monetize this immense stream of users.

NEWS FEED was introduced in 2006. It allowed users to log into a main or „home‟ page and see their friends‟ activities. From relationship status changes to new wall posts, the news feed allows users an unlimited pass to their friends‟ information. Of course, Facebook could once again be marred in controversy if privacy issues start to arise. It only took Facebook 2 months to add a simple yet efficient privacy system, where pieces of information can be kept private and not appear on the news feed. The news feed has recently been simply named “home”, and acts as a true home page with links to users groups, events, advertisers, friends, and more.

Made for developers…

The being a set of development tools and application programming interfaces, developers can easily create and integrate social applications, games, and websites linked to Facebook. They have the opportunity, in theory at least, to reach 845 million monthly active users. As of December 31, 2011, there were approximately 7 million applications and websites integrated with Facebook. These apps and websites are created by a very diverse set of developers, ranging from a student on his laptop computer to teams of professional programmers hired by leading international corporations to help their customers stay connected to the company. Developers rely on word-of-mouth between users to create demand for their apps. They sometimes use influential users to accelerate this process. This strategy is called viral marketing. Developers also have access to professional services companies that promise to make the app appear in the top 10 list of most wanted apps in exchange of payment. This marketing strategy is useful for companies that have a great product because it makes the app visible very quickly. But for those apps that don‟t gain user interest, it is mostly a waste of money because the app will fall off the list very quickly if it fails to create a self-sustaining demand. Facebook provides an online payments infrastructure that enables platform developers to receive payments from its users.

And Loved by advertisers

In terms of advertising, the obvious advantage of using the Facebook platform for advertisers is the potential to reach the more than 845 million monthly active users at a relatively low cost. Relevance is also strong because advertisers can specify that Facebook shows their ads to a subset of its users based on demographic factors such as age, location, gender, education, work history and specific interests that they have agreed – consciously or not – to share with the Facebook community or by using the Like button around the Web or on mobile devices. The company allows advertisers to select relevant and appropriate audiences for their ads, ranging from millions of users in the case of global brands to hundreds of users in the case of smaller, local businesses. Data collection and privacy issues have become extremely important for all parties: Facebook itself to avoid ethical and legal issues; advertisers to know their customers better and to provide targeted marketing campaigns; and Facebook users to protect their privacy. Advertisers also have the possibility of interacting with their audience and create a “social context” that enables advertisers to make users more involved and engaged rather than just spamming them with ads. The interactivity of the Facebook platform as well as the social environment it creates allow advertisers to know what works and what does not in a very short period of time. Additionally, any brand or business can have a presence on Facebook by creating a Facebook Page. Companies can include polls, encourage comments, or invite users to events, thus creating a two-way relationship rather than the traditional company to consumer channel. Through Pages, Facebook gives brands the opportunity to form direct and ongoing relationships with their customers, with the potential to turn them into valuable advocates. In addition, businesses can use Pages to influence fans and drive referral traffic to their e-commerce websites or physical stores.

How has the company raised capital?

While many private investments were made since Facebook‟s inception, the scope of operations and need for continued capital investments eventually brought Facebook to issue public shares. Facebook filed for an initial public offering on February 1, 2012 by filing their S1 document with the Securities and Exchange Commission (SEC).

Prior to the IPO, Facebook raised capital through private placements with angel investors, and private equity firms. These private investments were highly debated and used to estimate the market value of the company. Table 1 and Graph 1 highlight the major transactions that occurred from 2004 until the IPO and the valuation derived from them.

Table 1: Company Year Company Stake Offer amount Successful Valuation 2004 Peter Thiel 10.20% 0.5M 5M Y 2005 Accel Partners 12.20% 12.7M 100M Y 2006 Viacom 100% 750 750M N 2006 Yahoo! 100% 1B 1B N 2007 1.60% 240M 15B Y 2008 Facebook Internal Valuation 4B N/A Digital Sky 2009 2% 200M 10B Y Technologies 2010 Elevation Partners 5% 120M 24B Y 2010 Accel Partners Sale 35B Y Goldman Sachs & 2011 1% 500M 50B Y DST IPO IPO 15.00% 16B 104 Y

Billions Graph 1: Company Valuation Billions 104

100

80

60 50

35 40 24 15 20 10 4 0.005 0.1 0.75 1 0 2004 2005 2006 2006 2007 2008 2009 2010 2010 2011 IPO

Mark Zuckerberg was not particularly eager to make his company public because it would put the company‟s short term performance under scrutiny, and it might become more difficult to attract and keep employees. Prior to the IPO, shares of Facebook were changing hands on the private exchange SecondMarket, a marketplace for the buying and selling of private company stocks. However, they were soon found guilty by the SEC of having too many investors – the SEC requires companies with over 499 investors to release public statements – which may have been another deciding factor in the timing of Facebook‟s IPO. The preliminary prospectus announced that the company had 845 million active monthly users and that its website featured 2.7 billion daily likes and comments. The filing did note that the company's increases in membership, as well as its incomes, were slowing and that the deceleration was likely to continue. A total of 421 million shares were sold in the IPO at $38 per share (the high end of the proposed range). Newly issued shares accounted for 180 million shares, which raised $6.8 billion in capital for Facebook. Selling stockholders sold the remaining 241 million shares. According to company filings, uses of cash will include general corporate purposes, capital expenditures, and tax withholding obligations related to the vesting of stock- based compensation. However, the key result of the IPO is that Facebook is now flush with cash and better equipped to compete head-to-head with key Internet platform competitors, such as and Microsoft, to acquire fast-growing start-ups.

A few words on the IPO debacle

The day of the IPO, shares were supposed to begin trading at 11:00am but for half an hour, no share had been exchanged. When it finally started trading at 11:30am, with more than 80 million shares changing hands in the first 30 seconds, traders quickly started complaining that some orders were not completed and that others were filled at a higher price than expected. Although the problem was fixed within hours, the effects were felt for a few days as investors were not completely sure if their orders had closed. That was the first issue.

The second issues, and arguably much more important than the first one, relates to the SEC investigation into how Facebook and its bankers managed critical financial information during the IPO process. Morgan Stanley, the lead underwriter, Goldman Sachs, JP Morgan and Bank of America received information about Facebook‟s financial outlook that was not disclosed to the public. These four banks subsequently cut their earnings‟ outlook on the company after Facebook apparently told analysts at these banks “to materially lower their revenue forecasts for 2012”1. These earnings cuts (Graph 2) as well as concerns over the company‟s ability to grow mobile revenue and increase the number of monthly active users contributed to the drop in share price from a high of $45.00 to a low of $19.82 reached on August 2, 2012.

While it is perfectly understandable that investors complain if material information was hidden from them, it is somewhat confusing to hear so many of them complain that they have been cheated.

1 According to a press release by CNN on May 23, 2012. Graph 2: Expectations Downgrades $43 $0.130

$38 $0.125

$33 $0.120

$28 $0.115

$23 $0.110

$18 $0.105 5/7/2012 6/7/2012 7/7/2012 8/7/2012

Stock Price Adjusted EPS Expectations

Yes, the earnings cuts just days after the IPO show that bankers had pushed the IPO pricing a little too far, but it certainly did not imply that the company‟s value should be cut by half. It is therefore misplaced to blame bankers and Facebook for the fall in the valuation. Investors who bought shares the days following the IPO had to be financially educated so they must have realized that shares were extremely expensive. They took a bet that the price would go even higher over ensuing months but it was never a sure thing. Long investors simply took the risk of buying overvalued shares and it went sour for them. Suing Facebook or anyone else will not make up for their bad investment decision.

Recent notable transaction

Instagram Inc. was acquired on April 9, 2012 for the astronomical price of $1 billion from Andreessen Horowitz, Baseline Ventures, Benchmark Capital, Greylock Capital Management LLC, Lowercase Capital, Sequoia Capital, and Thrive Capital Seller Funds: Andreessen Horowitz L.P.

The $1 billion acquisition of represented nearly 27% of the company‟s revenue at the time. This is a huge amount by any standard for a start-up with only 13 employees that does not have a clear business model – although that has never been an issue to get insane valuations in the internet industry. So why did Facebook agree to pay such a hefty price for it? It was clearly not for patents as Instagram does not have any. It was not for its user base either; Instagram only had 31 million accounts between Apple and Android at that time whereas Facebook has about 845 million monthly active users. The only possible reason is that Facebook really wants to increase mobile revenues. It launched a mobile application but the app did not gain a lot of traction. Instagram, however, has made sharing mobile photos its specialty and is attracting mobile users from all over the world. One good example of Instagram‟s international success is that the French newspaper LeMonde uses Instagram to send pictures of the Olympic Games during its live online coverage of the event.

The acquisition of Instagram is seen as a way for Facebook to increase mobile revenues and increase picture sharing on smartphones but the fact that Instagram will stay a separate entity should be a source of concern. There will certainly be some synergies between the two entities and Instagram‟s employees will help Facebook adapt its computer platform to the smartphone world, but in my opinion this acquisition is also a sign that Facebook is afraid that another start- up will create something “cooler”. Instagram was actually becoming a social network of its own king, focused on sharing mobile pictures. About 250 million pictures are uploaded daily on Facebook. Sharing and tagging pictures is one of the main reasons people go on Facebook, and the thought that Instagram could take the lead in this area really pressured Mark Zuckerberg to pay a billion dollar for a start-up that was valued at half of that the week before the acquisition.

Here is a quick comparison of what other tech companies spent on applications, services and websites:  Apple spent $200 million on Siri, which has since become a key feature of the iPhone;  bought OMGPop, the maker of the application Draw Something, for $210 million;  Yahoo! purchased Flirck for $35 million in 2005 when it was the hottest company for photo sharing. Although this comparison has nothing scientific, it shows that Instagram will need to be a true money maker and stay in that leading position for a very long time in order to become a good financial investment for Facebook.

Industry Analysis

Industry classification

The social networking sites industry is still relatively young and really started growing ten years ago when MySpace was founded. Shortly after, in 2004, Facebook arrived and since then the industry has seen its revenue grow much faster than the economy. A large number of companies have entered the industry and customers are becoming increasingly accustomed to the services provided. This industry is characterized by rapid technology changes and introduction of new products, services and brands. As the industry leverages its customer information to derive more advertising dollars, revenue is expected to increase at a 35% annualized five-year rate to $4.8 billion in 2012. The number of companies is estimated to grow at a 30% annualized five-year rate in 2012. Going forward, revenue is expected to increase by 25 to 30% per year for the next five year while the number of companies could potentially grow by 40% per year until 2017.2 This industry has proven to be sensitive to macro events both on the upside and the downside. Economic slowdowns drive revenue down because total advertising expenditure decreases when

2 IBISWorld estimates or the US only. companies need to cut costs. Also, the recent financial crisis and more generally bear markets make raising capital (both private and public) very difficult for smaller companies. However, some macro events such as geopolitical conflicts have been a source of growth and increasing credibility for this industry as these events show the importance of fast information sharing by civilians.

Customers reign

According to IBISWorld the average age of social network users is 37 years old. Consumers aged 24 or younger are mostly attracted to casual social networking site such as Facebook or MySpace while consumers aged 25 or older tend to use professional networking sites like LinkedIn and blogs. Consumers are highly engaged in their social and professional life and have learned to take advantage of these services to reconnect with old friends and advance their career. This industry is really consumer driven and the crowd actively influences companies to introduce new products and services. It is quite simple, if consumers want a new service and the big companies don‟t make it available fast enough, then another company will appear to fill the gap. Therefore, customers have a huge influence on the industry and companies need to react very quickly to trend changes.

Low initial capital requirements but scale is everything

Market concentration is very high, with Facebook generating about 60% of the industry‟s revenue in 2012 and the largest four companies over 80% of revenue 3 . Despite market concentration, entering this industry does not require a lot of financial investments. A lot of entrepreneurs can just build a website or an app within a few weeks and test it on the market. If it becomes successful quickly enough, then angel investors and venture capital firms will provide the necessary capital and professional support to bring these start-ups to the next level and help them build a large user-base. Being close to the Silicone Valley is critical for this to happen because that‟s where the money and the risk-takers are located. Indeed, 65% of the industry‟s businesses in the US are located in California. Entering this industry is not a very risky adventure for young entrepreneurs. If it does not work they will not lose much capital and they will most likely be able to get an engineering job at one of the numerous established companies. What is really challenging is to grow these start-ups into large companies. Selling one successful application might be enough to become a millionaire but just as Justin Timberlake famously said in the movie : “A million dollar isn‟t cool. You know what‟s cool? A billion dollar.” Building a user base large enough to be able to monetize the products and services can take time and if users find something better in the meantime, it will be difficult for the company to survive unless it reinvents itself. Moreover, large companies such as Facebook have the tremendous advantage of being capable to spend billions of dollars to buy-out competitors, acquire employees and technologies.

3 In the US only. Low switching cost for customers

One of the big issues for the companies in this fast changing industry is the inevitable fact that customers can just change their mood and instantly transform a growing phenomenon into a fad forgotten within a few months. Consumers can easily switch to a substitute like or Instagram. These are companies that focus on a slightly different aspect the social networking with Twitter specializing in the sharing of mini messages and Instagram specializing in the sharing of pictures on mobile devices.

Major drivers

The percentage of services conducted online is one of the long-term driver of this industry just as productivity growth is a major driver of long-term growth for the economy. Although younger generations grew up with the internet, a lot of people and businesses still need to adapt to this new world. Consumers are increasingly shifting attitude toward online shopping and other services. As a consequence, brick and mortar companies as well as the new online retailers continue to develop their presence online. This results in a seemingly unstoppable increase in the number of online advertisements and online sales from these advertisements. This shift in customers‟ and companies‟ attitude toward online services benefits social networking sites that derive most of their revenue from advertising and online services (85% in the case of Facebook for example.) Other notable external drivers include per capita disposable income and technological change. Companies generate a significant portion of revenue by selling add-on services (i.e. online games) and premium subscription (professional networking sites like LinkedIn have based their business model on that). With disposable income expected to rise in most of the major markets, consumers are likely to spend more on these “extra” services. Technological change also has a tremendous impact on this industry. Five years ago mobile revenue was not a credible source of growth simply because smartphones were such a tiny fraction of the mobile industry. Now that these powerful devices are prevalent in the market, companies seem to focus all their energy on getting mobile revenue. New companies such as Instagram and Twitter have been and continue to be successful because smartphones allow them to offer new services to people who spend more time with their mobile device than with their desktop computer.

Key success factors

A lot of very abstract factors are key to achieving success in the social networking industry. Trendiness and being seen as “cool” by young generations is of critical importance to get strong name recognition. Social networking sites with high credibility and brand awareness will attract advertising dollars and therefore will do well in this industry. Ease of use for customers has proven to be very important because people tend to connect and disconnect from the social networks quickly and many times a day, especially when they connect on mobile devices. Innovation and the fast implementation of new services is also crucial because if existing companies don‟t reinvent themselves or respond to customer demands fast enough, an ingenious entrepreneur will just spring out of his dorm room and start a company of his own to respond to this need. Therefore, attracting talented employees is very important and will impact the quality of companies over the long-term. Small and private companies can do this relatively easily because new employees see the possibility of getting rich once the company does an IPO. However, big corporations that have gone public find it much more difficult to attract and keep employees and executives. A prime example of this is the recent Google announcement that the outflow of employees leaving for Facebook had stopped. It now seems that the acquisition of companies will be increasingly motivated by the need to have highly skilled and talented employees working for them.

Industry specific metrics

Just as was the case in the 90‟s when the internet industry was emerging, companies in the social networking industry emphasizes metrics that highlight user growth but do not reflect financial performance. Investors pay particular attention to the growth in monthly active users, daily active users and mobile monthly active users. Facebook has been able to grow the number of active users at a very impressive pace as seen on Graphs 3, 4 and 5. Knowing that there is an estimated 2.5 billion internet users worldwide, it is hard to imagine Facebook will continue to grow its user base at the same rate. In terms of penetrations, some markets are almost saturated (Chile and Turkey), others are on track to reach saturation (US and UK), while a last group has very low penetration rates (Russia, Japan, South Korea) due to the popularity of domestic social networking sites.

Graph 3:

Monthly Active Users Worldwide Millions 1000 900 800 700 600 500 400 300 200 100 0

Graph 4:

Daily Active Users Worldwide Millions 600

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Graph 5:

Mobile Monthly Active Users Worldwide Millions 600

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Another very important metric is the average number of minutes a visitor spends on a given social networking site per month. At this game, Facebook is the leader by far (Graph 6).

Graph 6:

Finally, now that a company like Facebook generates large revenues and profits, investors are also looking at revenue per employee, the ratio of engineers to total employees, and profit growth.

Facebook within the industry

The social networking industry has been one of the hot topics in the investment community for a few years. While it is still a very young and small industry with revenues expected to reach only $6 billion in 2012, it is one of the fastest growing industry worldwide. Aggregate revenue has been growing at a 36% annual rate since 2007 and will continue to increase an impressive 27% annual rate over the five years4. As mentioned previously in this report, the number of companies operating in this industry grew from less than 900 in 2007 to about 3,350 today and will likely expand more than five-fold to above 16,000 by 20175. These are impressive measures and attractive growth prospects but fail to highlight the fact that the industry is highly concentrated with the three largest companies controlling 78% of the market. Facebook alone has 60.7% of market share, followed by LinkedIn with 13.5% and Twitter with only 4.1%. The other 20% of market share is in the hands of 3,000 smaller companies, most of which are still at the start-up stage of growth and unlikely to go public in the next two years.

While it is a valid point to make that several social networking sites have gone public recently, it is important to know that these companies operate outside North America and their user-base is mostly domestic. As a consequence, investors willing to risk their money in this industry do not have much choice but to invest in either Facebook, LinkedIn or another public company closely linked to this industry such as Zynga. The problem is that the investment universe is too small for all the institutional and retail money available to invest. LinkedIn has a market capitalization

4 According to IBISWorld estimates 5 According to IBISWorld estimates of only $11.12 billion and Zynga, until recently the best play on Facebook growth, a market capitalization of $2.3 billion 6 . The only real investment opportunity for investors is thus Facebook, which had a market capitalization of $100 billion when it went public. A very simple economic principle known as market equilibrium tells us that when a good is scarcely available but in high demand, the price of that good is bound to increase. Applying this economic principle to the social networking site industry tells us that the strong demand from investors far exceeds the available investment universe and as a consequence the few public companies are likely to be overvalued. There are only two ways this market mispricing can unfold:

 The industry continues to grow and more companies go public. The combination of these two factors will increase the size of the market and the supply of publicly investable companies.  Facebook‟s financial performance does not satisfy investors and the industry encounters difficulties to grow and continues to be concentrated in the hands of two or three companies. This will inevitable disappoint investors and reduce the demand for shares of public companies.

In the very short-term it seems that the market is correcting itself by following the second possible path. Industry concentration is likely to stay very high for a few more years and the severe drop in the market capitalization of Facebook –the best proxy for the overall industry – since it IPOed on May 18, 2012 is directly related to concerns over its growth potential.

However, over the long-term we are very confident that other companies – new companies – will take market share away from Facebook and LinkedIn. This statement does not mean that Facebook will fall behind the competition and go bust. It simply means that new companies will eventually emerge as co-leaders and will help Facebook grow the industry. For now the industry almost entirely relies on Facebook to attract advertisers, attract new customers and create new products and services. The social networking site industry appeared less than 10 years ago with the arrival of MySpace and more importantly Facebook. People tend to forget that an industry needs several decades to stabilize and mature. Look at what has happened since the 90‟s in the internet industry. AOL and Yahoo seemed unbeatable and were growing amazingly quickly. People sought that these two companies had such a large market share that no other company would be able to rival with them. But then Google appeared in a garage in California and within a couple of years the two former giants had fallen off their throne. Yahoo and even more AOL now look like relics lost sometime during the formation of the internet world. The same thing might happen with Facebook. While Google gained supremacy because it had a better technology than its rivals, Facebook will likely see its monopoly weaken because of its failure to attract future generations. As I explained earlier in the report, people create a Facebook page for two reasons: one is to connect with other people, and the other one is just to appear cool and normal – yes, employers now are skeptical when a candidate claims not to have a Facebook page. It is very possible that a future generation of teenagers and young adults will prefer another social networking platform because it will have better services, a more appealing design or simply because they will not

6 As of August 8, 2012 want to socialize on the same platform as their parents do. While timing this prediction is very hazardous, I do believe that it will happen faster than investors think.

As the industry is very young, it needs a strong leader to lead the way and give an initial structure to it. But going forward the industry will segment itself to cater to different demographic and geographical groups. The recent emergence of so-called “neighborhood networking sites” is a strong indication that the industry is heading toward further segmentation. These local networking sites will probably be controlled by a few companies in each country and will be able to develop a more symbiotic relationship with the advertising industry and businesses.

As a conclusion, I would like to remind investors that it is very naïve to believe that the social networking site industry will not experience some structural shocks and that the major players of today will continue to dominate it indefinitely. While Facebook will provide most of the growth in the short to medium term, it will eventually loosen its grip over the industry as new companies emerge to benefit from generational transitions and the continued segmentation of the industry. The simple fact that Facebook has attracted 845 million customers shows that this industry is not just a fad and that people feel the need to be connected to each other. Social networking sites are just the next step in the quest to make the world smaller. It started with paper letters (physical mails), then the telegraph arrived, followed by the telephone. The last 20 years have seen this evolution accelerate tremendously with the emergence of internet. Internet brought us virtual mails, then instant messaging, and finally today we are experiencing what might be comparable to a virtual world where everyone can potentially become friend with a person living on the other side of the world.

Financial analysis and valuation

Summary of key financial data Table 2: Summary of key financial data Estimates 2009A 2010A 2011A 2012E 2013E 2014E % CAGR '09-14

Gross revenue 777 1,974 3,711 4,600 6,100 7,300 56.52% Consensus 4,930 6,730 8,110 59.85% EBITDA 340 1,172 2,079 1,050 2,480 2,730 51.68% Adjusted EBITDA 367 1,192 2,296 2,560 3,280 4,170 62.59% Consensus 2,610 3,510 4,500 65.09% EBIT 262 1,033 1,756 1,600 1,750 1,900 48.62% GAAP EPS ex items $0.10 $0.28 $0.43 $0.17 $0.30 $0.45 35.10% Reported GAAP EPS $0.10 $0.28 $0.43 $0.10 $0.30 $0.45 35.10% Non-GAAP EPS $0.51 $0.15 $0.35 $0.52 Consensus $0.17 $0.44 $0.64 FCF per Share $0.59

Margins 2009A 2010A 2011A 2012E 2013E 2014E Gross 71.30% 75.10% 76.80% 70.00% 75.00% 75.00% Adjusted EBITDA 47.20% 60.40% 61.90% 50.00% 50.00% 50.00% EBIT 33.70% 52.30% 47.30% 30.00% 30.00% 30.00% Recurring Net Income 29.50% 30.70% 26.90% 20.00% 20.00% 20.00%

Source: Company reports, Bloomberg estimates and our own estimates.

Facebook Valuation Summary

We derive our $20.08 target price for Facebook shares by equally weighting the values derived by our discounted cash flow model and comparable multiples analysis on an EV/adjusted EBITDA and non-GAAP P/E basis. Based on these estimates, we believe the shares could trade at a price of $20, which means the stock is overvalued by about 8%.

Table 3: Facebook Valuation Summary Valuation on 2014E EV/EBITDA Non-GAAP P/E DCF Summary Triangulated Adjusted EBITDA 4,170 Non-GAAP EPS $0.52 Terminal Mult. 8.0x Implied Target Mult. Target Multiple 10.0x Target Mult. 30.0x Discount Rate 8.4% EV/EBITDA 33.3% Enterprise Value 41,700 15'-18' FCF grth 15.0% Non-GAAP P/E 33.3% Net Cash Projected 9,482 19'-21' FCF grth 8.0% DCF 33.3% Equity Value 51,182 Price Target $20.88 $15.60 $23.75 $20.08 % Potential Appreciation -4.24% -28.46% 8.89% -7.94% Source: Company reports and our own estimates.

Comparable Multiples

As mentioned previously in this report, there are only a handful of companies directly comparable to Facebook. Therefore, instead of grouping comparable companies based on market capitalization, we decided to divide them into three categories: a group of large companies competing for leadership in consumer computing platforms (Apple, Microsoft, Amazon), a number of advertising-supported internet companies (Google, Yahoo!, Aol, Groupon, ValueClick, etc.), and social media companies with varying revenue models (LinkedIn, Zynga, Jive Software, Bazaarvoice, etc.). We put more emphasize on the group of social stocks, as these comparables are still relatively smalls companies in the early stage of growth. LinkedIn is arguably the best comparable for Facebook and is the second largest player in the social networking site industry, with 13.5% of market share in the US.

Table 4: Comparable Multiples 12/8/2012 Shares Out. Market Cap EV/REVENUE EV/EBITDA P/E Total D/E Company Ticker Price (mm) (mm) 2012 2013 2012 2013 2012 2013 Apple AAPL US Equity $621.70 947 $577,732 3.0x 2.4x 7.9x 6.4x 14.1x 11.7x 0.0x Microsoft MSFT US Equity $30.42 8,388 $255,023 2.5x 2.4x 5.9x 5.6x 10.1x 9.1x 18.0x Google GOOG US Equity $642.00 396 $210,588 3.9x 3.1x 9.0x 7.6x 15.2x 13.1x 9.6x Amazon AMZN US Equity $232.75 458 $105,218 1.6x 1.3x 32.6x 22.8x 277.7x 94.3x 31.8x Facebook FB US Equity $21.81 2,451 $52,672 8.8x 6.8x 16.6x 12.3x 44.3x 34.1x 5.3x Major Consumer Internet Mean 3.9x 3.2x 14.4x 10.9x 72.3x 32.5x 12.9x Comps Median 3.0x 2.4x 9.0x 7.6x 15.2x 13.1x 9.6x

Google GOOG US Equity $642.00 396 $210,588 3.9x 3.1x 9.0x 7.6x 15.2x 13.1x 9.6x Facebook FB US Equity $21.81 2,451 $52,672 8.8x 6.8x 16.6x 12.3x 44.3x 34.1x 5.3x Yahoo! YHOO US Equity $15.15 1,222 $17,947 3.5x 3.4x 10.2x 9.4x 14.8x 13.5x 1.0x Aol AOL US Equity $33.76 96 $3,173 0.9x 0.9x 4.9x 5.0x 26.7x 21.9x 3.4x ValueClick VCLK US Equity $15.76 80 $1,183 1.9x 1.7x 5.9x 5.3x 9.9x 8.9x 33.1x Digital Marketing Mean 3.8x 3.2x 9.3x 7.9x 22.2x 18.3x 10.5x Comps Median 3.5x 3.1x 9.0x 7.6x 15.2x 13.5x 5.3x

Google GOOG US Equity $642.00 396 $210,588 3.9x 3.1x 9.0x 7.6x 15.2x 13.1x 9.6x Facebook FB US Equity $21.81 2,451 $52,672 8.8x 6.8x 16.6x 12.3x 44.3x 34.1x 5.3x LinkedIn LNKD US Equity $104.92 112 $11,091 11.2x 7.5x 56.9x 32.3x 170.9x 81.4x 0.0x Groupon GRPN US Equity $7.44 663 $4,805 1.5x 1.2x 10.4x 5.3x 41.3x 11.6x 0.0x Zynga ZNGA US Equity $2.95 731 $2,241 0.6x 0.5x 3.0x 2.7x 50.0x 25.7x 5.4x Jive Software JIVE US Equity $15.57 62 $970 7.2x 5.3x N/A N/A N/A N/A 8.7x BazaarVoice BV US Equity $16.43 48 $1,000 6.1x 6.1x N/A N/A N/A N/A 0.0x Social Mean 5.6x 4.3x 19.2x 12.0x 64.3x 33.2x 4.1x Comps Median 6.1x 5.3x 10.4x 7.6x 44.3x 25.7x 5.3x Source: Company reports, Bloomberg estimates and our own estimates.

Discounted Cash Flow Analysis

We use an 8.4% discount rate and terminal multiple of 8x estimated 2022 Free Cash Flow (FCF) in our DCF model. FCF estimates beyond 2014 are derived using a two-stage growth model, first growing FCF at 15% per year until 2018 and then by 8% out to 2022. These growth rates and terminal multiple are lower than industry estimates as we believe expectations are still too high and that while over the next couple of years growth will be above industry average, we are more skeptical about long-term growth. Our estimated discount rate is higher than most sell-side analysts estimates and reflects the continued deterioration in Facebook‟s equity value.

Table 5: Free Cash Flow Estimates 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Adjusted EBITDA 340 1,192 2,296 2,560 3,280 4,170 - Interest expense -10 -22 -42 5 6 10 - Cash taxes 26 -287 -262 -96 -1 -12 - Capital expenditures -33 -293 -606 -1,503 -1,200 -1,400 + Adjustment 0 0 0 0 0 0 Free Cash Flow 323 590 1386 966 2085 2768 3,183 3,661 4,210 4,841 5,229 5,647 6,099 6,586 % growth 82.5% 135.1% -28.0% 128.9% 32.5% 15.0% 15.0% 15.0% 15.0% 8.0% 8.0% 8.0% 8.0% Terminal Value Calculation WACC Calculation Sensitivity Analysis Terminal Multiple of FCF in 2022 Value Net Cash/(Debt) 9,482 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x FCF in Terminal Year 6,586 Equity value 52,672 6.4% $22.40 $23.85 $25.30 $26.75 $28.20 $29.65 $31.10 FCF Multiple 8.0x Total capital 43,190 6.9% $21.80 $23.18 $24.56 $25.95 $27.33 $28.71 $30.10 Terminal Value 52691.73 10-year rate 1.7% 7.4% $21.22 $22.54 $23.86 $25.18 $26.50 $27.82 $29.14 Equity Value Calculation Beta 1.0x 7.9% $20.67 $21.93 $23.19 $24.45 $25.71 $26.97 $28.23 Value Per Share Equity premium 5% 8.4% $20.13 $21.34 $22.54 $23.75 $24.95 $26.15 $27.36

PV of FCF '12-21 25,120 $10.25 Cost of equity 6.8% 8.9% $19.63 $20.78 $21.93 $23.08 $24.22 $25.37 $26.52 Discount rate Discount Net Cash/(Debt) 9,482 $3.87 Cost of debt 0.50% 9.4% $19.14 $20.24 $21.34 $22.43 $23.53 $24.63 $25.73 PV of Terminal Value 23,598 $9.63 Tax rate 35% 9.9% $18.67 $19.72 $20.77 $21.82 $22.87 $23.92 $24.97 Total Equity Value 58,200 $23.75 WACC 8.4% 10.4% $18.23 $19.23 $20.23 $21.24 $22.24 $23.24 $24.24

Source: Company reports and our own estimates.

Share price performance and market value

Graph 7: Performance Since IPO Base 100 120

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50 18-May-12 8-Jun-12 29-Jun-12 20-Jul-12 10-Aug-12

Closing Price S&P 500 Return

What are the risks?

1. Although the market value of Facebook has come down 43% since the closing day of the IPO, we believe the company is still overvalued by a wide margin. There is a high possibility that following quarters will continue to disappoint investors because of modest mobile revenue growth. That would lead to a further compression in multiples.

2. The social networking industry is at an early stage of growth so it is not yet very regulated. As privacy issues continue to arise, it is likely that governments will try to tighten regulation around the industry. Increasing government oversight could lead to negative publicity for Facebook. Also, if Facebook continues taking market share and acquiring competitors such as Instagram, there is a high risk that regulators will eventually try to limit Facebook‟s monopoly.

3. The industry is driven by consumer trends and we believe that Facebook will face difficulties in attracting new generations of users. In some respects, this industry shares similarities with the fashion industry. If a company misses the trend, does not introduce products or services fast enough or fails to adapt to generational differences, another company will fill the gap in a matter of months.

4. Companies that go public have already gone through several rounds of capital investments and when they go public VC and PE firms have done everything to maximize valuation as they do not want to leave money on the table. It‟s not the 90s anymore, and young companies now take the time to grow and mature before they go public.

5. The industry is very young and still highly concentrated in the hands of just three or four companies. A lot of things will change as the industry grows and matures. While it is nearly impossible to see further than 3 or 4 years ahead, looking at the broader internet industry provides some insights into the evolution of the social networking industry. The internet industry is only 20 years old and already huge companies have died or soon might (Yahoo, AOL, Groupon, Zynga, MySpace…) because it is so competitive and consumer trends have such a high impact on the fate of the industry. It is unrealistic, in my opinion, to believe that today‟s leaders will still be at the top spot in ten years.

6. The industry is headed toward further segmentation and unless Facebook diversifies, it will likely lose market share against local/neighborhood networking sites.

Conclusion

The social networking industry is at the early stage of growth and highly sensitive to consumer trends. Facebook is by far the largest company is this industry but increasing regulations, diminishing reactivity to consumer demands and the inevitable segmentation of the industry will threaten the supremacy of Facebook in the medium to long-term. While we acknowledge the phenomenal growth and the potential to monetize the huge user base of Facebook, we believe that the company is overvalued and does not compensate for the industry and company specific risks discussed in this report. While we do not recommend investing in Facebook for the fund, this report should not be taken as a short-sell recommendation.

Appendix A: Key Shareholders

Graph 1 gives us a good overview of the shareholder base of Facebook. While it is not unusual for companies that only recently became public to have a low percentage of their shares owned by institutions, it is certainly unheard of for a company recently valued at $100 billion. Insiders represent more than a third of the investor base so it would be fair to assume that employees and executives will be committed to growing the company and enhancing long-term shareholder returns.

Graph 1: Ownership Summary

40%

6% Institutions Corporations (Public) Corporations (Private) Individuals/Insiders VC/PE Firms (>5% stake) 15% 36% Public and Other

3% 0%

Not only is the institutional group of investors small but it is comprised at 72% by VC and PE firms as well as Hedge funds (see Graph 2). In aggregate, Venture Capital firms, Private Equity firms and Hedge Funds control 17.4% of the company. These categories of investors tend to be more invested in the decision making of companies and while they usually have a long-term investment horizon, they can become very vocal if they disagree with the company‟s strategy. We view this as a good thing and will ensure that long-term growth is the priority.

Graph 2: Institutional Ownership Details

VC/PE Firms (<5% stake)

Traditional Investment 61% 15% Managers Banks/Investment Banks

Hedge Fund Managers (<5% stake) 12% Charitable Foundations

Family Offices/Trusts 0% 11% 0% 1% Finally, it is quite comforting to see that three key individuals own a total of 30% of the shares outstanding (see Graph 3). These three persons are very unlikely to sell a large portion of their holdings so it will somewhat soften the gradual supply increase that will result from the release of shares by once private investors (i.e. employees and some large shareholders).

Graph 3: Top Holders

Zuckerberg, Mark

60% Accel Management Co, Inc. Moskovitz, Dustin

21% DST Global

Parker, Sean N. 6% 3% 4% 6% Other

Before the IPO the investment community as well as regulatory bodies seemed to agree that Facebook was already trading like a public company due to the high level of trading on private exchanges and the diversity of its shareholder base. However, now that it has officially become a public company listed on the NASDAQ, it is fair to say that compared to most large publicly traded companies, Facebook appears very privately owned with 53% of its shares in the hands of insiders, VC and PE firms, and hedge funds. Overall, we are very pleased with the ownership structure of the company. We are confident that employees and executives will focus their energy on enhancing the long-term value of the company and that investors will provide support rather than merely collect quarterly dividends.

Appendix B: Board & Committees

BOARD OF DIRECTORS Name Position(s) Status Positive for the board Negative for the board The board is unlikely to go Founder, Chairman He is really at the helm of his company and wants to keep against him and propose Mark Zuckerberg of the Board and Insider the board on his side changes without his prior CEO consent Diversity of opinion as she is the only female director; Being the COO of the company she will be able to familiarize the board with current operations and internal issues that may arise; She is on the board of other fast Chief Operating Sheryl K. Sandberg Insider growing companies such as ; She has lots of Officer and Director experience working with not-for-profit organizations and worked on several projects to help underdeveloped countries so she might be more willing to listen to stakeholders other than shareholders and employees.

He has a lot of experience in the investment industry and is Director and on the board of Morgan Stanley. His ties with MS strongly Erskine B. Bowles Chairman of Audit Independent indicate that FB will continue to work with MS for its Committee corporate financing needs and secondary IPOs. Director and Chairman of He has a lot of experience in the investment industry and James W. Breyer Independent Compensation deep knowledge of the technology industry. Committee Lead Director, Chairman of He made his career at the Washington Post and has strong Governance ties with other publishing companies such as Newsweek and Donald E. Graham Committee and Independent Kaplan. Hopefully, he will give help in dealing with the Member of media Compensation Committee Director, Member of He has lots of experience with technology companies. He co- Audit Committee founded Netscape Communications and was the CTO of AOL Marc L. Andreessen and Member of Independent for a few months; He also has a lot of experience in the Governance investment industry, being a co-founder of Andreessen Committee Horowitz Member of Advisory He has experience in the investment industry and the Ronald C. Conway Independent Board technology industry. He has lots of experience with technology companies as he Director and is the founder and CEO of Netflix and on the board of Member of Microsoft. This might be a sign that FB and Netflix will Independent Governance create some corporate partnership in which FB will become Committee a selling platform to Netflix. That would be, in my opinion, a very interesting and promising development for FB Director and He co-founded PayPal and was its CEO and Chairman until Peter Andreas Thiel Member of Audit Insider its acquisition by EBay in 2002. He has a lot of experience in Committee the investment industry

In summary, the board is a very pragmatic one, in which financial expertise is prevalent. Most of the board members were either successful entrepreneurs in the technology industry or have been on the board of technology companies. There is no doubt that they will be able to monitor effectively the financial performance of the company and will be focused on investors‟ well being. However, with Mark Zuckerberg as Chairman of the company, it is highly unlikely that the board will go against him and offer alternative strategies for the development of Facebook. Having only one female director is somewhat disappointing and actually created a short-lived controversy around the IPO time. It is well-known that companies with diverse boards outperform companies with male only boards over the long-term. The fact that she is one of the most senior executive within FB means that she will nevertheless have a strong influence on decision making, which is a positive. Finally, the board members all have similar qualities, mainly financial expertise, so the board severely lacks diversity in that respect. There is no director with experience in risk management, which is a source of concern given the extremely high expectations placed on Facebook by investors.

Below is a description of the different committees put in place by the board of directors. Once again, we deem that the absence of a risk committee is a major setback given the scrutiny the company faces and the recurrent privacy issues threatening the reputation of Facebook.

Audit Committee:

Erskine B. Bowles: Independent Director and Chairman of Audit Committee Marc L. Andreessen: Independent Director, Member of Audit Committee and Member of Governance Committee Peter Andreas Thiel: Independent Director and Member of Audit Committee

Compensation Committee:

James W. Breyer: Independent Director and Chairman of Compensation Committee Donald E. Graham: Lead Independent Director, Chairman of Governance Committee and Member of Compensation Committee

Corporate Governance Committee:

Donald E. Graham: Lead Independent Director, Chairman of Governance Committee and Member of Compensation Committee Marc L. Andreessen: Independent Director, Member of Audit Committee and Member of Governance Committee Reed Hastings: Director and Member of Governance Committee

Appendix C: Key Executives

Mark Zuckerberg Mark Zuckerberg is the Founder of Facebook, Inc. and has been its Chief Executive Officer since July 2004. Mr. Zuckerberg is responsible for setting the overall direction and product strategy of Facebook, Inc. He leads the design of Facebook's service and development of its core technology and infrastructure. Mr. Zuckerberg has been the Chairman of Facebook, Inc. since January 2012 and has been its Director since July 2004. He serves as a Member of the Investment Committee at fbFund, L.P. He attended Harvard University.

Sheryl K. Sandberg Sheryl K. Sandberg has been the Chief Operating Officer of Facebook, Inc. since March 2008. Ms. Sandberg is responsible for helping Facebook scale its operations and expand its presence globally and also managed sales, marketing, business development, human resources, public policy, privacy and communications. She served as Vice President of Global Online Sales & Operations of Google Inc., from November 2001 to March 2008. She was responsible for online sales of Google's advertising and publishing products. She joined Google Inc. in 2001. She was also responsible for sales operations for Google's consumer products and Google Book Search. Prior to Google, Ms. Sandberg served as the Chief of Staff for the United States Treasury Department, where she helped lead its work on forgiving debt in the developing world. Before that, she served as a Management Consultant with McKinsey & Company and as an Economist with The World Bank, where she worked on eradicating leprosy in India. She has been a Director of Facebook, Inc. since June 25, 2012. She has been an Independent Director of Walt Disney Co. since December 2009. Ms. Sandberg served as Director of The Advertising Council Inc. She served as a Director of Starbucks Corp. from March 2009 to March 21, 2012. She served as Director of eHealth, Inc. from May 2006 to December 17, 2008. She is a Director at One Campaign and Leadership Public Schools. She is Director of Google.org/the Google Foundation and directs the Google Grants program. She serves on a number of nonprofit boards including The Brookings Institution, The AdCouncil, Women for Women International, and V-Day. In 2008, Ms. Sandberg was named as one of the "50 Most Powerful Women in Business" by Fortune and one of the "50 Women to Watch" by The Wall Street Journal. Ms. Sandberg received a B.A. in Economics from Harvard University and was awarded the John H. Williams Prize as the top graduating student in Economics. She was a Baker and Ford Scholar at Harvard Business School, where she earned an MBA with highest distinction.

David A. Ebersman David A. Ebersman has been the Chief Financial Officer of Facebook Inc. since September 2009. Mr. Ebersman oversees Facebook's finance, accounting, investor relations and real estate functions. Prior to joining Facebook, he served as Chief Financial Officer of Genentech Inc., from March 5, 2005 to April 2009 and its Executive Vice President from January 2006 to April 2009. Mr. Ebersman also served as Senior Vice President of Finance at Genentech Inc. from January 5, 2005 to March 2005 and as Senior Vice President of Product Operations from May 2001 to January 4, 2005. He joined Genentech in February 1994 as a Business Development Analyst and served as its Senior Director of Product Development from March 1998 to February 1999, as Vice President of Product Development from February 1999 to May 2001, as Manager of Business Development from February 1995 to February 1996 and as its Director of Business Development from February 1996 to March 1998. Prior to Genentech, he served as a Research Analyst at Oppenheimer & Co. Inc., Research Division. He has been a Director of Castlight Health, Inc. since July 14, 2011. He has been a Director of Intarcia Therapeutics, Inc. since July 2004 and Ironwood Pharmaceuticals Inc. since July 2009. He is a fellow in the Henry Crown Fellowship Program. Mr. Ebersman holds an A.B. in Economics and International Relations from Brown University.

Christopher Cox Christopher Cox is currently employed at Facebook, Inc. in the position of Vice President of Product. He is responsible for organizing Facebook‟s product strategy and overseeing the product management and design functions. Christopher joined Facebook in 2005 as a Software Engineer and was instrumental in implementing first versions of key Facebook features, including News Feed and Inbox. He then became Director of Human Resources where he drove the development of Facebook‟s mission, values, and people strategy. Christopher holds a bachelor‟s degree in symbolic systems with a concentration in artificial intelligence from .

Erin Egan Erin Egan serves as Chief Privacy Officer of Policy and Director of Privacy at Facebook, Inc. He previously worked as Partner and Co-Chairman of Covington & Burling's global privacy and data security practice.

Michael Richter Michael Richter serves as Chief Privacy Officer of Products at Facebook, Inc. and served as its Lead Privacy Counsel.

Erick Tseng Erick N. Tseng serves as the Head of Mobile of Facebook Inc. Mr. Tseng serves as General Product and Mobile Strategy Adviser at HealthTap, Inc. Erick Tseng advises HealthTap on product management and mobile issues. Erick Tseng served as the lead Product Manager for Mobile Search and the Lead Product Manager for Android at Google, where he also helped launch the open source mobile operating system. Before joining Google, Erick Tseng served as an Associate at McKinsey & Company and held product management and engineering positions at Microsoft, Yahoo!, and the MIT Media Lab. Erick Tseng serves as a Director of Epocrates, Inc. Mr. Tseng received B.S. and M.S. degrees in Computer Science & Electrical Engineering.

Jeffrey Rothschild Jeffrey Rothschild, Jeff serves as the Vice President of Technology at Facebook Inc. Mr. Rothschild served as the Chief Technology Officer at Mendocino Software, Inc. He is a Entrepreneur-in-Residence at Accel Management Co, Inc. Mr. Rothschild joined Accel Partners in 1994 and works in the firm‟s Palo Alto office. He is a part of Venture Development team at the firm. Mr. Rothschild has been active in the areas of storage management, system software, and networking since 1979. In 1995, he co-founded Mpath Interactive, now Hearme, where Mr. Rothschild was a Vice President of Engineering. After returning to the United States, he co- founded Veritas Software Corp. and helped establish it as the leader in storage management software. Mr. Rothschild's role at Veritas included product strategy, sales, and marketing. In the mid-80s, he moved to the Netherlands where he spent three years with Philips Data Systems. He was employed by Intel Corporation and Koninklijke Philips Electronics NV Previously, Mr. Rothschild created a successful consultancy focusing on network storage systems, and developed a number of successful storage networking products, including the DOS redirector for PC-NFS, which was licensed to Sun Microsystems. His career started as an Engineer where Mr. Rothschild worked on operating systems and mainframe storage systems at Honeywell and Intel. He served as a Member of Advisory Board of Terracotta Inc. Mr. Rothschild holds an M.S. in Computer Science and a B.S. in Psychology, both from Vanderbilt University.

Rebecca Van Dyck Rebecca Van Dyck, Rebecca has been Head of Global Marketing of Facebook, Inc since February 07, 2012. Ms. Van Dyck served as Global Chief Marketing Officer of Levi's(R) Brand at Levi Strauss & Co. since March 2, 2011, where she oversaw Levi's global Go Forth campaign. She was responsible for the development and implementation of fully integrated marketing strategies across all of the Levi's(R) brand's product categories and consumer communication channels. She had spent just 10 months at Levi's. Ms. Van Dyck joined Levi Strauss & Co from Apple, Inc. where she led the worldwide marketing and communications strategies for some of the world's most well-known and admired product launches, including introducing the iPhone, iPad and iPod + iTunes. Ms. Van Dyck has 20 years of marketing and advertising experience to the Levi's(R) brand. Prior to serving as Senior Director of Worldwide Marketing and Communications for Apple, Ms. Van Dyck was a primary architect of Nike's "Just Do It" campaign. During her tenure as Nike's Global Account Director at Wieden + Kennedy, she managed the Nike account across three continents and led Nike's Global World Cup and Olympic Campaigns. Ms. Van Dyck has also held a series of international appointments including founding Wieden + Kennedy's Melbourne office.

Lori Goler Lori Goler serves as Vice President of Human Resources and Recruiting at Facebook, Inc. Ms. Goler is responsible for all aspects of Facebook‟s people strategy including growing, developing and retaining the Facebook team. She has more than 15 years of experience in the management of consumer and retail businesses. She joined Facebook following five years at eBay, where she led consumer marketing with responsibility for marketing strategy, brand management, advertising, and consumer promotions. She served as Senior Director of eBay. At eBay, she served as General Manager of the eBay Stores business. She served as Vice-President and General Manager of Babystyle.com. She was a founding member of the executive team at babystyle.com where she led operations and merchandising. In that role, she led the roll-out of babystyle.com which became a leading online retailer in the category. She started her career at The Walt Disney Company focused on strategy and business planning for the consumer products businesses. She served as a Senior Director of ProStores, Inc. She holds a BA from Yale University, a master‟s degree in business administration from Harvard Business School and a master‟s degree in public policy from the Kennedy School of Government.

David B. Fischer David B. Fischer serves as Vice President of Marketing and Business Partnerships at Facebook, Inc. Mr. Fischer joined Facebook in April 2010. From July 2002 to March 2010, Mr. Fischer served in various positions at Google, including Vice President, Global Online Sales & Operations. Mr. Fischer was responsible for the online sales channel and operations of Google's advertising program in North America. He was also responsible for the operations of Google Checkout, an online payment service. In addition, he opened and oversaw several Google offices, including the India Online Sales & Operations centers in Hyderabad and Delhi, and the Ann Arbor, Michigan office. He served as Vice President of Online sales at Google Inc. Prior to joining Google, he served as Deputy Chief at Staff of the U.S. Treasury Department, where he was an Advisor to the Secretary of the Treasury and worked on a variety of economic policy issues. Mr. Fischer was an Associate Editor at U.S. News & World Report, LP covering economics and business from Washington, D.C. In the early 1990s, he was a Consultant in Moscow working on the implementation of Russia's privatization program. He serves as Executive Director of Softtechnet.com plc. He serves as a Director of The Advertising Council, Inc. Mr. Fischer holds a B.A. in government from Cornell University and an M.B.A. from the Stanford University Graduate School of Business.

Source: Company reports and Capital IQ

Appendix D: Zuckerberg’s Circle of Advisors

Source: Bloomberg Businessweek