Advertising on social media
RICHARD REED: ANIMAL SPIRITS
There is only one winner when start-ups advertise on Facebook
I think about Mark Zuckerberg every single day. Not in a bromance sort of way. Although anyone who makes billions while wearing a hoodie to work is my kind of guy. No, it is more because every day at Jam Jar, our angel investing fund that backs UK entrepreneurs, we sit through pitch after pitch, for every conceivable type of start-up, from dog food to posh watches, and everyone — and I do mean literally everyone — is selling their equity and raising millions and millions of pounds seemingly for one reason — to pay for ads on Facebook.
It is a phenomenon so consistent across the companies we see, the money being raised is so big and the faith in the strategy so absolute, that at the end of every pitch, we are always left with the same conclusion: we should just buy shares in Facebook.
What is particularly economically mind bending is that plenty of businesses still spend their money on Facebook ads even when those businesses have categorically, algorithmically, beta-testedly proven that they lose money when they do so. We know of businesses spending £400 on Facebook to sell something that makes them £200. That is minus £200 on every sale. But they can keep doing it because they complete on yet another investment round from a “don’t worry about profit, just concentrate on creating a tribe” fund, and raise £10m, all of which goes to Mark in the click of an eyeball.
Now, obviously, there are times when it all makes sense. If the “lifetime value” of a consumer means they will buy another 1.8 times before they get bored, forget, lose their credit card, get made redundant, die etc, then the numbers begin to stack up. And some brands clearly do well from the trade, but it is also true that others do not. After all, both Donald Trump and Hillary Clinton poured money into Facebook, but I bet Trump is happier with his return on investment. Of course, what is really the stuff of genius is that the ultimate winner, every single time, is Zuckerberg.
Facebook’s business model is also an economic illustration of the infallibility of the human species, in that when businesses raise more money to spend on more Facebook ads, their competitors have to do the same, and therefore the demand for the ads increases, and in return the price of ads goes up. It’s double genius. And then the businesses dutifully raise more money to pay for the ads. And it goes round and round, with the whole global investment community increasingly intent on pressure-hosing money into Zuckerberg’s face.
Now, I’d be the first to acknowledge that Mark is one hell of an ad sales guy; no one in the history of humankind has proved more gifted at shifting advertising space than this dude. But is that a good enough reason to increasingly give him all the money in the known universe? He’s now at No 5 on the list of richest people in the world (all white men, by the way #justsaying), and closing in fast. Plus, Zuckerberg is more than 30 years younger than all of them. By the time he’s as old as Warren Buffett, he will actually own the world. And your brain. Probably your retinas, too.
But the real ring-dinger is that you can’t actually tell if the ads that everyone has paid for are even there. You don’t get to see them. If you buy a poster, you can go check it exists. If you buy a Facebook ad, the main proof that it appeared on someone else’s site is Facebook saying it did. Because Facebook is audited only by Facebook. Now I am not implying foul play. I suspect Zuckerberg is as honest as the day is long, which we need him to be, given the power and the ubiquity of his business. But the thing I am most jealous of, and let’s face it, I am completely envious of the insanely successful machine he has created, is that when Facebook does place an extra ad on a page, it doesn’t actually cost any more to do so. The product has virtually a zero marginal cost. In comparison, when we sell an extra smoothie we have to buy more blueberries, crush them into a bottle and get it to the shops. Major faff. It’s why Facebook will become the most valuable company in the world and win out against Amazon and Apple and all those other loser companies that actually have to make and deliver a physical product, which is just so last century.
So Mark, I know this is stating the obvious, but you are a once-in-an-eon genius and you are going to end up No 1 on that list of rich white men. And I witness daily just how dedicated everyone in the investing community here in the UK seems to be to help you get here. So when you are top of the pile, when Buffett and Jeff Bezos work for you, and when you are President of the United Facebook TM States of America, with your 2bn-plus voters, please remember and be kind to us lesser entrepreneurs and investors, who helped syphon off money from all those family offices and pension funds and placed our unquestioning faith in Facebook. And if you, dear reader, are going to take only one thing from this article, it should be this: buy some shares in Facebook.
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