Facebook's Land Grab in the Face of a Downturn

As gloom descends on Silicon Valley, most startups and giants are growing cautious and cutting back. But not Facebook. The social-networking Web site sees a bleak economy as all the more reason to press ahead with aggressive plans for growth. "This is not the time for tech companies to be cutting back; this is the time to be hitting the accelerator," says Peter Thiel, a Facebook board member and investor.

Facebook executives think they can use the economic downturn to gain ground on the competition. So they're going to great lengths to keep user growth on track in these rough times. The company is gearing up for more acquisitions, hiring rapidly, and rolling out new advertising programs. Rather than trim the site's development costs, Facebook has engineers cooking up versions in languages such as Xhosa, Tagalog, and French Canadian to go after niche audiences around the world. "We're in this game not just for five or 10 years," says Sheryl Sandberg, Facebook's chief operating officer. "We're in it for 20 to 30 years."

To fuel growth, the company asked the Securities & Exchange Commission earlier this year for an unusual exemption. Typically, private companies that exceed 500 shareholders must start disclosing their financial results publicly. (This is the law that helped push Google to go public in 2004.) Facebook is approaching that threshold, so the company asked the SEC for a waiver that will allow it to keep hiring and handing out restricted stock without public disclosure. The SEC granted the request on Oct. 14. That will help the company reach 800 employees by the end of the year, up from 400 at the close of 2007.

The company is even reducing its revenue goals to pull in more users. In January, founder and CEO Mark Zuckerberg said Facebook was shooting for revenues of $300 million to $350 million this year. But this spring, Zuckerberg and his board lowered the revenue target to $250 million to $300 million, say sources familiar with company finances. Thiel says engineers were shifted away from ad programs to concentrate on fresh features, languages, and other projects that will boost user growth. Even as the economy has weakened in recent months, Facebook has decided to stick with its spend-now, profit-later approach. "We still think it's a land grab where we have to try to get to scale first," says Thiel.

It's a gutsy strategy, increasingly rare in Silicon Valley. Last month, prominent venture firm Sequoia Capital gave a presentation to its startups titled "R.I.P. Good Times," which argued that companies must cut costs fast to survive. One Power Point slide included a skull-and-crossbones and the words "death spiral" to show the likely fate of startups that fail to come to grips with the new reality. The Sequoia view has become accepted wisdom among Valley venture capitalists, leading to layoffs at scores of companies.

Facebook isn't yet profitable. But Thiel says the company can afford to be aggressive. It has raised about $500 million and is "slightly cash-flow negative," Thiel says. At its current burn rate, he says, the company has enough cash for three or four years. "If we stopped growing, we could make money, but it makes no sense for us to stop growing," he says.

Facebook's strategy stands in contrast to that of rival MySpace (NWS). Part of Rupert Murdoch's publicly traded News Corp. (NWS), MySpace has dialed back on growth to focus on profits. Over the past year the site has expanded modestly, to 118 million users, while Facebook has more than doubled in size, to 161 million users, according to research firm comScore (SCOR).