What Does the Facebook/Goldman Sachs Deal Mean in the Big Picture?

BRADENTON -- This week, there was much buzz about a complicated investment deal in which Goldman Sachs investors sort of pumped $50 billion into Facebook. I say sort of, because legally, it remains unclear if Goldman invested in the company, or the long list of their preferred clients did. This was no accident. Despite plenty of investor interest, Facebook has long resisted the temptation to cross the threshold of 500 investors that would force them to report financials, much in the same way a publicly traded company would.

That's where Goldman Sachs comes in. This might sound familiar. The Wall Street titans with deep ties to Washington engineered an investment product that seeks to pool those wealthy investors under the umbrella of a single investor – Goldman – hoping they will have allowed the social networking company with a $500 billion valuation escape government scrutiny, while allowing their clients something they'd long wanted, but was unavailable – getting in on what many perceive as a sure thing: Facebook stock.

Goldman, which raised over $450 million for Facebook, plans to raise more than three times that in total. That would put the investment giant in prime position to handle the company's lucrative IPO when it does happen, while making a handsome fortune in fees in the interim. Though Goldman has obviously found plenty of interest from those with the available cash to pony up the $2 million minimum, many experts are questioning Goldman's $50 billion valuation.

One reason is Facebook's tight-lipped approach to its numbers, especially since Russian Giant DST was able to get in at a $10 billion valuation in mid-2009. Their user numbers have doubled since, but at an estimated $4 annual revenue per user, it is hard to understand how such slim margins would cause value to quintuple when users double. Plus, the available shares indicate that a good chunk of investors (who one would think are more in the know then outsiders) are willing to cash out sizable investments in something thought of as a sure thing when it goes public. One has to ask – why are they getting out.

On the other end of the spectrum, such investments could be a troubling indication of things to come in terms of the way hot company stocks are traded. If companies are allowed to raise hundreds of millions in capital without reporting numbers or undergoing an IPO, are more companies going to go this route? If so, what does this mean to the average investor without $2 million in investable assets lying around or the $10 million to become a private client with someone like Goldman Sachs to being with? The massive profits of trading such stocks might be absorbed by such institutional investors long before the IPO, relegating normal investors to guessing on the one in a million long-shots if they seek such returns, while the more sound bets would be reserved for the privileged few.