What Does Facebook Need to Do to Live Up to its $15 Billion Valuation?

There’s a large and predictable amount of skepticism around the announcement yesterday that Microsoft’s investment in Facebook values the burgeoning social utility at $15 billion. Most people thought that $10 billion was absurd enough. Lee Lorenzen of Altura Ventures seems to think that Facebook is actually worth $100 billion.

As enthused as I am about Facebook — remember, I convinced my boss to do a Facebook conference — I’m tentatively weighing in on the side of the skeptics. Facebook in its current form is not worth even $10 billion, let along $15. But it does have potential that may make Lorenzen’s valuation look reasonable.

That potential revolves in part around feature revisions that will accomplish two key business goals for Facebook: (1) keep the growing user base daily and active, and (2) improve the click through rate on their advertising.

In order to keep more people active on Facebook for longer, it will have to add social context to enhance features that already exist elsewhere on the Web: namely search and shopping. And if Facebook is really smart, they’ll create a shopping infrastructure within the site. As my father always used to tell me, “Teresa, you always want to be where money changes hands.” Incidentally, the e-commerce angle is the crux of Lorenzen’s $100 billion argument.

The clickthrough rate problem is trickier, but even more essential. I still think that making FB into a Pandora for advertising is the right way to go. To a significant degree, advertisers are still relying on the shotgun model of outreach on Facebook. They pick a target demographic and have Facebook serve ads t0 all of them. That’s the reason I keep getting weight loss ads, even though I have no interest in losing weight. Advertisers assume that all women are unhappy with their bodies.

To fine tune that shotgun approach, Facebook should allow users to give feedback about which ads they do and don’t like and why. I should be able to click a link that says, “why am I seeing this ad?” Ideally, a window would then pop up to tell me why the ad was being served to me. It would provide me with a series of check boxes to say whether or not I like the ad and why.

Facebook should also keep track of who clicks on what ads. That way, even if I never tell them that weight loss ads do not interest me, they’ll be able to tell when I don’t click on weight loss ads. And when I do click on an ad — like the one below — they should serve me more ads like it:

Obviously, the New York Observer wanted to target this ad at people who say they love HBO’s Sex and the City. It’s a lot smarter than targeting the ad at women between the ages of 18 and 45. This is the kind of ad that I click on.

If Facebook can add sufficient value to search and shopping, and tailor its advertising more closely to user needs, I think we may one day look at that $15 billion valuation as the smartest move that Microsoft ever made. Whether or not that potential will be fulfilled remains to be seen.

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