William D. Cohan
New York: By paying $19 billion in cash and stock for WhatsApp’s 55 employees — $345 million apiece — Facebook has crystallized why it’s been so difficult for the U.S. to climb out of the unemployment ditch dug by the 2008 financial crisis.
Hiring and nurturing lots of new employees is no longer a required, or even necessary, way to build a business in the Internet age, or to create wealth for owners, which, after all, is the reason businesses are started.
This is one of the reasons some members of the Federal Reserve’s policymaking committee have begun to back off their previous goal of considering raising interest rates once unemployment reaches 6.5 percent. (It now stands at 6.6 percent.)
To be sure, mine is an anecdotal theory, not an economic one, and I can certainly imagine Larry Summers rolling his eyes in disbelief. But it seems the Fed has painted itself into a corner now that the U.S. is about to reach the 6.5 percent threshold. Since the official jobless figure removes from the calculation people who have stopped looking for work, it doesn’t capture the millions who have dropped out of the labor force and therefore blurs the real picture of unemployment in America today.
I suspect an increasing number of those dropouts have given up because many new businesses, such as WhatsApp, can create huge value for their investors — Sequoia Capital reportedly will receive a return that is 50 times its $60 million investment in WhatsApp — without very many people.
WhatsApp isn’t alone. Facebook has a market value of about $181 billion and about 5,800 employees. That gives it an impressive value-to-employee, or VTE, ratio of $31 million.
Google, with a market value of about $410 billion and an employee count of about 54,000 (including 17,000 from its acquisition of Motorola’s handset business, which it just sold to Lenovo Group and so they may be going over there), has a value-to-employee ratio of $7.6 million ($11 million without the Motorola employees).
There is other evidence as well. Snapchat, which Facebook tried unsuccessfully to buy last year for $3 billion, supposedly has about 30 employees, giving it a VTE of $100 million. Given the renewed frenzy surrounding anything related to social media, Snapchat is even more valuable today than it was before (no doubt by rejecting Facebook’s offer). Instagram had 13 employees when Facebook bought it for $1 billion in 2012, giving it a VTE ratio of $77 million.
The funny thing is that even Twitter and Tumblr — next to WhatsApp and Snapchat, relative pikers with VTE ratios of about $15 million and $5 million, respectively — have created far more value per employee than some of the U.S.’s most august corporations. For instance, General Electric, with 305,000 employees and a market value of $252 billion, has a VTE of $826,000. JPMorgan Chase, with 255,000 employees and a market value of $217 billion, has a VTE of $850,000. Facebook’s $31 million VTE is off the charts by comparison.
Mr. Market’s message seems very clear: If you have a business that touches the Internet — wouldn’t that be nearly all of them these days? — far fewer employees can create a lot more value for shareholders. And don’t be fooled into thinking this message isn’t getting through to investors and management.
A few years ago, I interviewed David Karp, the chief executive officer of Tumblr. We first met in the Manhattan office of the incubator where Karp started the business. At that time, he had three employees in New York and three more in a Virginia office, plus some contract workers. By a later visit, he had moved the company to its current space on East 21st Street because Karp knew he needed room for more employees as the business grew. Still, he was highly focused on keeping the head count as low as possible. This was a mantra for him.
Karp even resisted his venture-capital backers, including Sequoia, Union Square Ventures and Spark Capital, which were urging him to hire the people he needed. “People hire at all different rates,” he told me. “We were very conservative. I was uncomfortable having a big team because I’ve never worked on a big team before. You absolutely needed the huge team to build eBay. You don’t need that anymore.”
When Karp sold Tumblr to Yahoo! in 2013 for $1.1 billion in cash, the company had 222 employees. Karp pocketed around $250 million. The two founders of WhatsApp, Jan Koum and Brian Acton, are walking away with about $8.5 billion and $3.8 billion, respectively, of Facebook’s money. And they did it with only 55 employees, most of them engineers.
There’s no mistaking that the world has changed and huge fortunes can be generated on the back of the Internet, not on the backs of workers, as was once the case. This fact is having a profound effect on what it means to be employed in America. It also complicates immeasurably the Fed’s plans for ending the morphine drip known as quantitative easing.
Cohan, author of the forthcoming The Price of Silence: The Duke Lacrosse Scandal, the Power of the Elite, and the Corruption of Our Great Universities, is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. He can emailed at email@example.com.