Wagcenter.com Snapchat CEO Evan Spiegel.

Will Facebook go the way of Yahoo? Snapchat CEO Evan Spiegel thinks so.

During the dot-com boom, Yahoo reached a $US128 billion market cap on massive, fast-growing advertising revenues. Then, when the bubble burst, Yahoo’s market cap shrank to less than $US10 billion.

The reason: The companies buying Yahoo’s ads weren’t traditional brand advertisers — the kinds of companies that bought TV and magazine ads. They were dot-coms themselves. They were paying inordinate sums to become Yahoo’s official partners in various sectors, from greeting cards to pet stores to travel.

The money they were spending on ads wasn’t coming from their own revenues, but from investments made by venture capitalists.

When the bubble burst and venture-capital funding dried up for startups, Yahoo’s source of revenues went away too.

In an email leaked in the recent Sony hack, Spiegel says he thinks a similar fate awaits Facebook.

He believes Facebook’s ad revenues are also overdependent on venture-backed startups buying traffic and users. Only instead of buying links on the Yahoo homepage, they’re buying app install ads.

Spiegel thinks that if venture-capital funding for startups dries up — and he believes it might, when the Fed stops printing money and inflating public tech stocks — Facebook will suddenly, and violently, shrink.

“Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance, especially app install advertisements,” he writes.

“This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded).

“VC dollars are being spent on user acquisition despite unknown [lifetime value] of users — a recipe for disaster.

“This props up Facebook’s share price and continues to justify VC investment in technology products based on abnormally large market cap companies (i.e., “If this company attracts just 5% of users that FB has, it will be HUGE” — fuels spend on user acquisition as user growth is tied to values).

“When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease — compounding problems for Facebook and driving stock even lower.”

Spiegel’s views on Facebook are unusually bearish. He doesn’t seem to appreciate how many traditional advertisers are switching their spending from TV, magazines, and billboards to Facebook. They are spending more than a billion dollars marketing on Facebook every quarter.

At Business Insider’s annual conference earlier this month, we asked a Target executive which she’d cut first: TV ad spending or Facebook spending. In an upset for Facebook, she said it would be a really hard choice. Ultimately, she said that TV is more important for establishing Target’s brand, but that Facebook is a crucial and big part of the company’s marketing mix. She said she’d cut spending everywhere else (except TV) before cutting Facebook.

It’s also important to understand the context around Spiegel’s email. He was sending a note to an investor in his company not long after he rejected a $US3 billion acquisition offer from Facebook. It was in his interest at the time to assure this investor that Snapchat had a better future as an independent company than it did inside Facebook.

All that said, it is true that Facebook is at least somewhat dependent on venture-capital-backed startups spending money to buy users who may not prove to become valuable customers in the long term. The Wall Street Journal’s Mike Shields reports that, generally, Facebook’s app-install ad customers are startups that make mobile games.

The problem for Facebook investors is that the company will not say how dependent it is on those types of ad buyers.

REUTERS/Adnan Abidi Sheryl Sandberg won’t say how dependent Facebook is on app install ads.

During Facebook’s last conference call with investors and analysts, COO Sheryl Sandberg was asked how dependent the company is on mobile app ads sold to “developers” — code for venture-backed app makers.

She said, “Our growth in mobile ads is very broad based. It’s across all market or segments, and it’s across all of our different ad formats, and we talk about our mobile ad business growing. Mobile app ads are a small part of that, that’s growing in line with our total business.

“The other thing that I think people get a little confused about is who is using mobile app ads,” she said. “I think commonly when you think about mobile app ads, people often think about developers, and developers are moving them, and we’re pleased we’re able to help them grow. But they’re also being used by some of the largest branders and marketers in the world.”

That’s a somewhat informative answer from Sandberg. She’s saying Facebook investors shouldn’t feel over-exposed to the venture-capital market. But it’s an incomplete answer. She should tell investors exactly how exposed they are. Facebook should, as soon as possible, begin to break out how much of its revenues are generated by app install ads.

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