fbFund - What does it really mean for Facebook?

So about a week ago Mark Hendrickson at Tech Crunch reported that Facebook (along with a number of high profile VCs) will be launching a $10 million fund for Facebook application developers. However, instead of investing in these applications and taking an equity stake, the fbFund will simply be giving cash "grants" to these budding entrepreneurs -- very similar to the cash grants many students receive while attending college.

So what is the fbFund?

Is this is an education fund for would be entrepreneurs -- the principle being to teach them to develop on the Facebook platform before deeming them worthy to conquer the rest of the web? Or is Zuckerbeg such a "good guy" that he just wants to throw money at ideas and see what sticks? I mean, it's a win-win for Facebook anyway - a tremendous amount of value gets added to their system each and every time an application gets developed. So they're just adding fuel to the fire that's burning within this hot mini-market of companies.

This must've thrown a bucket of cold water (no pun intended) on Bay Partner's idea to start a fund to do the exact same thing -- however, Bay Partners would be looking for equity right away while fbFund simply gets right of first refusal on any follow-on financing that takes place.

But is that the only benefit for Facebook?

Could these guys simply be looking to add incremental value to their product and possibly invest in some of these start-ups before anyone else can get their hands on them? That sounds possible - it seems like a sound business strategy...

But yours truly has a conspiracy theory hatching in his sick, twisted brain.

As some of you may or may not know, Facebook recently acquired web-OS company, Parakey. Parakey was founded by the same dynamic programming duo that built the oh-so-popular Firefox web browser.

And while most folks thought that the investors who put $2 million into Parakey walked away with a handsome reward of Facebook stock, that just wasn't the case. According to Arrington, it turns out Facebook paid only $4 million for the company - considering the previous round was done for just under $2 million, which probably had a much higher post-money valuation. In fact, I'd be surprised if investors made anything at all on this deal (read Mike's post to see his ideas on why investors even let the deal happen).

The founders of Parakey, however, walked away with a Facebook employment contract that included Facebook stock and options compensation agreements!

So it looks like these guys sold themselves AND their company...so even though Facebook came out of pocket for $4 million (not a large sum of money for this company), they in turn got two rock star developers.

Conspiracy Theory

Facebook isn't only looking to add value to their platform by encouraging people to develop great applications. Nor are they simply looking to invest in those companies down the road.

Facebook is looking for developers that know how to create very popular consumer software applications.

It's like a publisher being able to find an author like J.K. Rowling -- someone who already has a following and can consistently write list-topping best sellers over and over again.

Think about it: the relative cost for acquiring top talent is huge. By funding some of these companies for a comparatively small amount of money, Facebook sees some tremendous upside:

1. They add value to the Facebook community by making it easier for new applications to get launched.

2. They have the ability to invest directly in these applications as they become more successful and potentially move away from the FB platform.

3. They have the ability to acquire top talent after already seeing them in action (a HUGE cost savings along with a tremendous benefit).

So while I called this a "conspiracy", it's more of a very savvy business move on their part.

Go Facebook!