Thoughts on the Facebook IPO

Facebook: The IPO of the Century?

With Facebook set to likely make its IPO on May 17, there has been massive buzz and anticipation surrounding the potential impact and implications of possibly the most highly publicized IPO we’ve ever seen. Investors and speculators worldwide have argued back and forth about what this offering means for Facebook users, investors, founders and even average Joes.

Lets start with some background that investors and founders should surely already know, but users and Joes may not. Facebook will be doling out 337.4 million shares at between $28 and $35 per share; a strikingly low price that many feel is an attempt to generate more interest in Founder/CEO Mark Zuckerberg’s IPO road show going on this week across America. Of those 337.4 million shares, 180 million will come from Facebook Inc., 157.4 million will come from investors Accel Partners and Digital Sky Technologies, and Zuckerberg himself will offer up a generous 30.2 million of his existing 533.8 million shares.

For those who haven’t been keeping track, these numbers value Facebook at between $77bn and $96bn USD, a predictable valuation for a company with operating profits of $1.7bn on $3.7bn in revenue in 2011.

Why go Public?

Question: Why go public? If Facebook is enjoying such incredible monetary success so far, then why hand over partial control to public investors?

Answer: They aren’t. Well, at least Mr. Zuckerberg isn’t. Following suit with most of Silicon Valley (See: GOOG, AAPL), Zuckerberg is sticking with his dual class stock structure that gives him 10 votes for every other shareholders single ballot. It’s still his show. Does that bode well for buyers of the stock? We’ll see.

Concerns About Facebook’s Business Model

Mark Zuckerberg undoubtedly kicked the social media phenomenon into high gear with his 2004 introduction of Facebook Inc., but he himself says, “I wasn’t starting Facebook to be a business.” which is a major issue for many prospective investors, and probably strongly detracts from a more advertising-centric platform. The $96bn skepticism surrounding Facebook – besides privacy issues – has always been the ability to effectively (Again, See: GOOG) monetize the 900 million monthly users. I tend to agree with Rocket Lawyers’ Charley Moore’s outlook on the dual class structure, “the approach can backfire when founders lose their mojo and investors have less power to intervene.” Does Zuckerberg’s mojo include moneymaking skills to the tune of $96bn? I’m still on the fence about that one.

Three Strikes Against Facebook & Zuckerberg

Three things Zuckerberg has said in the past few days have drawn huge criticism from people aiming to include moneymaking as part of that mojo: “We’re going public for our employees and our investors. We made a commitment to them that when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and that’s what this IPO is doing.” Strike one. Public investors want investments that promise progress, not paydays for existing stakeholders.

Second, “We just want to make money so we can make better services.” From an investor’s standpoint, that’s backwards. Strike two. In addition, this might be the reason for low penetration rates in markets like Brazil (Less than 60%), and Russia, South Korea and Japan, which have all adopted at less than 20% to date. Perhaps the interface has become too complex to be ‘new user friendly’. As North Americans, the majority of us adopted between 2006 and 2008 when peripheral Facebook features were minimal (apps, ads, fb chat, timeline, etc.) and we have been able to learn these features as they have been introduced one-by-one. Not so for new adopters who are introduced to a platform aesthetically similar to the Vegas strip the first time they log in.

Finally, Facebook’s mission, “To make the world more open and connected” sounds great for business owners who set up free business listings and connect with users on an ongoing basis, but how does ‘the book’ get in and get their piece of that pie? I have no answer.

Enjoy the Show

Despite all the skepticism surrounding Mark Zuckerberg and the future of Facebook, no one can deny that Facebook has been the real deal, to date. It remains to be seen whether we are simply in a Facebook bubble that is about to burst, or if Facebook is going to make their IPO, get paid, and turn the corner towards a next level of revenue that the world hasn’t seen from social networking giants yet. Either way, sit back – on top of your wallet – grab some popcorn, and enjoy the show.