Facebook flotation woes & investor disquiet

As you read this, Facebook’s share price is probably trading about almost 30% below the flotation price. A flotation price that was unfathomably high. Mark Zuckerberg’s (paper) net worth is probably down 4 billion dollars and his company, the world’s leading social media website and some of its advisors may well be facing lawsuits. What went wrong? Did the money cloud someone’s judgement ? And who loses? The tech industry, the effervescent finance business or simply, small investors?

Wired’s ‘Supersizing the IPO’ in the April edition presented an interesting chart of comparison

Company $ Raised Employees Revenue* Profit/Loss*
Netscape $207 million 257 $8 million ($16.5 million)
Google $1.5 billion 2,292 $1.8 billion $128.9 million
Facebook $5 billion 3,200 $3.7 billion $1 billion

*Revenue and Profilt/Loss in year preceeding IPO

Wired’s analysis of Facebook V Google V Netscape’s IPOs makes interesting reading; In terms of cash-requirement Netscape had to go to IPO, Google probably did, and Facebook probably didn’t. So why float? Was this simply a pay-day for the investors who’d (admittedly) bravely funded mark Zuckerberg’s burgeioning ambition a few years back? Venture capital investors take risks – and they sometimes encourage companies to sacrrifice profit for growth – growth is ther holy grail – growth=enhanced valuation.

For the VC companies who bet their cash, it’s all about growth and valuation. Facebook was overvalued at flotation time. The stories of who know what, and who was told what may even be played out in teh courts, but it illustrates that every IPO is not a sure-fire bet. When you get all the shares you asked for – you know something’s not quite right. Industry analsysts, I believe correctly, wonder about Facebook’s ability to grow; and if they don;t grow will profits grow? When 1 in 3 internet users in the world is already using a site – developing new markets becomes absolutely crucial. But, as in Facebook’s case, developing market share in culturally and commercially different territories is a challenge. That’s challenging enough, but when you can’t make enough revenue from the users you have, there is no panacea even in opening up new markets.

Facebook and analsysts express concern that they aren’t making enough revenue per user (ARPU:Avereage Revenue Per User), and this is primarily because more and more users are accessing Facebook from mobile devices, which is a challenging platform. But I think, as I’ve always thought about Facebook, that the genius of Facebook is in it as a platform: you can create pages or games or apps that interact with Facebook users and exisit within the Facebook ecosystem.

Apple have created the finest example of a user-centric ecosystem ever conceived. And Amazon are gathering pace behind them. Facebook needs to leverage their un-rivalled user-base and exploit the Facebook ecosystem for revenue. Companies like Zynga have done this successfully on the Facebook platform, but Facebook needs to innovate itself and create an attractive, rewarding eco-system for developers – and for consumers. Create a Facebook app that only works on Facebook, with rewards from advertisers and perhaps even cellular carriers. No-one eats (data) free. Remember that.

Amid the recriminations of the Facebook IPO hopefully we won’t see the public, and by public I mean small retail investors, losing faith in the technology industry as whole. IPOs have formed a fundamental part of the life-cycle of small-cap tech firms, and whilst ‘alternative markets’ likeSecondMarket and private sales are likely to become more populat with tech firms opting to forgo IPO and public scrutiny, the retail-investor shouldn’t be denied the opportunity to share in the development, growth and excitement technology investing.

  1. The Guardian: Facebook shares tumble
  2.  BBC Coverage of flotation concerns
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