As Facebook has swelled to around 800 million users, it has become one of the most valuable privately held tech companies.
With each successive round of funding it raises, its valuation has spiked accordingly. Despite having received numerous buy-out offers in its early years it is now too large for any single group of investors or company to purchase. This has spurred all kinds of speculation as to whether Facebook will finally IPO, and when this may take place.
The monstrous 1.5 billion dollar round from Goldman Sachs raised in the beginning of the year only added to the speculation. U.S. Securities and Exchange Commission (SEC) rules dictate that any company with more than 500 investors are required to file quarterly public earnings reports. Though companies can stay private while filing these reports, there is little incentive not to take advantage of the opportunity to raise new capital in the face of added public scrutiny and the added trouble of financial reporting. It was under similar circumstances that Google decided to IPO.
Facebook is expecting to cross the 500 investor threshold and is now targeting to IPO sometime in the second quarter of 2012. They are looking to raise approximately $10 billion at a valuation of around $100 billion. This would make Facebook the largest tech IPO in history, placing it high on the list of the top 10 most expensive IPOs ever.
What is the reasoning behind such actions? It can’t simply be the SEC rules regarding the number of investors, as Legislation introduced to the House is already moving along to increase the investor limit from 500 to 2000.
Why go public?
Why open up to the pressure from shareholders to constantly increase revenue? Facebook is a company built by engineers, as such the product was at the center of everything they did. In order to maintain the innovation and advancement Facebook is known for, it requires talented programmers. Companies in Silicon Valley are known for ruthlessly poaching talent from one another. Fat salaries only go so far when it comes to recruiting and retaining employees, especially when you’re battling the likes of Google, Twitter, Dropbox, and a handful of other hot startups. That’s where stock options come in. Having a vested interest in a company is a lot more valuable than the immediate paycheque alone.
Recently, Facebook enforced rules preventing employees from liquidating their share until the company goes public. Therefore, going public may very well be a strategy to reward early key employees and investors. Also, Facebook is no longer growing at the rate of a hot new startup. Having tradable stock may prove very beneficial in attracting new talent and retaining existing talent. In an interview with Charlie Rose, Mark Zuckerberg briefly talked about the looming IPO.
He told Rose:
“We’ve made this implicit promise to our investors and to our employees with equity…at some point we’re going to make that equity worth something publicly.”
In fact, it is expected that a Facebook IPO could create upwards of a 1000 new millionaires with a substantial and liquid reward for those investors and employees. Many of these newly made millionaires are likely to venture off and fund their own startups. Others may even start funding other startups, similar to many of the original PayPal founders and employees who were credited for kicking off web 2.0 by funding numerous startups. Interestingly, Peter Theil (co-founder of Paypal) made the first major angel investment into Facebook in 2004, when it was really taking off. Facebook is sure to add to the innovative ecosystem of new startups around the Valley and the extended startup world.
It is clear that many people associated with Facebook will benefit greatly from the IPO. Facebook itself is also likely to benefit from such a large influx of capital. There is no doubt Facebook will now have the ability to substantially increase hiring, allowing them to focus greater resources on new projects and existing product development; perhaps we will finally see the much-rumored Facebook phone. The newfound cash could also enable Facebook to go on a shopping spree, buying new, small and medium sized startups. Facebook, unlike most companies its size, has been very conservative in its acquisitions. Most of the acquisitions are for a startup’s talent rather than the product, often abandoning the acquired company’s product shortly after acquisition. Now Facebook may finally devote more time and resources into fully exploring the potential of the acquired product, not just the talent alone.
Facebook has always been a product-centered company. An effective revenue model has been secondary to product development, and positive user experience. Screen real estate for advertisement is used sparingly in an effort to enhance, not take away from the end-user experience. The question remains whether the company will maintain true to that vision when they have a new responsibility to shareholders, as well as the added scrutiny of their every move. They have leveraged the social-graph to introduce new features and continue to innovate. Short sided stockholders could very well pressure Facebook into exploiting the social-graph for more aggressive and immediate monetization.
Will Facebook Unfriend Mark?
Until now Mark Zuckerberg has been careful to retain control over the important decisions, such as new product implementation. His vision for new features has consistently been forward thinking, and new features have typically been implemented well in advance of what users have been ready for. The long-term implications of new features and products are considered looking years ahead. Features such as the news feed, and soon to be, the new time line were greeted with mass resistance from the user community only to become accepted and loved over time. It is possible that stockholder influence could force the company to abandon new features in the face of short-term user uproar and resistance.
Companies like Apple are expected to break revenue records quarter after quarter. When they don’t, their stock price is punished by investors. Facebook will likely face similar repercussions if they fail to meet shareholder expectations. This could possibly force the company to make many decisions based on its stock price and revenue. This is likely to hinder innovation and introduce a level of bureaucracy seen in larger companies, possibly causing Facebook to lose the small, private company edge it is known for. The ability to make quick decisions, innovate and react rapidly may be lost. Mark needs to keep an eye on this threat.
Advertisement Jamboree ?
Just this week Facebook announced that they will be featuring “sponsored stories” in the News Feed. Until now sponsored stories were limited to the side ad bar where they were less noticeable. The social nature of the sponsored story had always made them more valuable for advertisers. Ads appearing with our actual friends’ activities make the ads immensely more valuable to advertisers. The biggest benefit to advertisers is that the sponsored stories will be presented like regular social friend content, and users will not have the ability to opt-out of seeing them.
It is clear that Facebook is already favouring advertisers and increased revenue over their general user experience; however, this is not necessarily a downfall of the company. The stock prices of recently IPO’d tech companies such as LinkedIn and Groupon have taken hits, but these companies are not Facebook. They do not have the popularity of 800+ million users; they likely don’t have anywhere close to the same revenue; and they are definitely not as in demand with investors. As such there is no precedence to measure Facebook against. Never has such a large social media gone public.
One thing is clear though, Facebook needs to mind the balance between increasing revenue while continuing to innovate; a balance between shareholders and what’s made the company such a success – its users.