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Facebook’s $5 Billion IPO: The Next Google? Or The Next Groupon?

Facebook filed the prospectus for its initial public offering on Wednesday morning. Above, CEO Mark Zuckerberg at a 2011 event in San Francisco. Photo: Jon Snyder/

Facebook is finally going public.

On Wednesday, Facebook filed the prospectus for its initial public offering. The social giant seeks to raise $5 billion in initial funding. That’s in line with some of the largest IPOs in technology history, and it comes eight years after the company was first launched in the Harvard dorm room of CEO Mark Zuckerberg. According to the company’s IPO filing, in 2011, it recorded revenue of $3.7 billion, operating income of $1.75 billion, and net income of $1 billion. While the company’s S-1 filing does not list how much shares will cost upon the date of the IPO, Facebook’s most recent estimate as of December 31 puts the per share price at $29.73.

Given Facebook’s size and popularity — the social network has over 845 million members worldwide — eight years is actually quite a long time. Over that period, Facebook had unprecedented access to capital, and on sites like SharesPost and SecondMarket, pre-IPO prospectors have been able to purchase and trade shares in the company from employees and other early stakeholders. The company’s relative maturity means that most of the millions — or billions — that could be made from buying public shares have probably already been made.

This could mean Facebook’s IPO will meet a fate similar to that of this year’s other high-profile tech IPOs. Both Zynga and Groupon actually sank below their IPO share price — right out of the gate — a sign of failure on Wall Street. “The tech class of 2011 has underperformed,” said Paul Kedrosky, a prominent financial blogger and senior fellow at the Kauffman Foundation, in an interview. “Because of secondary markets, that post-IPO balance happened pre-IPO. My expectation is, Facebook will see a very similar phenomenon.

Regardless, the IPO will put cash in the pockets of the many paper millionaires surrounding the company, and it will inject a massive amount of capital into Facebook’s coffers. This capital will allow the company to invest more in its products and grow its revenue streams. But this comes with its own problems. In order to grow revenues, some analysts believe, Facebook must find a way to better target ads on its service. This means tapping the vast array of personal data it has collected about its users, which could easily raise the ire of both users and government regulators.

And fine-tuning its ads is crucial, given that it’s the company’s predominant revenue stream: Currently, advertising accounts for 84 percent of the company’s $3.7 billion in revenues.

What’s more, when the company is traded on public markets, it must be more transparent and more regularly disclose its finances and activities. Soon, all prospective investors — that is, everyone — will be privy to information the company has previously been reluctant to share beyond a close inner circle of early investors and friends.

The Facebook Paradox

Facebook is a paradox. Throughout its history, it has been both open and closed. It began as a closed social network for Harvard students, but within that closed network, it sought to push the boundaries of each user’s privacy. So much of Facebook’s culture — especially its boundary-challenging, generation-defining norms of sharing and privacy — stems from those early days as a place where Harvard students could meet, socialize, and share (often embarrassing) photos of each other.

The irony is that there were fierce fights about whether to open the network to students from other colleges. Facebook eventually opened the service not only to other colleges, but to the world at large, and it gradually changed the service’s default privacy settings so that more and more data was shared among its members. But at the same time, it has consistently sought to extend the sense of comfort that comes from a private network.

The company’s funding process has followed a similar trajectory. After early investments by elites like Sean Parker and Accel Partners’ Peter Thiel, the fledgling company opened itself up to an “Ivy League” of investors. This includes institutional investors and partners like Microsoft, but also a cleverly brokered deal from Goldman Sachs that allowed both the investment bank and its private clients to buy over $2 billion in Facebook stock at a $50 billion valuation.

Now, it’s going completely public. And this will force the company to seek new revenue. As it does so, it will have to make use of all that data openly shared by its members. But as usual, it must also ensure that it doesn’t push the boundaries too far.

Are You Just Yahoo In Disguise?

As it stands, many advertisers love Facebook. The attraction is that it’s less expensive and resource-intensive than traditional kinds of advertising. This makes it especially useful to small- and medium-sized businesses, who often don’t have the resources to produce a television commercial or magazine ad.

Even a powerhouse like Proctor & Gamble — which traditionally has a large marketing budget — is betting big on Facebook to help hold costs down. P&G is operating under the assumption that it can repeat its viral Old Spice hit, which generated 1.8 billion free impressions.

But what if P&G and other companies aren’t so lucky again? “We’re hearing from our clients that their return on investment from Facebook ads doesn’t look anything nearly like what it does for TV, print and radio ads, or from Google advertising,” said Forrester analyst Nate Elliott.

“I don’t think this will be a problem in 2012…. But if marketers find in 2012 that Facebook ads still aren’t delivering, I would worry about how much they spend in 2013.”

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Showing 44 comments

  • Erin Blue 1 comment collapsed Collapse Expand
    Ultimately, I think they'll be a "Yahoo".  They're a bit one note and a generational fad.  Much of what they do that upper generations like is the ability to easily share photos.  Apple, Google, and Microsoft are already building those abilities into their basic products and services.

    Essentially, Facebook is a gap play.  A service that was easier to use than it's similar predecessors, but ultimately it's something that makes more sense in already existing products, like phones, tablets, email, media management systems, etc.  The space where Google/Droid, Apple, and Microsoft/Nokia reign.  Sony keeps missing that boat...

    All three of those companies are very carefully adding those features throughout their product lines.

    I think they'll have a slope up, and then a long slope down, as their service becomes an appendix - an additional icon on the tablet that really doesn't do much the OS doesn't already and doesn't integrate as nicely. look at how g+ is integrated with gmail (now) and droid. Google can do that because they control the integration points. Like Apple does on their platform, and MS does on theirs.
  • kuei12 8 comments collapsed Collapse Expand
    Facebook is gonna flop. People are leaving Facebook the same way they left Myspace. Facebook is nothing more than a cesspool of FBI agents and police.
  • BluBlue 1 comment collapsed Collapse Expand
    Well... realistically I don't think FB will crash and burn like MySpace anytime soon, but they definitely aren't going to be as popular as they were a few years ago.

    It's funny, if everybody put as little overall information about themselves as I do FB would be worth zilch. FB's advertising revenue comes from idiots who constantly are self absorbed and feel the need to share every modicum of information about themselves with everyone else who doesn't give a rats ass.

    Billions of dollars? I lol at those numbers--- there is no real value in those inflated figures which should scare Mr. Marky Mark. Sure he will never be poor in his life now, but he should know that in the internet age his company could lose most of it's value practically overnight.

    Invest in something tangible Mr. Z.
  • kibbles 3 comments collapsed Collapse Expand

    out of tinfoil? better resupply.
  • kuei12 2 comments collapsed Collapse Expand
    WOW! And I thought people with no imagination using the word tinfoil would have tired of it by last year.  That's some endurance for the painfully over beaten you have there. Maybe 2013 will bring you some creativity. Ah, what the hell. Just put on your Members Only jacket and stick it out. When the rest of the world is thirsty for archaic lingo, you'll be REAL popular.
  • darrkblu 1 comment collapsed Collapse Expand
    Easy there killer.  Much like The Wizard of Oz and Ovaltine, tinfoil is timeless. You seem overly hostile about the still chronologically appropriate usage of this well accepted and easily comprehensible reference.  Perhaps you should contact your physician and request an increased dosage of Zoloft, or quit trolling these comments and spend more time brainstorming cliches for 2013. Either way, your popularity is questionable if your comment is indicative of your social interactions outside of these comments.  Also, obvious troll is obvious.
  • MooreCowbell 3 comments collapsed Collapse Expand
    You forgot stalkers.
  • kuei12 1 comment collapsed Collapse Expand
    Stalkers are the only good thing about facebook.
  • MooreCowbell 1 comment collapsed Collapse Expand
    And your next potential employers, loan officers, and landlords.
  • Mack Knife 3 comments collapsed Collapse Expand
    There is nothing there! It isn't indespensible anymore than is myspace. Text messaging is more valuable. All it will take is a kid playing with a laptop to come out with the next great fad and voila, bye bye Facebook.

    What does Facebook really do? Connect people? I have to laugh at all the businesses on facebook that give up their stake on the Internet to play in Facebook. The untold millions and billions put into e-commerce, their web presence just to be supplanted by Facebook. Think about this. You have a business and for that have a website or portal. YOU control it including how much information you put there. Enter Facebook and suddenly you need to opt out or everything you put there is open? What if Facebook changes it's privacy policy and you don't agree? Get out? Think it will be that easy? What are people thinking?

    There is no play here except for some quick money if that indeed happens. The "visit us on Facebook" is about as lame as a business can get. Businesses that work hard to build a brand give it up when they start using Facebook. Visit us on Facebook? Goodness, what happened to visit us on OUR site?

    No, Facebook isn't another venue to get the word out. It is a fad where one day you'll pay dearly for being there.
  • darrkblu 1 comment collapsed Collapse Expand
    Yes, Facebook is a fad. A multi-billion dollar fad.  Like Microsoft, Apple and Google.  All fads.
  • kibbles 1 comment collapsed Collapse Expand
    companies don't give up their own sites to use fb. the advantage of fb is fans following your stream when they Like your biz.

    when the next greatest thing hits, biz will use that too. no foul.
  • Matt Udewitz 1 comment collapsed Collapse Expand

    If they file for a public offering, how much money can they raise? Are people really this irrational? When there is a bubble or a stock value goes up it goes up incrementally, this means that normally the stock total market value is the value of the last trade multiplied by the number of shares outstanding. This is how the other stocks in the market get their value.

    If Facebook has itinital pricing that is say $100B then they will actually receive $100B! This is not rational. Why would anyone buy it, there would not be room for it to go up, and only rational thought is that there would be room to go down.Facebook has a better chance to go out at much less and then run up with incremental stock purchases for value. The investor then gets the value. The way Facebook is positioning the Facebook would receieve this value in real dollars and the investor would then be left to take the fall. Please market, tell me you are rational and will not allow this to occur. The market can not be this dumb! Can't wait to see what happens. Based on the above, if you buy and give into this overpriced valuation at the begining, then there will not be very far for Facebook to travel upwards. If this upward direction doesn't exist so strongly, then there would only be down to go. Facebook would then capture there money.Please market don't forget fundamentals or fundamentals will end up haunting your pocket book leaving you thinking, what happened?Investors should also be concerned about the Facebook's revenue! Will their revenue really go up? I would assume that they will only face more and more competition as other companies enter the market to provide social networking advertising dollars. The amount of advertising dollars is not unlimited. Remember, that this current cash flow assumes a year where Google plus didn't have really strong traction, Google plus alone could hurt their ability to continue at this rate.Right now they are a first mover, but this could be a disadvantage in the advertising revenue business since there are limited total add dollars. Please consider the above before you buy a share. There may just be too many shares available! This math doesn't add up
  • Tommy Thomson 2 comments collapsed Collapse Expand
    $5,000,000,000 for a company that produces nothing.  Zero.  Nada.  Now that's amazing folks!
  • MightyMolecule 1 comment collapsed Collapse Expand
    ...popularity IS value. high school never ends...
  • sp12 1 comment collapsed Collapse Expand
    I hope it becomes the next AOL.
  • amanfromMars, In a nutshell, a Shell IDEntity into SMART CHAOS with NIRobotIC Quantum Remote Virtualised Controls 2 comments collapsed Collapse Expand
    Isn't Facebook just a metadatamining operation into which one pours personal secrets and latent desires for others to sell on and server back to you, with a price tag attached to your dreams? Or are they supplied free at no personal future cost, and is that what makes it a valuable float/stock ...... for a new kind of sociably responsible capitalism?

    It is also a great spying program too, of course, delivering all sorts of high leveraging positions with the private information it makes available.
  • Patrick 1 comment collapsed Collapse Expand
    Umm..fake money for a fake number of alleged(unaudited) daily users. The mustard is about to come off this hot dog.
  • Mack Knife 3 comments collapsed Collapse Expand
    BTW, anyone notice their stock market symbol is the same as...

    PIRATE BAY? Yes, they picked FB. The only thing more mind boggling would have been iFB.
  • Mack Knife 2 comments collapsed Collapse Expand
    Yes, I know Pirate Bay isn't a stock.
  • anonEngadget 1 comment collapsed Collapse Expand
    Pirate begins with a P, not an F.

    and it's often abbreviated TPB.
  • omega_factor 1 comment collapsed Collapse Expand
  • Peter Hjemdahl 1 comment collapsed Collapse Expand
    I would gladly have bought shares if the opportunity would have presented itself 5 years ago, but buying shares now would be like buying shares in MySpace the year before it died.That's what these things do, they bloom and grow rapidly, but when the soil (users) are depleted of nutrients (interest) they wither and die. That's where Facebook is at now. I've lost interest, all my friends (real friends, not FB "friends") have lost interest. No one posts anything interesting anymore. A culture of anxious lurking has replaced the fun first few years when people were not so PC and lame on their walls. The reason for the lame anxious wall posts is of course the fact that in the interest of greed, Facebook is turning into a shoppingmall. Your boss is there, you are supposed to "like" your local grocery store!? What's up with that ? Dead I tell you.
    In a recent study in Sweden, 70% of users say they are considering closing their account this year. I believe the study (made by one of our Universities) Facebook has alienated it's users by misusing private data and the users themselves getting fed up with Ad's and commercialisation of what used to be a fun and lively communication platform.
  • Facebook Application Developer, Facebook Application and Games Developer 1 comment collapsed Collapse Expand
    Amazing and its a huge IPO ever Facebook change the market world ...
  • sevec 1 comment collapsed Collapse Expand
    will be fascinating to see the IPO performance.  Personal view >> build a cash hoard and a public currency and then build the biz from acquistiion.  Pick up Twitter, Spotify, Baidu others.... base business seems to be stalling.  and the insiders are cashing out.  this is not a long term model.  it's a financing platform.  look at the analogs >> zynga.   look at the usage patterns >> US vs. markets that don't generate ad revs.    give zuck credit.  huge win.
  • Raul Bibriesca 1 comment collapsed Collapse Expand
    una burbuja muy grande y cara, pero es una burbuja, google no le va a poder ganar porque facebook es una sola empresa y ademas no tiene la etica como una de sus proridades.... aver si no la inflan de mas.
  • Bombingdownhills 1 comment collapsed Collapse Expand
    The best way to answer the question is to poll your friends on FB. Do they use it just to communicate with each other, or do they actually use the links to find products and other services? I bet most people do not click-thru to other services, thereby rendering advertising dollars paid to FB moot. When advertisers and others who pour money at FB  finally do the analysis and determine their cost valuation, the money  flow will decline. Too often advertisers and others who do not fully comprehend the usage of social media fall under the guise that this will increase their revenue stream for their products. Nothing on FB so far shows me that it will be a long term success as it may only provide limited lifetime as a social network.
  • aniptofar 1 comment collapsed Collapse Expand
    Some people will make money and others will be left holding the bag.  The internet is still pretty young and any security person will tell you putting info on something like FB is a bad idea.  FB security issues will get worse, not better. But there will always be self absorbed people.  I'm still trying to figure out who clicks the ads that pay for it all.
  • Snoggler 1 comment collapsed Collapse Expand
    you assume those mountain of data can be "better" used, maybe they can't. People overshare to such extent it means the data shared doesn't necessarily point to some clear preferences and interests. Regulations mostly concerns how data is collected not used. Better targetting is about the algorithms, not much to do with regulations. Facebook has always taken the approach of "pushing as far as the laws allow, and for as long as we can" already, there isn't much room to go further.
  • maddcribbage 2 comments collapsed Collapse Expand
    All of the people in the comments are extremely disillusioned. Facebook will IPO, garner huge amounts of cash, and continue to grow as Zuckerberg tries to make it the platform of the internet. There will be a billion users, perhaps more. As most tech articles point out, Facebook is probably here to stay. Whether ol' Zuck can figure out a way to make real money from it...that's the question.
  • omega_factor 1 comment collapsed Collapse Expand
    Its also created a forum for harassment and lead to many teenage suicides!

    What a wonderful tool!
  • McGhee 1 comment collapsed Collapse Expand
    The next MySpace?  The next AOL?  The next shark waiting to be jumped?
  • kibbles 1 comment collapsed Collapse Expand
    entertainment. it's easy to waste time reading what my friends have to say or share.
  • jimbo92107, Technical writer, editor 2 comments collapsed Collapse Expand
    It comes down to being useful. What do people gain by their Facebook membership?
  • darrkblu 1 comment collapsed Collapse Expand
    I find Facebook to be extremely useful for staying in contact with people I know who are not geographically close to me.  Being military, my friends live all over the world, as does my family.  Facebook gives me the platform to easily stay in touch and share.  Maybe I don't understand why people are getting jaded with it.  Facebook is useful to me, and so long as the people I care about continue to use it, I will also.
  • Belial 1 comment collapsed Collapse Expand
    The only good that has come out of Facebook is that a nerd has been able to tell high school kids how to be popular.
  • nick price 7 comments collapsed Collapse Expand
    Facebook would be much bigger than many longer-established American companies, including Abbott Labs, Caterpillar, Kraft Foods, Goldman Sachs and Ford Motor.
  • totnuckers 3 comments collapsed Collapse Expand
    with a closed internet business model? nah I don't think so.
  • Jeremy Villalobos 2 comments collapsed Collapse Expand
    @totnuckers  I totally agree.  Were it not for its closed approach to technology I would say Facebook is the next Google, but given its Apple-like view of the business, it is more likely businesses will embrace Google+ making the social network environment a two company raise similar to the smartphone market.
  • kibbles 1 comment collapsed Collapse Expand
    you two are so cute.

    where can we buy your stock?
  • Patrick 1 comment collapsed Collapse Expand
    IPO valuations are artificial. This is a pure whipped cream event and goodness knows what sort of privacy claims they will make on such mundane things as actuals, versus claimed participation.
  • John 2 comments collapsed Collapse Expand
    you're paying a premium for FUTURE earnings, if you don't like the valuation you should short it on the opening. 
  • asdfasdf 1 comment collapsed Collapse Expand
    You geniuses forget people use it as an entertainment outlet and the byproduct is a business that knows how I exploit this.