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