or If you’re so rich, why aren’t you smart?**
We wrote, in our last issue, about why we thought Facebook’s IPO was going to turn out to be a pig in a poke, and after it was summarily hammered by the market — and followed with the predictable filing of a lawsuit by people who thought they’d buy something for $38 or so and sell it a few days later for twice that (see: LinkedIn, among others) — we were initially chuckling at the comeuppance received by some pretty greedy people. (Hats off to our friend Vic, who told us first thing Tuesday morning that he had shorted the stock and made “beer money” by doing so.)
But upon reflection — and about the fourth review of Facebook’s “roadshow presentation” — we have to admit that we have a newfound respect and admiration for young Mr Zuckerberg, who, we think, has pulled off a practical joke the likes of which his former classmates at the Harvard Lampoon would never have dreamed. He suckered everyone — and didn’t even have to try very hard to do it. All he had to do was tell the truth — most of it anyway — and let a lot of people with a lot of money hand it over to him like he was an only child at Christmas who happens to have a dozen childless aunts and uncles.
Mr Zuckerberg’s most memorable bits in the roadshow piece are twofold. First, he talks about being a college student building his little website on a rented server that cost him $80 a month, and how, when he needed to rent another server, he went out and hustled a little more advertising. Second, he describes his vision of what Facebook is all about: connecting the world and making it more open. Now, we can argue until you-know-where freezes over about the relative nobility of that goal, but there’s no denying that building one site that exists solely to give people a place to share their lives with X thousand of their closest friends is going to be technologically difficult and expensive — and since Facebook has all these members providing all this data, it’s pretty reasonable that being the guy who sells them advertising is the quickest and easiest way to make a few [billion] bucks.
Facebook is also quite famous for two things: its aggressive acquisitiveness (though they are generally thought to buy companies for the purpose of getting the engineering talent and not, necessarily, the products the company produces) and its rather cavalier attitude towards privacy. Indeed, if there’s something that could derail Mr Zuckerberg’s bullet train, it will be that; all it will take is one episode where the wrong people’s private information becomes public (or a successful class action lawsuit), and the wheels could come off — but that’s the hazard of the game.
Mr Zuckerberg, meanwhile, is noted for lots of things, but two stand out. First, there’s the hoodie and its symbolism as a disdain for the trappings of extreme financial resources. Neither he nor anyone in his inner circle seems to really give a hoot about the fact that they’re all extremely wealthy (and have been for a while); they’re all about just building their site. Second, he celebrates the hacker (in the best sense of the term) mentality of Facebook. Someone has an idea, and they crank it out without really thinking too much about whether or not it’s going to make money; they just want to see if they can do it.
His ambivalence toward the whole money thing has been evident to anyone paying attention for the last few months. He ducked, for as long as he could, even admitting that Facebook had a target date for its IPO. For one thing, the business is making some money, and he really didn’t owe anyone anything (he could probably have come to some kind of repayment agreement with all the people whose venture capital he’d taken), so there was no compelling need to do an IPO except that the number of people who had received stock (or had bought it through capital infusions) was pushing the limit allowed by law. And let’s not be coy: if you’re building huge data centers all over the world (we’ve been in Luleå in winter and it gets damn cold there) it goes a lot quicker if you have cash reserves of $16,000,000,000 as opposed to trying to build them with current profits of about 1/16th of that per year.
And this is where the fun starts. In the roadshow video, Facebook CFO David Ebersman says flat out that while it’s been very profitable, there is no question that Facebook is going to use the capital it got from the IPO to expand its infrastructure and acquire more talent. In other words, just because Facebook made a net profit of 27 per cent last year doesn’t mean it will make the same this year (remember, the boss just shelled out a billion for Instagram — that’s 2010′s profit right there). Chief operating officer Sheryl Sandberg spent a good amount of time talking about the number of users Facebook has, and how often they use Facebook, and threw in a couple of nice stories about a few people who had done well by running ads on Facebook.
But at no time did anyone say anything about two important issues: what Facebook’s projections for being able to keep selling at the rate they have been (and at the profit margin they have been), and what kinds of successes the large number of advertisers have had (remember, GM just bailed on Facebook, and it’s a good bet that money will wind up going to Google and Microsoft). It’s all well and good to sell advertising, but if it doesn’t show results, eventually that well will run dry.
That doesn’t mean the people who watched the roadshow video didn’t hear the Facebook honchos say things that weren’t said. The buyers saw all of the banks and brokers telling all of the media how huge the Facebook IPO was going to be, and the Facebook folks didn’t have to do a thing; there were so many stories (the Internet has done some remarkably perverse things to the nature of news reporting, but that’s another article) about how big it would be that it became a self-fulfilling prophecy to which Mr Zuckerberg and Company contributed almost nothing; in some ways, they did almost everything they could legally do to diffuse the hype.
And nobody paid attention. You can make the case that it was up to Facebook to disclose fully (and you would think, given the Facebook mantra of “open and connected” that indeed, they should have) — but what’s “fully”? Does that include what Mr Zuckerberg ate for lunch the day before the IPO occurred? How about the price he paid for gasoline a week ago Tuesday? Facebook gave out all the information required by law; if investors just bought the hype created, not by Facebook, but by media folks itching for a story and investment banks and brokers staring at a big payday, and fueled it with their own demand for more of the stock, then they really did get what they asked for.
Law schools will be stepping up donation requests.
* Headline, part A courtesy of younghv.
** Headline, part B courtesy of our longtime friend, Ward, said in reference to some elderly women from whom he was attempting to get campaign contributions.
Footnote: if you want to read some really good articles by some very smart people about why Experts Exchange has a pay-for-services system and doesn’t much think about advertising, see:
Doc Searls: After Facebook fails
Mark Cuban: Facebook IPO Post Mortem — Killer — but not for the reasons you think!
Terry Heaton: Facebook’s fail? No, Madison Avenue’s!
This article first appeared in the Experts Exchange newsletter.