Why Facebook May Not Be Ready to Face the IPO Music... Yet

Now that the oohing and ahhing is over concerning Facebook raising a cool $450 million from Goldman Sachs (and, just for fun, another $50 million from long-time investor Digital Sky Technologies), the rumination has begun. And much of it has had to do not with the business of Facebook itself, but with whether there's something somehow nefarious about the social network's decision not to go public, at least at this time.  

It's deep territory. But the Social Media Insider, being a notorious glutton for punishment, just put on her waders and is going in. 

The first reason people are tied up in their underwear over this is simple: it doesn't follow the predictable path outline start-ups are supposed to follow, and that's disconcerting. We all like the satisfaction of knowing what happens next. As I was saying in an email conversation with a keynoter at our upcoming Social Media Insider Summit (plug!), we've all bought into the script: company gets several rounds of financing from (usually Silicon Valley-based) VCs, and only brings Goldman Sachs into the room once it's time to find a lead underwriter for the inevitable IPO. This deal, from a purely psychological perspective, makes us all look dumb for speculating about when the IPO is going to happen. It's a big "gotcha!" It makes Google's pledge not to "be evil" -- or to do forecasts -- when it went public look positively amateurish. 



The second reason has a little more weight -- and that's that Facebook, even at almost 600 million users, is nonetheless blocking us out. Unless you're one of the relative handful of Goldman clients that received an invitation from the company to buy in, you're, as they say, shit out of luck. A private market for Facebook shares -- above and beyond what was already going on -- only enhances the sense, in the U.S. and elsewhere, that there's the super-rich, and then there's the rest of us.

 Federated Media's John Battelle describes this another way:  "Facebook is the greatest repository of data about people's intentions, relationships, utterances, and relationships that ever has been created. Period. And a company that owns that much private data should be accountable to the public. The public should be able to review its practices, its financials, and question its intentions." 

Maybe its antecedent is the Kremlin? I'm not sure. 

But seriously folks, ever since the news broke, here's what I've been wondering: that even if it's true that technology companies must continually evolve, Facebook just isn't quite evolved enough yet -- as a company, rather than a phenomenon -- to become a public company.  If you think back to Google's 2004 IPO, at the time, it was on a similar trajectory to Facebook, to the extent you can really compare the two companies.  

In the first quarter it reported revenue (Q3 2004), Google made more than $800 million, ending 2004 with more than $3 billion in revenue. Facebook, which allegedly had $2 billion in revenue in 2010, could well see its revenue double, or more during 2011. 

But, there's a big difference between the two companies. Google's revenue model, at the time, was pretty well fleshed out, even as, in the intervening years, it's become more of a factor in display and other areas that bring in the bucks. Bid on keyword, buy keyword, rinse, repeat.

But social media advertising -- even with Facebook's current level of success -- isn't fully baked yet. Social ads do work, or advertisers wouldn't be buying them, but Facebook advertising is still not in the same realm as the easy cause/effect of keyword-based advertising. I still feel as though, despite Facebook's success, there are other big shoes to drop with its ad model, not to mention in things like virtual gifting, other forms of social commerce and privacy regulation, all of which could change the trajectory of Facebook as a business. It's still more of a consumer phenomenon than a revenue phenomenon.  

The danger, of course, is being forever gun-shy about public scrutiny. For its own sake, and for investors everywhere, Facebook should eventually do the IPO. But its hesitation at this point is understandable. It's building out a whole new category of Internet advertising, and that may not be something that stands up well, at this point, to the kind of scrutiny an IPO would invite.

9 comments about "Why Facebook May Not Be Ready to Face the IPO Music... Yet".
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  1. David Carlick from Carlick, January 5, 2011 at 5:33 p.m.

    CPealeT! Why go public? Founder or investor liquidity? Done! Insane reporting restrictions? Who wants that? Ability to invest freely in engineering and development and acquisitions without quarterly nitpicking over every penny of earnings? Lovely! Give your competitors a breakdown of your revenue composition and costs? Hell no! Love your writing, as I have for the last (too many) years.

  2. Erin Haskell from Crowley Webb & Associates, January 5, 2011 at 5:39 p.m.

    Facebook has a lot of issues to work out before they can continue to grow their revenue through ad agency media spends.

    There are a lot of defects in their current self-serve ad system, and arranging and maintaining consistent contact with an actual human representative at Facebook is spotty at best.

    Some of our representatives we've dealt with in the past have disappeared from the face of the planet never to be heard from again even while our spends continued.

    Through the many Facebook Ad campaigns we've run, I can personally attest to their abysmal, non-responsive customer service. I can only imagine that other agencies experience the same poor Facebook customer service management.

    Perhaps this Goldman equity deal will provide them with an infusion of cash to step up and start treating their paying advertisers with more TLC.

    If someone who works at Facebook would like to contact me, please do so!

  3. James Curran from Lotame, January 5, 2011 at 5:43 p.m.

    The Goldman Sachs move very much mirrors Facebook's entire growth model - exclusivity. If you can't get in, it's seemingly that much more valuable to people.

    They should milk the exclusivity of owning their stock as long as they can. I wouldn't be surprised if it really is until they are forced to go public.

  4. David Trahan from Mr Youth, January 5, 2011 at 6:01 p.m.

    @James - Couldn't agree more. I'm very familiar with the model Goldman/Facebook are using to garner investment. It's not to gear up for an IPO, its to use instead of an IPO. Investment in Facebook is going to be exclusive, which will work out better for Facebook.

    There's no need for Facebook to go public, and this move shows that they know that too. Private is the new public.

  5. Tom Troja from Social Sympony, January 5, 2011 at 6:20 p.m.

    The key here is that "social media advertising -- even with Facebook's current level of success -- isn't fully baked yet".
    What is going to work for brands and facebook are larger integrated, long term social plans that motivate people to embrace brands, share brands and connect with the passion of others. This is not about display. Display is proving less and less efective as people really don't see billboards. Display will be useful in lighting up effective social efforts and sustaining them. Until the brands get the social rhythm, facebook will be limited in what it can do. facebooks big job in 2011 will be teaching brands how to dance.

  6. Bruce May from Bizperity, January 5, 2011 at 7:55 p.m.

    You are spot on Catherine. The Facebook ad model is a new animal and I still have not heard enough about how effective it is. With the kind of customer experience reported above it's clear that it is not a mature organization so it has a lot of growing to do on both counts. I think this sizable private investment (1/2 billion) is based on the assumption that Facebook will likely become the defalut entry portal for the Internet for millions (I mean billions) of users in the near future. My gut feeling is that they are more likely to spend that money mostly on consultants and attorneys in some 240 countries in order to establish their worldwide dominance in the marketplace. I hope that I am wrong about that because they need to spend much of it on building a mature operating company (including a few more customer service reps) and most of all, building out an ad model that really leverages the value of all those eyeballs they've collected.

  7. James Curran from Lotame, January 5, 2011 at 10:23 p.m.

    @David - "Private is the new public", yep that's spot on. Good comment.

    Google tries to keep some of this exclusivity by not splitting and keeping their stock price high enough to keep smaller investors out. (Like Berkshire)

    I think the really big tech companies with large end consumer presence have the best chance at pulling it off. Twitter or Groupon may try it next. They could do it with the same type of exclusivity.

  8. Kennerly Clay from Lincoln Financial Group, January 12, 2011 at 10:36 a.m.

    I agree with the commentary here. Let Facebook continue in its organic and relative infancy, letting the young founders and creators continue with their creativity and cutting-edge technological genius. When the "baby" is ready to wean, it will.

  9. Howie Goldfarb from Blue Star Strategic Marketing, January 16, 2011 at 6:34 p.m.

    I have a Financier's view since that is my realm. Facebook to money from some shaky places. The Russian and Chinese investments put a lot of pressure on Zuckerberg not to lose their money. Then Goldman comes to bail out Mark so he doesn't have to sweat as much. Because Facebook is Opaque the 'Aura' masks reality. Think more Bernie Madoff than Google. What Facebook is cooking isn't the books. Its what happens on its network. Last April I blogged about the pitiful per person activity based on its Stats Page. They then Scrubbed the page of the damning data. Network usage per person per day is down 30% since April if its true they have 600mil accounts. Every metric of usage is down on a per person measure. But it is growing in an aggregate viewpoint.

    So this opaqueness benefits Facebook and the investors for now. But I will use an analogy I told my friends when they said I should buy $250 worth of Iraqi money in 2008 with expectations of getting $100,000 back. I said why would anyone on wall street tell you that if it was true? Wouldn't they keep it secret and become mega rich? So if Facebook could go public at $50bil tomorrow? Wouldn't they?

    But if Goldman comes to Mark and says I have a plan to ensure you can pay back your investors at a profit, pull the weight off your shoulders, and we will just screw the public like we always do...signed sealed and delivered.

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