Facebook IPO: Timing is everything

Summary:The Facebook IPO will be a watershed event - history will provide the context. Prospective investors will have to judge the risks.

Mark Zuckerberg is everywhere: Interviews on prime time US and foreign TV; features in leading newspapers and magazines -- it's one almighty PR push: Facebook is prepping for an IPO.

The reason for the publicity blitz is that once Facebook files for an IPO it enters a quiet period during which it can't make any public statements that could be construed as marketing the company's stock.

But why now? That's also carefully managed. Facebook doesn't want to leave too much money on the table when it IPOs. The best time to IPO is when business is growing fast enough to convince new investors of a generous upside, but not too soon so as not to lose out on rapid gains in valuation as a private company.

The best timing for an IPO is just before a peak in company fortunes and when growth settles down to more prosaic levels.

In secondary markets, which allow wealthy investors to buy Facebook shares in private transactions, the company's valuation is about $78 billion (Sharespost) and it has remained around that level since September. It has flat-lined after spectacular jumps in valuation from around $7 billion two years ago. It's a good time to IPO.

The Wall Street Journal reports that Facebook plans to raise $10 billion at a $100 billion valuation, providing about a 25% premium for current shareholders.

But how much upside will be left for new investors? Clearly, social networks aren't going away but what are some of the more troubling signs that new investors will have to consider?

Here are just a few of the risks that they'll be acquiring:

- People like to share on Facebook but new members tend to share more than those that have been on the service for a while. But how large is the decline in sharing by Facebook users? The "frictionless" sharing feature that Facebook introduced recently does a lot of the sharing for the user. However, this masks any decline in overt sharing, which would be viewed as a negative trend by analysts.
[What if people stop sharing? Here's Facebook's OpenGraph | ZDNet]

- People spend nearly four times as much time per month on Facebook than Google, according to Comscore. But Facebook has failed to monetize that time to the same extent as Google. Is this an intrinsic characteristic of social network sites that ads will always perform badly?

- People leave social network sites. Take a look at Friendster, MySpace there's little loyalty and people will disengage as rapidly as they joined. Investors have to decide if Facebook will be able to retain members over a long period.

- Facebook will face higher operating costs over the short term because of the short supply of hard drives for its data centers due to Thailand floods. It will have to buy the servers it needs from IT vendors, rather than being able to build its own. Will this affect performance and anger users? Increased costs will make Facebook's financial performance less attractive.

- Is social media fatigue becoming widespread? George Colony, CEO of Forrester Research claims that social networks are running out of people, and that those members are running out of hours to keep engaged.

[Social networking's salad days are ending, Forrester says | Deep Tech - CNET News]

- Can management operate at the same level within a public company? As a private company Facebook can share key financial metrics internally, and that gives its business groups important information on how they are doing. Public companies legally can't share important financial data with insiders and that can be a big problem, especially for an online company that must respond in real-time to changing business conditions.

Max Levchin, co-founder of PayPal mentioned this to me as a key challenge when PayPal went public. How will becoming a public company affect Facebook's performance?

- As Facebook brings in new ways to monetize its audience, will those efforts degrade the user experience? WIll it put people off so that they leave or visit less frequently?

These are just some of the risks that Facebook plans to outsource to new investors.


Topics: Social Enterprise, Banking, Legal

About

In May 2004, Tom Foremski became the first journalist to leave a major newspaper, the Financial Times, to make a living as a full-time journalist blogger. He writes the popular news blog Silicon Valley Watcher--reporting on the business of Silicon Valley.Tom arrived in San Francisco in 1984, and has covered US technology markets for leadi... Full Bio

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