The Facebook IPO: Lessons for Us All

The uproar over Facebook’s botched IPO points out more problems across business, technology, and society in general than we can count. And, trust me, there’s wireless and mobile in here somewhere.

I'm not in the business of providing guidance on investments, but, as a businessperson, investor, former venture capitalist, and perpetual entrepreneur, it has been at best amusing to watch the process of Facebook's recent initial public offering and to marvel at just how screwed up it was - really, across the board. But the implications for the future - including the future of mobility - are what are really of interest here.

First, let's review what happened and where we are now. But, really first, I must state here that I have no affiliation with Facebook - they are not a client, I am not a user, and I am most certainly not an investor in the company. OK, that said - an IPO is the process whereby a firm sells shares - partial ownership - to the public. Facebook went through the usual process here, motivated in terms of timing, I think, by upcoming changes in the tax laws that may result in much higher taxation of capital gains. I believe Mark Zuckerberg when he says that Facebook's goals are not to be public and make a lot of people - himself included - rich. But his investors don't give a whit about social media, and obviously pushed the company to strike while the financing iron was hot and the tax iron cold.

The IPO process includes the issuance by the investment bankers involved in the deal of a prospectus called an S-1. This details what investors are really buying. There are other rules about what the bankers can say and to whom both before and for a period after the IPO. There are allegations now that the folks at Morgan Stanley tipped off their best customers that all might not have been kosher with the deal, leaving mere mortals (retail investors) out of the loop. Such, if true, would indeed be a crime. Facebook sold at a very, very high price when measured by the P/E (price to earnings ratio), and, while seasoned long-term investors might have taken note of this regardless, the general public isn't always adept at spotting value. The stock is now well below the IPO price, and lawsuits have been filed across the board, as is often the case when money is lost in the securities markets. Any investor should know that stocks do indeed go up and down, and a company doing an IPO - even a purely altruistic firm like Facebook - doesn't really want to see the stock skyrocket after the IPO. That would mean they left money on the table, and, similarly, if the stock tanks, as Facebook's did, that's an indication that the offering was overvalued by the offerers - the company and its bankers. Such leaves a bad taste in everyone's mouth and such must similarly be avoided.

Moreover (and here's a little IT for you), the NASDAQ market, where Facebook is listed, apparently had colossal technical problems, opening the stock late and then being unable to send acknowledgements - meaning investors had no idea if their order was filled, and at what price. This is totally unacceptable and indicates that the IT staff at NASDAQ - and their management - have a lot of work to do. Their very credibility is now damaged, and that's something no business can tolerate for very long. Retail investors may not be able to recognize value in any given case, but they must at the very least have confidence in the mechanics and fairness of the markets themselves.

Anyway, with respect to valuation, I don't really understand Facebook's business model and therefore I would not be an investor under any circumstances. Company COO Sheryl Sandberg, speaking recently at Harvard's commencement, asked the crowd, as Facebook is now a public company, to please click on an ad or two. That's really Facebook's ultimate role in the market - an advertising platform like Google, but more closely bound to specific users who apparently have no problem posting their most intimate secrets for advertisers to harvest. Whether this model will ultimately work I have no idea, but (here comes the wireless and mobile part) many have pointed out that it's unclear if Facebook will be able to capitalize on the broad shift to mobile devices, particularly smartphones, for primary access to service on the Web - this being cited by some as one reason for the stock's fall after the IPO. I actually believe that Facebook will ultimately apply location-based services here and make a reasonable go of it. But enough of a go to justify a sky-high (again, as measured by P/E) stock price? I'm not convinced. And poor Mark Zuckerberg - instead of getting to write code or spend those billions he pretends not to care about, he'll be spending much fo the next few months meeting with lawyers, accountants, government officials, and lots of others for whom he undoubtedly has nothing but disdain (if we can infer such from The Social Network)

Anyway, there are lessons across the board here for corporate managers, investment bankers, Facebook users, and individual investors. The facts are often unclear. Screwups do occur. The facts surrounding any given investment may be in doubt. The risk of loss is always present. Lawsuits will be prosecuted. And, as always, caveat emptor. Because this is unlikely to be the last time those screwups occur.

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