Thursday, January 06, 2011
A Tale of Two IPOs
So by now, you've heard endlessly about the Facebook/Goldman quasi-IPO. What is its larger significance?
Consider, for a moment, a historical contrast. When Google IPO'd, it explicitly refused to play by Wall St's rules--instead, issuing equity in a relatively open Dutch auction:
"...Among other things, Google issued a firm warning to speculators hoping to make a buck by quickly flipping their shares, a hallmark of many hot technology IPOs in the past. Instead, Google hopes to place its shares in a way that avoids the typical investment banking strategy of intentional underpricing--and the volatility that frequently follows.
"Our goal is to have an efficient market price--a rational price set by informed buyers and sellers--for our shares at the IPO and afterward," the filing states. "Our goal is to achieve a relatively stable price in the days following the IPO and that buyers and sellers receive a fair price at the IPO."
"...According to its filing, Google seems willing, eager even, to start off life as a publicly traded company on the right foot, hoping to steer clear of some of the sweetheart dealmaking that characterized the last wave of go-go IPOs. Instead, Google plans an auction of its shares to raise up to $2.7 billion; a process open to all bidders."
Today, we have Facebook--not challenging Wall St's rules, but, instead, endorsing and subscribing to them. Facebook's quasi-IPO is a deal with Goldman to build an SPV through which high-net-worth investors can essentially buy blocks of Facebook equity.
The contrast couldn't be more striking. A closed SPV for a tiny number of clients, which skirts the SEC's rules on venture finance, is the antithesis of Google's open Dutch auction.
All of which is very revealing, and tells us a great deal about Facebook's culture--and hence, maybe just a little bit about its future prospects. Google had a Dutch auction for its IPO because it had what I call in the Manifesto a philosophy. That is, a set of principles for creating enduring value. One of Google's bedrock principles is a belief in democracy--hence, a Dutch auction.
Companies that have philosophies are resilient--they're able to weather the fiercest of storms, because they focus on enduring value, not transient gains. What Facebook's Goldman deal might tell the astute observe of strategy is this. Facebook has no philosophy, no set of guiding principles that focus it on enduring value. Instead, it is focused--as it has been focused--on building an extractive ecosystem rife with subprime economics and tail risk, not creating value that matters, lasts, and grows. Needless to say, where ecosystems like the latter flourish, on the foundation of mutual incentives that spark acceleration effects in wealth creation, ecosystems like the former are prone not merely to long, slow decline--but to rapid, sharp collapse.
The difference between the two? In a word: resilience. 21st century advantage. Facebook's great challenge isn't cashing out; rather it's cashing out that vividly demonstrates the great challenge that Facebook, like 90% of industrial age firms, faces: learning to create thick, shared value.
Brilliant insight and so true! While Google truly exemplifies the democratic, disruptive nature of the internet in everything they do Facebook - only pretends to do so and only for as long as it serves their needs.
"By their actions shall ye know them". Facebook has a philosophy, its the antithesis of Google's at the time.
I'd argue Google's philosophy has shifted too.
The irony is that as Google has faced serious competition in mobile, international and social networking domains, it's abandoned many of those same principles to the point of practically refuting "do no evil" as an original core value of the company.
As to Facebook, I think that culturally they have been very clear from the get go where they stand on egalitarianism, based upon a number of their business practices.
Is it better to be a wolf in sheep's clothing or just be a wolf straight up?
Very true...I couldn't have said it better. The valuation is so extreme. I also don't like that insiders are selling their shares on Secondary Market wedsite. It tells me there is no community and true passion. I'm just looking forward to seeing what the world will go to after facebook...just like they vacated myspace. Its only a matter of time until history repeats itself.
Thanks Umair, yes, and capped off by a drubbing by the Daily Show, Zuckerberg is at the same time, again, showing his lack of ethical fibre, a kind of 20-something short-term-gain mindset and committing Brand hara-kiri, which as you indicate will eventually erode Farcebook's relevance and reach.