IPO’s, The Social Web, and an auction from Holland

by Ashok Nayar

The recent ruckus around Facebook’s IPO has forced me to come back to blogging.  Not in my adult life, or even post pubescent life has such a media frenzy around an IPO been seen.  Are valuations too high?  Who can justify $700,000 in private airfare?  Facebook’s ability, (or according to some, lack thereof), in creating shared value that’s resilient to the rest of time is under question, and rightfully so.  Are the naysayers wrong?  It’s too early too tell.  One thing is for sure.  Facebook controls the social internet.  The question is if that means anything yet.

The easiest comparison would be Google.  And it seems to be the only comparison most can come up with.  The problem with equating the Google situation to Facebook’s is that it’s an Apples v. Oranges argument.  Google was insistent on using a Dutch auction.  An auction, that in their eyes, avoided volatility by forcing a market equilibrium.   But for a company like Google, who is so deeply technical in value, that’s okay.   Few knew about the true value of a company like Google, at the time, relative to their competitor Yahoo.  The level of information asymmetry allowed an efficient rational price set using the model of the Dutch Auction.   But Facebook isn’t Google.

Your grandmother knows about Facebook.  Never before has a company reached so many people so quickly and on such a deeply personal level.  How that translates to revenue isn’t even the argument here.  There’s in effect no information asymmetry, which by design creates shared value.  It doesn’t concentrate value in the hands of investors, but in the hands of it’s users.  By taking the route of a traditional IPO, you allow more investors into the mix, by definition creating a much more rational market equilibrium.

Most argue the future of the web will be driven by mostly social mechanics.  Who not better to back then the company that owns that space?  Sure their revenue is only $4 and change/user and they need to accelerate that as they scale, otherwise their current multiple on their revenue simply purely isn’t sustainable.  At least not for a public company.  But why is no one talking about the single biggest value add that Facebook has given itself?  Their platform.  By initiating a well designed, well executed platform, Facebook hasn’t focused as much on creating revenue for itself, but has designed a market that forces smart entrepreneurs to not compete with it, but leverage it.  Leverage its network, its data, and its access.  Everyone is talking about how important Zynga, the other hot IPO of late, is to Facebook (it’s even up 26% since the filing on Wednesday).  Sure 12% is a significant amount.  And amount that, if lost, could cause Facebook to stumble.  But Zynga makes 93% of their revenue from goods sold on Facebook’s platform!!  Without Facebook, there would be no Zynga.  The inversion here is NOT true.  Zuckerberg has effectively made sure that the next Zuckerberg won’t beat Zuckerberg!  The ecosystem of entrepreneurs today understand the value of Facebook’s network.  It’s a distribution platform, the likes of which has never been seen before.  That’s sustainability.  Instead of shipping and iterating at a rapid level (which, by the way, they do), they focused on polishing the user experience, and forcing competition to need them.  Facebook will scale.  They’re smart enough to accelerate revenue/user as well.  What others can’t do is take their network and their platform.  That’s the real value of Facebook.

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