There's Only One Reason Why Facebook Is IPO'ing: To Access The Public Equity Markets

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How much is Facebook worth? Good God do I not care. Go ask a prediction market. Here's one:

Another choice is the delightfully named bookmaker Paddy Power, which also puts it at $40, plus or minus $5, which seems pointless, though unlike SharesPost Paddy Power will also let you bet on whether Bono or Bill Gates will ring the opening bell for Facebook's first day of trading. (Eduardo Saverin doesn't seem to be an option though wouldn't that make you just cry?) Forty bucks is a $93bn pre-money equity value if you use Facebook's pro forma diluted share count, and why not.

Markets for predicting the price of publicly listed securities are ... strange, I guess, depending how you slice it. You could argue that in the ordinary course "markets for predicting the price of publicly listed securities" are called "stock markets." But SharesPost, and its peers like SecondMarket, are of course not really prediction markets though that might be their highest and best use for the next three months. They're quasi-public exchanges that allow employees and investors to get liquidity and allow dubiously accredited dopes like me to buy shares of unlisted companies relatively easily, though they are also "used car markets where buyers aren’t allowed to check what’s under the hood," according to some finance professor. My used-car purchasing days were not distinguished by a deep knowledge of automotive engineering and if my first post-college car had a drunken hamster on a rusty wheel under the hood I would probably not have noticed at the time of purchase.*

I digress.** When I said "unlisted companies" I meant "social networking companies" and that gravy train may be slowing:

Now, with Facebook on the verge of listing on either the New York Stock Exchange or the Nasdaq, the secondary market is faced with the prospect of losing its golden goose. Not to mention that Zynga, Groupon and LinkedIn, all of which were actively traded on private exchanges, have recently gone public. ...

“We certainly expect a reduction in revenue, but we also expect some companies like DropBox to step in,” said Gregg Brogger, the president and founder of SharesPost. “Venture capitalists always have another generation of new start-ups, and our market will as well.”

That seems right, right? Facebook is nice PR for them and if I were a VC I'd certainly be thinking about SharesPost/SecondMarket/etc. as a liquidity venue for my next exit or mark-to-market. And for the exchanges, I don't know why they'd be stuck on internet companies; why not PE LP stakes or whatever?

Ultimately, though, if I were a VC I wouldn't be entirely satisfied with the depth and liquidity and general dubiousness of those markets, and would ultimately want to tap the NYSE or NASDAQ, where both liquidity and shennanigans are far deeper. Which brings us to the amazingly headlined "Facebook ought to ditch its public offering":

There is still time to cancel its IPO and the filing provides plenty of reasons why it ought to, and why Mark Zuckerberg, its founder and chief executive, would probably be happier if it did. He could carry on running Facebook as a private company and would not have to justify himself to outsiders. ...

Given that it doesn’t need capital and doesn’t want shareholders to get in the way of its autocratic founder, why the IPO? Apart from meeting US regulations for a private company to go public when it gains more than 500 investors, Facebook’s motivation is clear: to gratify its venture capital investors and employees.

This is not a cynical statement; it is a quote from Mr Zuckerberg’s letter to new shareholders. “We’re going public for our employees and our investors,” he writes. “We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment.”

In terms of Silicon Valley’s logic, it makes sense. The returns from occasional winners such as Facebook make up for venture capitalists’ losing bets on thousands of other start-ups – provided the winners are sold either to other companies or to the public markets. ...

For the company itself, however, the logic is far less obvious. As a corporate entity, Facebook could clearly thrive without seeking new shareholders, whose main purpose is to allow the insiders to get rich and eventually exit. Facebook’s IPO is mainly taking place to encourage the others in Silicon Valley.

There's STILL TIME to get in on this amazing offer of not going public at a $100 billion valuation! An obvious issue here is that "for the company itself" you can only have so many motivations and "gratifying" your shareholders and employees have to be two of the bigger ones. Corporations are people, my friend, and who else would you gratify?*** You can go think your thoughts about Facebook's corporate governance but "they're doing something nice for shareholders" is hardly a strike against them. On the flip side, if you're worried about Zuckerberg losing his autocratic control or having to justify himself to outsiders, don't be. His public shareholders are likely if anything to be more docile than VCs would be, especially un-gratified VCs.

Similarly, I'm not sure why pour encourager les autres would be a bad reason for the IPO; presumably Sean Parker was only able to get giant cocks painted on the walls of Facebook HQ because of the prospect of an eventual public exit.

I'm a big believer in the notion that things are the present value of their future selves, so I don't really count Facebook's meh-we-don't-really-need-the-money IPO against it. It's good for other startups to be able to credibly promise a juicy exit, even in these days of volatile HFT-driven maybe-transaction-taxed insider-trader-y public markets: it allows them to keep starting up and raise money. It's good for the private exchanges to be able to point to their IPOed alumni and say that they're doing great: just like early-stage VCs, SharesPost and SecondMarket buyers will be most likely to put up money if they see the prospect for a lucrative and fully public exit. It's good for existing employees and shareholders who get to cash out and buy socks. And for potential shareholders staring down a company that is solely controlled by Mark Zuckerberg until his dying day and for a reasonable period thereafter, and whose financial case is hard to quantify, a reasonable question to ask might be: is Facebook motivated to make money for shareholders, or just to amuse the Zuck? Inconveniencing Mark Zuckerberg and raising money Facebook doesn't need just to help its shareholders out seems, on that metric, to be a small positive.

Losing a Goose That Laid the Golden Egg [DealBook]

Facebook ought to ditch its public offering [FT]

* It may be relevant that that car blew up within a year.

** Really, though. No one forces you to buy privately traded shares. And it's not like people are buying Facebook for the financials in its S-1.

*** Your customers, I guess, though that's never exactly been FB's forte no matter how you define their customers, and anyway not sure why they'd be affected by the IPO one way or another. Your founder, though he's also a shareholder and an employee and a customer, is retaining tons of control, and I suspect he's gratified enough, all things considered.

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