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TECHNOLOGY

6 Lessons that Facebook’s IPO Can Teach Entrepreneurs

Few IPOs will be of the size of Facebook's. But the company's path to going public can teach any entrepreneur how to better navigate her own road to getting funding.

Mark Zuckerberg, CEO and founder of Facebook, speaks in front of the logo at SXSW in Austin in 2008.

flickr / deneyterrio's photostream

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Facebook plans to file its IPO paperwork with the SEC today, according to reports. Depending on whom you ask, the company will raise between $5 billion and $10 billion at a company valuation that could run ten times those numbers.

It's a staggering amount, and will represent one of the largest IPOs ever. However, even though financing at this level is big business, smaller companies and their owners can learn some valuable lessons from the path that Facebook has taken to the public markets.

1. Take your time. Many entrepreneurs make a mistake of rushing to get funding. Certainly, you need money to operate, but trying to get a big hit early on — or even later — can be a mistake. Investors want to see a company's track record. As that record improves, so does valuation. Keep growing and achieving your goals, and you can get the money you need without giving up as much control or equity as might otherwise be necessary.

2. Focus on revenue, not just customers. Many entrepreneurs, especially in the tech space, get advice to focus on customers and forget about revenue. The theory is that the bigger the customer base, the harder it is for a competitor to come in and the more chances you will eventually have of monetizing the customers. There's just one problem: This theory doesn't always work. In fact, companies that undertake such an approach often end up thrashing about. When people are used to free, they aren't keen on suddenly having to pay-- whether that means sending cash, seeing ads, or some other mechanism. You can still develop revenue streams over time. Just look at the possibilities early on.

3. Get ready for the limelight. How many entrepreneurs find themselves the subjects of books and movies when still in their mid-20s? But the more success you build, the more you can become the subject of publicity, whether through television, books, magazines, news websites, or–and this can be the big one–word of mouth among potential investors and business partners. Time to live your life like you bought a glass house, because you basically did.

4. Banks are not your friends. Banks like to talk about partnering with businesses and being the friends of entrepreneurs. They don't and they aren't. These financial institutions are out to make a buck and your interest is not what is topmost in the minds of their executives. And that's okay. There's plenty of room for commercial relationships. But remember that it's always time to negotiate better deals when possible and to evaluate the performance of a bank. When Goldman Sachs made some major blunders in the private offering Facebook did last year, Mark Zuckerberg and his management team reconsidered who should lead the IPO and reportedly chose Morgan Stanley (and Goldman may have taken a third place position in selling the IPO). If you can't at least get the level of cooperation necessary to make business happen, then start looking for a bank that can deliver what you need.

5. Things take off after funding. With all the feel-good attention on the IPO, there are concerns about whether Facebook is worth the sums in mention. A big reason is that the company's revenue is reported to be only a fraction of what Google sees, even though Facebook's valuation would be about half of the search giant's. In other words, Facebook has a lot left to prove. Too many people who haven't gone through the process think that raising money is the big finish, after which you get to go off and run the business as you see fit. But they forget that bringing in capital will happen in waves and that successive round depend on the success of previous ones.

6. Ask for an allowance when Dad's smiling. When you want someone to do something for you, it's best to catch them in a good mood. And smiles haven't necessarily been abundant recently. For example, the mood of Silicon Valley venture capitalists has actually been declining for the last three quarters, according to University of San Francisco management professor Mark Cannice. But a strong Facebook IPO could actually change that, increasing confidence of investors and entrepreneurship in general. If you've been considering a move to raise money, the coming six to nine months might be a good time.

Even though your business may never set funding records, you might as well learn what you can from those that do.

IMAGE: Flickr/Creative Commons
Last updated: Feb 1, 2012

ERIK SHERMAN's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.
@ErikSherman




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