Why You Shouldn't Care About Facebook's IPO
Lots of buzz about this in high tech, but don't pay any attention. For an entrepreneur, thinking about Facebook's financial future is a fantastic waste of time. Even if your company is on the road to an eventual IPO, Facebook is such an unusual and high-profile case that it will have little impact on the general IPO outlook. Instead of looking ahead, cast a backwards glance, because the most valuable things you can learn from Facebook come from the company's past.
Build a killer business model
Facebook could have been like any of hundreds of high tech startups—creating products or services, trying to get traction with customers, and failing. But CEO Mark Zuckerberg did something smart early on. Neither he nor the other people he worked with at the time got caught in the trap of creating features that they thought would be great.
Instead, they focused on what their initial Harvard customers wanted, which was a website with student photos and contact information from the university. What gave Zuckerberg the edge? He listened and did something about that specific problem. Fast.
Get a real revenue stream
Unfortunately, the Silicon Valley-approved generic tech business model has become "get customers and then figure out how to make money." Having customers is clearly critical. But the making money part is a lot harder to glue on than most VCs and entrepreneurs realize.
Look at some recent industry IPOs. Groupon? A money sink. Pandora? Red ink. Demand Media? Finally seeing some net income in the last two quarters, but running losses before. LinkedIn? Negative before the IPO, though it's moved into profit since. Many are now trading below the IPO price.
Ultimately, the markets like profit, as they should. Even with many tech IPOs quickly sinking, Facebook will do fine. The company has built significant revenue and, according to rumor, profit.
Learn to deal with regulations early on
One thing that Facebook did poorly was anticipate the regulation hurdles. Entrepreneurs generally hate paperwork, and regulatory compliance is all that and expensive, too. Zuckerberg never saw a privacy regulation that he liked—and the settlement with the FTC proves it.
The results could have been worse, in the sense of a walloping big fine. But the damage is enough. Not only does Facebook now have to get explicit user permission before changing how the service shares consumer information, but it can look forward to 20 years of government oversight no matter how it moves forward on the financial front. That's a huge potential distraction and it will most certainly harm company leadership. Execs may second guess decisions based on what the feds might think or divert too much time to reacting to officials. Although larger in scope, the strategic difficulties that Microsoft faced after the famous antitrust action slowed the company and made room for new competitors to race ahead.
Even if you never plan to go public—but especially if you do—you must understand what regulations come into play and when. No sense in having a nasty surprise at a critical point of growth.
If you like your freedom, stay small
Finally, an IPO may seem like a great idea, and could even be necessary to make venture capital investors happy. But it's a royal pain that puts a company's practices under a microscope and the CEO in a hot spotlight.
You can already see Zuckerberg’s freedom on the wane. There's greater attention on him personally. How many CEOs are the subject of books and a movie? And the entire industry is poised to pore over the company's financials when they finally become public information. That will mean a leg up for competitors.
If Facebook's IPO means something to you, it's this: That road leads to intense scrutiny, reams of new regulations, and losing a good deal of your independence. If that's not a fate to which you aspire, you might consider whether a slower growth plan that doesn't need an IPO might not be a much better choice.
ERIK SHERMAN | Columnist
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.