The Social-Web IPO Window Is Now Closed
Photograph by David Paul Morris/Bloomberg
This isn’t how things were supposed to unfold with Facebook’s IPO. The social network’s public offering was supposed to be a once-in-a-lifetime moonshot, triggering a frenzy of interest in other social-web companies that would then ride that wave of demand to equally successful IPOs. At least, that’s what plenty of venture investors seemed to be thinking as they pushed up the private-market valuations of Facebook—which was supposedly worth $100 billion not long ago—and every other company with a social component, including Twitter.
Now Facebook’s (FB) share issue looks like a disappointment at best and a train wreck at worst, and the doubts that investors have about it as a growth business are likely to trigger broader doubts about the viability of every other social-web business without a rock-solid monetization model.
It’s not just Facebook’s fault, of course. Groupon (GRPN) was the first major disappointment associated with the social web (although many have argued that it isn’t really a technology or Web-based company and that it isn’t all that social, either). Nevertheless, the group-buying service’s IPO was one of the first to test the waters for a technology-related offering, and by most accounts it appears to have failed miserably: The shares are down more than 65 percent from their initial issue price, and the company’s financial performance has been lackluster, with few signs it will improve in the foreseeable future.
The other player that should share some blame is Zynga (ZNGA), although its poor performance is directly connected to Facebook, since the two have a symbiotic relationship: More than 90 percent of Zynga’s revenue comes from the social network, and more than 10 percent of Facebook’s revenue come from Zynga-related payments. Shares of Zynga have fallen about 70 percent from the initial offering price, and while insiders have cashed out to the tune of about $500 million, regular investors are still left holding the bag. As a result, anyone who was counting on the Facebook platform to be a cash-cow monetization scheme for social apps and other Web services is likely revising their financial models by subtracting a few zeroes.
And now we have Facebook, which is down more than 50 percent from its initial offering price after what the market seems to have decided was an unimpressive quarterly earnings report. Although the company met estimates, those estimates had already been reduced during the runup to the IPO, and there were enough question marks in the results—especially in the critical area of advertising revenue and the mobile market—that investors seem to have gotten spooked. Facebook’s market value is now hovering around $51 billion, which is barely half the $100 billion it was allegedly worth before it went public. (Update: According to the latest figures from Facebook, its current market value is $65 billion; a number of market-data sites, such as Google Finance, have an outdated share figure).
As Om described in a recent post, there has proved to be an uncomfortably large gap between what private markets think these kinds of businesses are worth and what public investors think they are worth. So who is right? Regardless of where you come down on that question, public markets have the upper hand, since venture investors require some kind of liquidity event, such as an IPO, to see a return on their investment. Even if they manage to pump up a company’s valuation and get out quickly after it goes public, the risk of miscalculation is still severe, and each lackluster offering makes it harder for the next.
The biggest issue with all these companies—and the thing that makes this a much broader issue than just Facebook’s fate—is that their financial performance hasn’t come even close to the expectations that many seemed to have for social-web businesses, and that raises questions about the assumptions that venture investors have been operating on. What if Facebook isn’t a dramatically new kind of social-web business but just a moderately successful advertising platform and/or payment service? As one venture investor put it:
“Zynga has been crushed, Facebook payments are effectively dead—Facebook is just a mediocre ad company with a ton of traffic.”
Of course, Facebook could come up with some dramatically profitable new monetization method: some kind of e-commerce offering perhaps (although there is still much skepticism about that as well) or a way of making virtual payments work for something other than Zynga games. Or it could start charging for such features as API access or some other aspect of the platform. But that would also be a substantial risk. And so investors are left waiting for the company to show that its social ads are going to generate enough revenue to make its valuation look reasonable or that mobile is going to be a big moneymaker. But we are a long way from that now.
There is likely still room for some technology-stock offerings to do well, judging by the response to IPOs from companies such as Kayak (KYAK), the online travel service, and Palo Alto Networks (PANW). Both are Web-enabled businesses, but they don’t rely on the same kind of advertising-based business model that Facebook and its ilk are shackled to. As a result, their monetization methods are a little more tangible and therefore easier to value. But even some of those kinds of companies are seeing valuations get reduced, as Square and others have found.
In hindsight, a lot of the assumptions about Facebook and what it was going to do for both social-web valuations and the technology sector in general were aggressive, to put it mildly. While much of the fallout may take place behind the scenes, in the offices of venture capital investors and the boardrooms of private money managers, there will definitely be an accounting for those ambitious expectations. And the pressure on companies such as Twitter to prove they have a solid path to monetization will be ramped up even further. If you don’t like where that is taking the company, prepare to be further disappointed.
Also from GigaOM:
Facebook’s IPO: Ideas and Implications (subscription required)