Facebook Must Woo Investors Before Any IPO

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Getting users to pay for certain features or tiers of access to the site could help to demonstrate a more stable revenue base, he says. Introducing such fees before going public would give potential investors a better idea of the company's prospects. "It would be better if you had a few months or quarters' worth of information" on a fee-based model, he says.

Durable Success?

It may also be difficult to make long-term bets on a service that could be easily abandoned by its users for a competing site, such as Twitter. "The biggest risk is that Facebook doesn't end up being an enduring franchise," says Jacob. After all, it was Facebook's arrival in social networking that ultimately led to the decline in use of News Corp. (NWS)-owned MySpace. Already, some pundits regard microblogging site Twitter as a Facebook rival.

To be sure, some fund managers are warming to Facebook. The social network has the potential to reap returns on par with those of Google and Cisco Systems (CSCO), Ken Allen, manager of T. Rowe Price Group's (TROW) Science & Technology Fund, said at a Nov. 24 news conference in New York. "Facebook has gone so far beyond what people expected even a year ago," said Allen, whose fund manages $2.56 billion. "They've created amazing value for their customers." Allen's remarks were reported by Bloomberg News.

Facebook may try to woo more investors with a charm offensive. "As [companies] start to prepare for an IPO, usually you'll see their advertising changes and they start to market the company" rather than the product, says Peter Iannone, a certified public accountant at Los Angeles-based accounting firm CBIZ MHM (CBZ). Iannone, who advises companies planning to go public, expects Facebook to begin reaching out to investors with ads in business and trade publications.

Management could be in for an overhaul, too. "I think you'll see more senior people in there before they go public," says Jacob Internet Fund's Jacob. Of particular interest is the relationship between Facebook's 25-year-old CEO Mark Zuckerberg and the firm's more seasoned Chief Operating Officer Sheryl Sandberg, a former executive at Google, and how their roles may change if Facebook goes public.

If Google's past is any indicator, the prospect of a Facebook IPO all alone will bring a boost of attention. "Google's IPO was very helpful to getting them momentum," says Tom Taulli, an independent IPO analyst. "It was a media circus." But when the commotion died down, Google's shares surged, closing on Dec. 2 at 587.51. And even timid investors who bought Google at the start and have held it to now have enjoyed an almost sevenfold return.

Douglas MacMillan is a staff writer for BusinessWeek in New York.

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