Reasons Why the Facebook IPO Bombed

Facebook IPO failureShare prices of Facebook stock have been distinctly underwhelming since the first day of trading — to the tune of ~30% off its original offer price. And everyone seems to have an explanation as to why.

I’m partial to a list of reasons put out by Dan Janal, president of and author of the business book Reporters Are Looking for You.

Mr. Janal has come up with a dozen reasons for the Facebook IPO failure. The ones that struck me as most compelling are these:

  • The public is not as dumb as Wall Street thinks. Chalk it up to too many other “can’t miss” opportunities that whiffed big-time.
  • Who has excess money to throw around? Small investors are struggling with underwater mortgages and mountainous debt … so how do they have extra funds to throw at an IPO? Get real. (And the institutional investors stayed away because they were clearly “in the know” about how unrealistic Facebook’s IPO share pricing really was.)
  • Who goes on Facebook to actually buy things? Precious few, that’s who. And if buyers aren’t on Facebook … then advertisers won’t be there either. And with that, there goes a big part of Facebook’s business rationale down the toilet. (GM backed out of its Facebook advertising program – very publicly – just days before the IPO. That timing suggests they were trying to tell the market something!)
  • Friends aren’t really “friends.” Indeed, many Facebook friends are more like acquaintances, which is a lot less compelling when it comes to word-of-mouth influencing. (LinkedIn connections are far more “honest” in terms of being “all about business.”) When Facebook contends that friend networks will influence more buyers, investors look at their own friend networks … and they don’t buy the hype.
  • There’s a huge gulf between Facebook “friendships” and actual “engagement.” And if friends don’t engage, a big piece of what makes the Facebook power matrix potentially so potent falls away.

Mr. Janal maintains that the characteristics that make the Facebook platform what it is aren’t the same ones that’ll launch “a million new millionaires.”

Sure, the early investors who acquired stock options early in the game came out big winners. But precious little of that largesse turns out to be in the cards for the rest of the investors.

Bombs away.

Facebook’s Interesting Week

Facebook's_first_day_of_tradingBy now most people have heard all of the news reports about Facebook’s initial public offering, and how the world now has a new crop of instant millionaires and billionaires.

But the news last week wasn’t all roses for Facebook. For one thing, it became clear as Day 1 of trading ground on that Facebook shares weren’t going to increase in value. Indeed, it took the underwriters stepping in with institutional buying to keep the share price (barely) above the initial offering price of $38 per share.

And there was the news of GM dissing Facebook by announcing that it is dropping its paid advertising program with the social network … evidently due to Facebook’s failure to convince GM marketing execs of the effectiveness of its program.

But there was even more. Consider this news report: Facebook was hit with a $15 billion privacy lawsuit on the very first day of public trading. Filed on behalf of a number of Facebook’s users, the class action suit claims that Facebook invaded personal privacy by tracking users’ web usage.

The lawsuit cites a bevy of case law and regulations as part of the briefing documentation, including the Federal Wiretap Act, the Computer Fraud & Abuse Act, the Stored Communications Act, and various California statutes.

Consider the implications if this suit is at all successful:  Now that it is a public company, Facebook is under increased pressure to increase its advertising revenues rapidly – which means collecting yet more user data to help it target paid advertising effectively and thus command premium pricing.

But if the lawsuit is successful, it could prevent Facebook from collecting the very data it uses to serve up advertising based on relevant audience targets.

On the other hand, similar cases brought against Facebook in recent years have been thrown out of court because browser cookies haven’t been viewed as “wiretaps.” Moreover, plaintiffs have had difficulty in proving any “harm” as a result.

Of course, there was some additional very good news this past week for Facebook – at least for CEO Mark Zuckerberg: He got married.

… Which in the end may turn out to deliver far more happiness and fulfillment than all the money in the world ever could do.

Good marriages are like that … so let’s all hope for the very best for Mr. Zuckerberg.