This is the finishing line. With only a couple of weeks to go until its massive IPO, all eyes are on Facebook. A potential valuation of $100 Billion within their reach, the stakes are high. Yesterday, in what will be its final financial statement before its IPO, the bad news broke: Facebook’s revenue and profit have declined from the past quarter, whith the former down 6% and the latter down a staggering 32%.
Why, you could ask, does something like that happen to a company as successful as Facebook? Actually, with their eyes on the prize, they could have easily avoided these numbers. I think their growth has been slowed down on purpose. Let me tell you the two reasons why:
Facebook needs to prepare itself for the hard times ahead of it
After its IPO, Facebook will have to focus on revenue and profits more than ever before. In fact, it will have to focus on revenue and profits even more than on innovation. When it shifts from being a privately owned to being a publicly traded company, it will be highly dependant on its valuation, which is driven by revenue and profits. As Felix Salmon described in his brilliant Wired article “For High Tech Companies, Going Public Sucks”, an IPO brings more than fresh cash into your company. It also makes your company subject to being traded via classic stock trading, options trading and even high frequency trading. Most of the people trading stock (actually, there are already more machines than people) look at the numbers, that’s all. Investments reduce profits, as we have seen with Facebook. Shrinking profits can reduce your stock market valuation. And when you are a publicly traded company, that is the one thing you want to prevent.
In the past couple of months, Facebook has, among others, bought 650 patents from Microsoft for $550 million and spent a whopping $1 Billion on the purchase of Instagram, the famous photo sharing community. The patents will help Facebook arm itself against patent related legal attacks by other companies, an issue commonly referred to as ‘The Patent Wars’ in the tech sector. In fact, Facebook is in the midst of a patent dispute with Yahoo at the moment, and has already bought 750 patents from IBM last month. The alleged reasons for the purchase of Instagram, although Facebook never officialy commented on the issue, span from acquiring the user base to securing more quality user generated content (UGC) to buying one of the best teams in the industry. After all, Facebook’s spendings were an investment into its future, long term growth. Something not too popular among most stock traders and trading machines nowadays. Investing in its long term growth is a very good reason for the acquisitiongs, though. But there is another reason why Facebook might have wanted its growth to slow down ahead of its IPO.
Facebook needs to keep expectations low
What is the second worst thing for a publicly traded company? High expectations. If publicly traded company misses to fulfill the growth expectations of their shareholders, that often causes severe damage to their valuation. Since the stockholders expect companies to exceeed or at least meet their expectations, stock companies are always interested in keeping those expectations low. For Facebook, the company that exceeded every single professionally stated expectation of user base growth since its founding (except for Mark Zuckerberg’s own ‘1 Billion users’ goal, but that will only be a matter of time), the little hickups in its user base growth which recently occurred are no longer sufficient to lower stockholder expectations. Facebook is ubiquitous, everybody knows that, and – at least for now – is neither able to collapse nor could it be taken down by other players in the market. The only sustainable way of lowering the growth expectations of stockholders is to increase its spendings, which is what Facebook effectively did.
Facebook’s IPO is an unprecedented event. Nobody can forecast its outcome. All we can see from here is that Facebook has been very smart in securing its future growth and base for innovation after day X.