Life isn’t fair! – and 5 other lessons from the failed Facebook IPO (for Nigerian techies)

by Hauwa Gambo

Facebook

This was supposed to be the IPO (Initial Public Offering) of the century, from the most iconic tech company of this generation, but it turned out to be just like a Facebook Status Update: People might click ‘Like’ on the picture of your product, but when it’s time to buy, they don’t reply your ‘Inbox’ message. In case you haven’t been paying attention. There’s this, from the Telegraph:

The social network has lost more than a fifth of its value since its faltering Wall Street debut on May 18, while its 28-year-old founder Mark Zuckerberg has been honeymooning in Rome. It is now unlikely to recover in the short term, analysts claimed.

After placing at $38, Facebook’s shares briefly peaked at $45 before sinking back to $38.25 on their first day of trading. They have fallen every day since then, and today plummeted nearly 10pc to a low of $28.84 at the close in New York.

Many brokers are expected to cut their losses now that Facebook shares have passed the important psychological thresholds of $30 a share and a 20pc drop in value.

Shares in Facebook have dropped below the $30 mark, capping what has been hailed as the most disastrous start to trading of any major flotation in the last decade.

And then for good measure, this from Reuters:

Facebook shareholders filed a class action lawsuit against Facebook and banks that underwrote the deal, including Morgan Stanley and Goldman Sachs. They’re pissed over reports that Facebook hid worrying financial numbers from the public before the IPO, while working with banks to tip off preferred investors. s:

Shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were “selectively disclosed by defendants to certain preferred investors” rather than to the public generally.

“The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result,” the complaint said.

So, you get the picture. What happened? And are there any thoughts for Nigeria’s fast-growing technology sector – many of whom look to Zuckerberg and Facebook as the ultimate? I asked around with some of Nigeria’s more prominent tech-heads and I have distilled 8 possible lessons. Of course these guys aren’t infallible and for good measure, they haven’t created a genius social networking with almost a billion members. Take this with a pinch of salt. Or, you know, a word could be enough for the wise. Up to you, really.

Social Networking is still a struggling business model: If you didn’t realise this by the time General Motors withdrew its ads from Facebook, then you must realise it now. And of course, you must know that neither Twitter nor Facebook – the big deals in social networking – have turned in a profit (instead, they are cash-positive). If what you’re looking to do is make money, then perhaps you should be thinking of opening a gossip blog.

The hype always comes crashing down: A piece on CNN pointed this out as far back as one year ago –

Yet social media is itself as temporary as any social gathering, nightclub or party. It’s the people that matter, not the venue. So when the trend leaders of one social niche or another decide the place everyone is socializing has lost its luster or, more important, its exclusivity, they move on to the next one, taking their followers with them. (Facebook’s successor will no doubt provide an easy “migration utility” through which you can bring all your so-called friends with you, if you want to.)

We will move on, just as we did from the chat rooms of AOL, without even looking back. When the place is as ethereal as a website, our allegiance is much more abstract than it is to a local pub or gym. We don’t live there, we don’t know the owner, and we are all the more ready to be incensed by the latest change to a privacy policy, or to learn that every one of our social connections has been sold to the highest corporate bidder.

So it’s not that MySpace lost and Facebook won. It’s that MySpace won first, and Facebook won next. They’ll go down in the same order.

The longer the company can maintain the illusion of great profits without alienating its user base, the longer they can delay the inevitable decline. But given that Facebook has already begun cashing in its chips, that moment has quite likely arrived.

Learn from Seun Osewa: Read excerpts from the Nairaland founder’s interview below –

Do you intend to include other features, such as evolving Nairaland to become a social networking hub? Why or why not?

This is such a nice question.  If I got 5 Naira every time a developer offered to help me make Nairaland like Facebook, I would be rich enough to buy the moon!  MySpace, Hi5, and even Google’s social network (Orkut), and Microsoft’s Live Spaces have been beaten and are still losing members every day.  If Google and Microsoft can’t beat them, I don’t think I should waste my time.

There’s an element of Facebook I’d like to incorporate, though.  The ‘social graph’.  It’s the reason why Facebook can have 500m users on the same site and yet, unlike most big forums, doesn’t feel over-crowded.  The social graph approach scales so well.

Is this where you envisioned Nairaland when you started out?

Seun: My initial dream with MobileNigeria was to make more than 60k a month, which seemed like a reasonable salary at the time, and then use any extra income as capital to start a more promising business.  This was reasonable to me, afterall the total capital I wasted in my failed hosting business was under N60k.  Nairaland flew past this target within the first year, and continues to grow.

Apart from wanting to create a place where Nigerians at home could feel at home, I didn’t have lofty visions for Nairaland, save to remain number 1.  I just wanted to succeed at something for once, and I thought this was the cheapest thing I could try.

Yeah, not a very visionary fellow, but he still has a point. So, for instance – if what you want to do is earn a steady income, then a business model that can give you 900,000 ‘members’ without being able to make money off them is not the way to go. You’ve got to know what you want; don’t just get carried away by the numbers.

Follow the money: There’s been a first wave – mega-social networks that have changed the world and toppled governments (Egypt), and their success should also serve as a lesson; it will be great to get a new wave of entrepreneurs who can actually find ways to combine numbers and money. Because, you see, that’s the entire purpose of being an entrepreneur; and only innovations that make money can truly be sustained (Steve Jobs, anyone?). Will a Nigerian be that person?

What problem is this solving: Why aren’t people buying into the Facebook IPO? It’s the same reason people distrust venture capitalists. You know how it works with car manufacturers, food sellers, even banks (you know the whole savings-interest cycle), but in this case – people look through and they don’t see what is actually being ‘created’. The world still looks at value in terms of utility – what problem is this solving? That’s what people generally buy and sell into. That’s why countries like China and Japan continue the ride up.

Life isn’t fair: There are two angles on this – the first is, no matter how much those Facebook investors will lose in the shares they own or bought, Mark Zuckerberg will remain rich. As the Los Angeles Timesput it.

The shares began selling at $42.05, valuing Zuckerberg at about $21.18 billion. Then, for a split second, the share price shot up to $45, its high for the day, which would put Zuckerberg at $22.66 billion. It was a paper gain of more than $3 billion, but he was unable to keep it.

From there the number fell down below $40 for a while, hitting $38 a couple of times, which again put the Facebook CEO at about $19.14 billion.

The stock climbed back up and stayed in the $41 neighborhood for a good portion of the day. It spiked up to around $41.65 a couple of times, which would value the 28-year-old at about $20.97 billion.

Then for a while the stock fell back down and hovered at the $40 mark, which would put Zuckerberg at $20.14 billion.

But toward the end of the day, Facebook’s stock began hitting the $38 IPO price once again, and it finally settled at $38.23. At that price, Zuckerberg is worth $19.25 billion.

That’s about a $110-million gain. Not bad for a day’s work, but that’s probably not the kind of gain he or other Facebook investors were hoping for.

But even worse is this piece:

To me, Facebook’s value can be measured in far different ways – how well it’s serving its members, how its treating and compensating its employees, its social impact on society as a whole, and how well it’s positioning itself for the future.

When I look at Facebook, I don’t think about price-to-earnings ratio, but of how it’s changed the world for both better and worse, and how nearly a billion Facebook users are using it to enhance their lives and the lives of those they care about.

Indeed. Some things in life should be more than about money. And Facebook still rules the world. Still, there are lessons to be learned.

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One comment

  1. Hauwa Gambo. Thanks for this. This is highly informative. You just shade more light on my initial doubt about the Social Media Business Model. For Startup and Techies social media busines model is not the way to go right now.

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