To the world outside of entrepreneurship, Facebook has served as the poster boy for startups everywhere. The marriage of the Tech Business sectors in the 21st century has resulted in a revolution in the way companies are valued and in the way that they succeed.
More importantly, the startup industry has come to a crossroads: one path leads to legitimization, in which the world will finally respect the unique way startups operate and their intrinsic value that is sometimes hard to see. The other path is the worst-case scenario, in which the public does not validate the startup industry and the opportunities this tech boom has provided will pass as just another bursting bubble.
Through a series of circumstances and events, Facebook has become the determining factor that will establish which path the startup industry goes through. The reason why Facebook has been dubbed the trailblazer (or guinea pig, depending on which way you look at it) is another story all together. The main reason is because of the spotlight the media has continuously shined on Facebook, resulting in an unjustified amount of hype in the public’s eyes.
If Zuckerberg were more responsible, he would have stepped out in front of this years ago and cleared the air about Facebook’s role in the startup community. In actuality, Facebook is nothing more than the usual dorm room venture turned mega-corporation. But, this is irrelevant because Facebook’s IPO will decide the fate of this entrepreneurial explosion that has culminated in recent years.
In the perfect world, if everyone was well-educated on the subject at hand and if people did NOT make decisions based on emotion and quick impressions, then Facebook’s performance thus far would actually spell out great things for the startup community. But, what should happen and what will happen may be two separate things.
Naturally, it could be summed up that the future performance of Facebook’s stock in the next six months will be the single point of reasoning in which way the startup industry will go. This past month alone, there have been several contributing factors of why Facebook’s stock has tumbled in its first week on the market. From the incompetency of the NASDAQ index to the misconception that the price Facebook was trading at in the secondmarket (private shares before IPO) should be equal to its publicly traded price have resulted in a tough first week.
However, if you look at Apple, Microsoft, Google, or any other trailblazers that entered the public arena, the beginning always starts off rough. Granted, Facebook stock has lost 25% of its value since it went public May 18 at $38 a share, yet it is unfair to make any decisions in such a short amount of time.
If Facebook’s stock can stabilize – not skyrocket, but just perform respectably – the public’s perception of the startup community will forever be changed for the better, creating a wealth (literally) of opportunities for entrepreneurs everywhere. The following reasons are why Facebook’s role as a guinea pig should validate the startup community in the eyes of the people in 2012:
More Financing for Entrepreneurs
Even though Facebook did not soar to $100 on its first day, venture capital firms that invested early made billions in profit. Top-dog Accel Partners took in an estimated $1.8 billion alone that day. Now, there is even more money sloshing around at VC firms looking for a home in a rapidly growing start-up with a great chief executive.
Hundreds of other people also became instant millionaires and billionaires on May 18th. Some were – or are, now – Angel investors who look to invest in startups but historically, never had enough capital to make a difference. Now, there is an army of Angels ready to pump massive amounts of capital into the next big idea. Also, there are wealthy individuals who purchased private shares in Facebook and made a great return on investment even with the poor opening week. So now, those who have never considered investing in small technology companies may now conceive the risk/reward of investing in a young, unproven company.
Facebook offers advertisers unprecedented access to consumers. More than anything, it's this scale that makes the site so valuable. "You can reach massive audiences in a single platform," says Melissa Parrish, an interactive marketing analyst for Cambridge, Mass.-based Forrester Research. In one month, 889 million more people use Facebook than attend one of the 405 regular-season Major League Baseball games. In August, after eight years in business, Facebook projects it will have more than one billion users. It took McDonald's 15 additional years to serve the same number of customers.
In the past year, for example, the social network has purchased at least 1,300 patents from Microsoft and IBM for an undisclosed amount of money. In addition, Facebook's acquisitions of smaller firms have brought it new tools and capabilities. The stores of data, however, may be the most invaluable asset, allowing Facebook to deliver targeted advertising to users in new ways.
The data, and the potential to use that data, is a lot of how Facebook derives its value. It's smart data that allows you to effectively and efficiently target very specific audiences. I think its scale can't be over emphasized." These values do not show up on Facebook’s balance sheet"
Contrary to popular belief, Facebook does actually have an impressive financial earning track record over the past 3 years. Revenue rose 154 percent from 2009 to 2010 and 88 percent from 2010 to 2011. The growth is slowing but not abating. In the meantime, payments and other fees from partner companies such as Zynga have nearly doubled as a revenue source.
The vast majority of the revenue comes from advertisers, but the mix is shifting. Marketers want more from Facebook, Parrish says. But at the moment, Facebook is a little bit stingy and has become more sensitive to how it handles user data, fearing a backlash. This will change now that it has become public, as Facebook is already working out a way to please both users and clients, which means big financial reward. Also, Facebook has yet to develop ads on their Mobile app, which is something that could be easily done and would be even more lucrative given the fact that’s where most of their users come from.
Confidence in the Young and Inexperienced
The reality that a young company, led by a CEO who is younger than most of the company’s 900 million users, has gone public with such a high valuation after only 8 years is stunning to many. What this further exemplifies to those who are less familiar with technology startups is that young and innovative companies can create great products that can be quickly adopted, without requiring the traditional resources of some of our economy’s larger giants.
The public is slowly becoming more accepting to the fact that companies started from the garage can evolve into an economic juggernaut. This means consumers will hopefully become more comfortable purchasing from startups and companies should be more comfortable partnering with startups. As a result, people outside of the tech scene will become more attracted to this unique company lifestyle. This IPO will likely increase excitement for working within a startup environment. People outside of tech communities will become more interested in working for a company where equity ownership is possible, where their decisions affect the look and feel of the product, where they truly feel part of the team.
Interconnectivity with other Startups Spells Profit
In the same way that Microsoft enabled thousands of companies to build software products for the PC, Facebook’s success is partially credited on their approach of opening their technology to external developers, via Facebook applications like games (i.e. Farmville), communication tools, or simply organizational products. This has allowed Facebook to become more than just a social network, but also an entertainment destination, a productivity tool, as well as a place to plan your life. Facebook has exhibited how a startup’s product could serve as a collaborative platform that earns money for all parties involved.
Ryan Babikian | Elite.