Commentary: Facebook isn’t your typical company, so why should its IPO be any different?
In one week, Mark Zuckerberg and friends will ring the NASDAQ bell, and we will witness the largest Internet IPO in history. Facebook will likely raise more than $10 billion at a valuation I suspect will skyrocket past $100 billion.
The best part: all of this will happen under the direction of a 27-year-old CEO with absolute control over his company. Some investors are complaining about his nonchalant attitude towards the IPO (oh no, Zuck isn’t wearing a suit!), but there is no shortage of investors who want in on this IPO.
Facebook has not bent the traditional rules of the IPO — it has fundamentally altered them. And while Facebook’s IPO is a once-in-a-decade event, its impact will be felt for much longer. Here are a few of the ways Facebook has fundamentally altered the IPO landscape:
1. Hot companies, not bankers, dictate the rules. The influence of bankers has waned, while Silicon Valley’s influence has grown. The collapse of Lehman Brothers was a permanent black eye to the financial sector’s reputation, while the industry continues to hemorrhage jobs.
On the other hand, Silicon Valley companies are on the ascent, and the banks know it. Tech companies can’t find enough people to fill their engineering jobs, and more and more money is flowing into tech startups, thanks to films like“The Social Network” and big exits by companies like Instagram.
As a result, investment bankers need Facebook and other hot tech companies far more than they need the investment bankers. And thanks to a greater emphasis on founder control, increased liquidity on private markets, and changing government regulations, Internet companies looking to IPO are coming to the table with significantly more power and leverage.
2. Morgan Stanley is in the driver’s seat for future IPOs. Morgan Stanley won the coveted “lead left” slot on Facebook’s IPO, meaning that it got the biggest fees and the bragging rights. And as Business Insider points out, Morgan Stanley’s been on an IPO winning streak with LinkedIn, Zynga, and others.
According to CNN, Morgan Stanley was the lead underwriter of more than 65 percent of the top 20 Internet IPOs in 2011, completely blowing Bank of America (9.6 percent) and Goldman Sachs (7 percent) out of the water.
Morgan Stanley has now been the underwriter for the last three blockbuster Internet IPOs (Google, LinkedIn, and Facebook). And while Goldman has been making up ground, Morgan Stanley’s large and in charge. I suspect it will remain that way for the foreseeable future.
3. Founders are in the drivers seat. Zuckerberg owns 18.4 percent of Facebook, but he controls 57 percent of the vote, effectively giving him complete control over the company. Mark Pincus of Zynga followed a similar ownership model at Zynga, but they’re just the beginning of a wave of companies that will focus on keeping founder control. (Google’s founders, of course, deserve a hat tip for laying the groundwork for this trend.)
There are a lot of reasons why founder control is becoming more and more common in Silicon Valley startups, but one of the biggest drivers of this trend is top-tier venture capital firm Andreessen Horowitz, whose core belief is that a founder should be CEO and invests with that philosophy in mind.
Facebook’s success will only reinforce that belief. More Internet companies are implementing ownership structures that increases founder control. Wall Street had better get used to it.
4. Why go public when you can stay private? Thanks to a government regulation that forces private companies to publicly report their finances after it surpasses 500 shareholders, Facebook decided to go public. If it weren’t for that rule, there’s a good chance Zuckerberg would have kept the company private.
That regulation no longer exists though, thanks to the recently-passed JOBS Act. The press surrounding Facebook’s necessity to IPO helped trigger a change that now allows private companies to keep their financials private until they reach 2,000 shareholders. Thanks to the JOBS Act and the rise of secondary markets such as SecondMarket and SharesPost, companies can raise more funds without the headaches that come with going public (*cough*Yahoo*cough*).
The IPO isn’t going away, but it will take longer for an Internet company to reach that stage. I wouldn’t be surprised to see more and more companies avoid the IPO roller coaster, especially if they’re led by founders who have long-term visions for their companies. That is a good thing.
Thanks to Facebook, we are entering a whole new era for the IPO.