Facebook: How To Raise Money Without Raising Oversight
There are some similarities between Google's IPO (Initial Public Offering) and Facebook's attempts at an Initial Private Offering with its recent Goldman deal.
The similarity is that Google didn't want too much oversight or influence on its management by outsiders, and clearly, Facebook wants the same deal.
When Google filed for its IPO in 2004 it raised $1.67 billion, not far off the $1.5 billion Facebook could raise through the Goldman deal.
From the beginning it was clear that Google wanted the money but it didn't want the oversight that comes with being a public company and the influence on management.
Larry Page and Sergey Brin explained in their "Founders' IPO Letter" that they intend to manage the company based on long term investment opportunities and not on managing to meet quarterly market expectations. They said that they got this idea from Warren Buffett. "We would request that our shareholders take the long term view."
But they didn't want to take a chance on their investors agreeing with this philosophy. They made sure that investors had no choice and no chance at influencing the company's plans. The IPO provided Google Founders shares with ten times the voting rights of common shares.
In a similar way, Facebook with its Goldman deal, is able to raise capital from investors and avoid any oversight or influence on management.
However, John Battelle writing at Searchblog says Facebook needs to become accountable to the public.
It's a good point but clearly, Facebook wants to limit its accountability as much as possible, even using the Goldman deal to avoid SEC regulations that force companies with more than 500 investors to declare their financial performance.
Facebook is the greatest repository of data about people's intentions, relationships, and utterances that ever has been created. Period. And a company that owns that much private data should be accountable to the public. The public should be able to review its practices, its financials, and question its intentions in a manner backed by our collective and legally codified will. That's the point of a public company - accountability, transparency, and thorough reporting.
Mr Battelle writes that if Facebook refuses to become accountable then "we'll migrate our 'social graphs' to a company that is."
Let's see ... which company is it that we will take our social graph to?
Facebook currently holds all the cards and it won't give them up without a fight or without government intervention in the form of new regulations.
Usually, the tech sector avoids attracting government regulation like the plague because the solution is often worse than the problem. But in this case Facebook seems to be steaming full ahead for a showdown with regulators. Why?
Is it a case of poor decision making by Mark Zuckerberg and his team, or is it part of a deliberate strategy?
If there are new regulations on secondary markets then that would shut the gate for other companies from doing the same as Facebook.
And by keeping its financial performance secret, Facebook makes it tough for competitors to benchmark their performance.
When Google filed for its IPO it was the first time that anyone knew how much money Google was making. Everyone was guessing how much money Google was making just as they are now with Facebook.
Google's IPO forced it to file a highly detailed financial report that showed competitors how much it was investing, the size of its revenues, and its profitability. This is information vital to investors but also to competitors who now had a benchmark to test their operations against.
Unlike with Google's IPO, Facebook gets to raise a considerable amount of capital without having to reveal any vital information -- which gives it a competitive advantage. At least for a bit... until regulators move to plug a huge loophole.