Did you know that a company called Facebook is planning to sell shares of itself to the public in an event known as an initial public offering? And that in order to make sure it comes off successfully, the company's executives must travel around the country making solid presentations to investors? And that Wall Street investors, those notoriously hard-nosed and rational actors, must be convinced about the merits of fresh companies like Facebook before they're willing to place buy orders?
Please.
The roadshow is an established tradition. For small, little-known companies, it's still vital. Some IPOs can't get done unless the CEO sits down in front of groups of mutual fund managers, pension fund managers, and other institutional investors in New York, Boston (hello, Fidelity!), Minneapolis, and Los Angeles. Executives describe the business and its prospects for earnings and growth in the next several years. Analysts push back and ask probing questions. Investment bankers user their vast experience to gauge demand, and calculate the precise, just price for the IPO. It has to be juuuuust right. If the stock pops too much on the first day, the company feels like it left money on the table. If it falls, the investors who bought the IPO feel like chumps.
The Facebook IPO is not going to be like one of those IPOs. In fact, it's a big game of make-believe. Facebook's executives will pretend they have great certainty about the future direction of their business and industry. And investors will pretend they care what those results are.
Sure, Mark Zuckerberg can talk about 2011 results, and rhapsodize about modern humanity's seemingly endless capacity to share information and post pictures of their cats and dogs. Sheryl Sandberg can talk about the opportunities presented to a company willing and able to sell or package that information to advertisers. Everybody will nod.
They could be right. But they'll almost assuredly be wrong — too optimistic, or too pessimistic.
Years ago, industrial companies could chart out with some degree of confidence how their business would flow over the next several years. But these days? Not so much. In the digital media world, projections about what will happen three years from now, let alone one year from now, almost always defy expectations. Go back to 2007, and virtually every five-year forecast issued by economists, corporate executives and stock analysts has been wrong — wrong on the aggregate and wrong on the particular. (If you can find a 2007-vintage pro forma that accurately projects a company's five-year growth trajectory, send it to me. I'll send you a free copy of my new book.)
In 2008, could Zuckerberg have projected how Facebook's users would grow by 2012? In 2009, would Facebook have told shareholders that it would consider spending $1 billion on Instagram? No. Instagram didn't exist. Business models come and go with such speed that anything a CEO — even one as legendary and awesome as Mark Zuckerberg — tells you about the near-term future is likely to be wrong. Success in this world isn't about crafting a five-year plan. It's about trying to get through the year, jumping on new opportunities, and shifting directions. Anything a CEO of any type of company tells you in May 2012 could well be moot come May 2013.
For their part, the investors who are lining up for a free lunch and a glimpse of Mark Zuckerberg's hoodie aren't on some journey of value-discovery. The vast majority of them don't really care about Facebook's projected share of the projected online advertising market in 2014. And since Facebook's stock has been trading on private markets like Second Market for a couple years now, they already have a pretty good idea what other investors think the company is worth. The ones who don't (forgive me) 'like' Facebook will boycott the IPO, even if the IPO prices come in a bit low. The ones who believe in its ability to grow —and, more importantly, in the willingness of retail investors to pay a higher price for a small piece of Facebook — will jump in, even if the IPO prices at the top of the projected range.
So, yes, Silicon Valley is meeting Wall Street. The dress-down CEO is coming face-to-face with the suits. Enjoy the show! But let's not act as if the outcome depends on the back-and-forth of the roadshow.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.
His new book, Better, Stronger, Faster, is on the shelves now.
