Facebook may or may not juice the market for promising young companies hoping to go public. But it has already set a strong example for entrepreneurs who want to build their companies into influential game-changers instead of taking a safer route--selling out to a competitor or a goliath.
Even after it goes public and must, theoretically, answer to shareholders, Facebook and its 28-year-old CEO, Mark Zuckerberg, will retain an unusual level of autonomy. The public offering has been structured so that Zuckerberg himself will retain enough voting power to make unilateral decisions, if he chooses to--as he apparently did when single-handedly negotiating the recent $1 billion purchase of Instagram. Few company founders, if any, get such an influx of new capital while retaining so much control over their firms.
That could end up being a risky business strategy, but for now, it's heartening to entrepreneurs eager to stick with their firms for the long haul.
Since the recession hit in 2008, skittish lenders and weak financial markets have depressed the market for initial public offerings and forced many promising startups into the arms of healthier acquirers. Pure Digital, which made the popular Flip video camera, was acquired in 2009 by Cisco--which shut down the Flipcam operation just two years later. Personal-finance startup Mint.com was purchased by Intuit and rolled into its broader lineup of productivity offerings. Google bought Zagat and more than 50 lesser-known companies over the last three years, merging many of them into its existing platform of offerings.
There's nothing wrong with selling your company to a corporate giant, especially if you're an entrepreneur who's eager to do something else or who simply wants the big payday. But acquired companies often lose their mission and sometimes their entire identity. Instead of growing into independent companies that hire people, build a following, and make an impact, they become indistinct parts of a corporate bureaucracy.
Some analysts feel the trend toward "flipping" companies can erode the self-reinforcing culture of entrepreneurship in places like Silicon Valley, where startups often rely on the cultivation of others who have built their own firms into powerhouses. "If you create a mercenary culture, it will kill the goose that laid the golden egg," says Andy Rachleff, a former venture capitalist who's now CEO of personal-finance startup Wealthfront.com. "You solve little incremental things, but they don't make much of an impact on society."
Rachleff says entrepreneurs start new companies for three basic reasons: to make a lot of money, to build a great enterprise, or to change the world. Those goals aren't mutually exclusive, obviously, but Zuckerberg has made it clear that his primary intent with Facebook is to change the world (even if he gets rather rich in the process).
In an open letter contained in the official registration documents filed with the government, Zuckerberg stated that "Facebook was not originally created to be a company. It was built to accomplish a social mission--to make the world more open and connected." He then went on to explain how its entire business strategy is built around that goal--whether shareholders like it or not.
Other startup CEOs can only wish they had the standing to dictate terms to their investors, since lenders are firmly in the driver's seat these days. After peaking in 2007, the number of U.S. IPOs plunged in 2008 and 2009, according to consulting firm Pricewaterhouse Coopers. The IPO market recovered somewhat in 2010, then fell back in 2011. This year, it's on a pace to eclipse last year's activity, but it's still about 30 percent below the pace of deals in 2007. "It's starting to look normal," says Henri Leveque, a partner at PwC. "We're seeing enough of these to feel good about people's confidence in capital markets."
If the Facebook offering goes well, it could generate more enthusiasm for other IPOs believed to be in the works, involving companies such as Airbnb, Dropbox, LivingSocial, Pinterest, Spotify, Twitter, and Workday. One thing many young firms have going for them these days: They've come of age in a tough economy, which means they're pretty durable. "Recent IPOs have had solid management teams or sophisticated financial sponsorship," says Leveque. "They're real companies." Maybe some of them will even stick around for a while.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.
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