Episode 25 The Facebook IPO

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal reflect on the Facebook IPO and its tumultuous aftermath, acknowledging their previous cavalier attitude towards the election cycle and the tech industry's role in America's divide. They highlight Facebook's challenges with mobile usage and monetization, which initially lacked a revenue model, and the consequential pressure to go public. Despite the IPO fiasco, which saw Facebook's stock plummet and legal troubles arise from revised earnings forecasts, the company's rapid pivot to mobile advertising became a success story. The hosts discuss the broader impact of the Facebook IPO on tech companies' approach to going public, noting a trend towards staying private longer and raising significant capital, which has implications for wealth inequality and investor accessibility. The episode also touches on the closure of Vine by Twitter and the possible sale of the service, and concludes with recommendations: the Internet History Podcast and the book "Connectography" by Parag Khanna.

• Speaker A acknowledges a cavalier attitude towards the 2016 election cycle in past episodes.
• They express regret for not addressing the significant problems and deep divide in America.
• Speaker A admits to being wrong about the AT&T Time Warner merger comparison to "Make America Great Again."
• They recognize it was insensitive to the pain people are experiencing on both sides of the political divide.

"First, we apologize for our cavalier attitude towards this election cycle over the past couple episodes and our glossing over of the clearly very real problems and deep divide in America that it represented in the Skype episode."

This quote highlights Speaker A's realization of their previous oversight in addressing the political climate and its impact on the nation.

• Speaker B suggests the episode provides a parable for the country and lessons for the tech industry.
• They acknowledge the tech industry's role in contributing to America's divide and wealth inequality.
• The Facebook IPO story is presented with its dark side, where institutional investors profited at the expense of public retail investors.

"Second, looking back on the episode, we think it actually presents a relevant parable for our country right now, and we hope some important lessons for the technology industry going forward."

Speaker B's quote underlines the episode's potential to offer insights into America's current situation and the tech industry's responsibilities.

• Speaker A highlights Facebook's ability to overcome existential business challenges.
• They suggest that Facebook's success story can inspire resilience and progress during difficult times.
• The hosts express a commitment to improving their show and serving the community better.

"At the same time, Facebook's perseverance and their determination in overcoming what were massive existential challenges to their business model, as you'll hear about in this episode at incredible speed, we think can be an inspiration to us all right now on how to move forward when it doesn't look like that's super possible."

The quote from Speaker A emphasizes Facebook's determination as a source of motivation for overcoming adversity.

• Speaker A and B introduce a new content direction for the show, focusing on analyzing IPOs.
• They express a desire to understand what makes companies endure and create lasting value.
• The episode aims to explore companies that go public instead of being acquired, using Facebook's IPO as the first case study.

"Today's episode, we're trying something new. We're piloting a new idea, analyzing ipos in addition to our normal acquisition format."

This quote marks the beginning of a new thematic exploration for the podcast, shifting towards an analysis of IPOs.

• Speaker A and B encourage listener feedback through various channels to improve the show.
• They value critical feedback and seek to make the show more beneficial for the audience.

"Mean both of us are very involved with early stage companies in different facets and in kind of typical customer validation customer development format. Be harsh, we'd love all your criticism."

The quote invites listeners to actively participate in the show's development by providing honest feedback.

• Speaker C and D introduce Pilot, a company offering accounting, tax, and bookkeeping services.
• They emphasize Pilot's growth and reputation, backed by prominent investors.
• Pilot is presented as a solution for startups to focus on core business activities while outsourcing accounting needs.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner Pilot for startups and growth companies of all kinds."

This quote introduces Pilot as a sponsor, highlighting its relevance to the startup community.

• Facebook was founded in 2004 by Mark Zuckerberg and others, turning down significant acquisition offers.
• The company grew rapidly, with high user engagement and revenue by the time of the IPO.
• The Facebook IPO is referred to as a "cultural touchstone" and the third-largest IPO at the time.

"But suffice to say that Facebook was founded in 2004 by Mark Zuckerberg, Eduardo Savarin, Andrew McCollum, the forgotten Facebook founder Dustin Moskovitz, and Chris Hughes."

The quote provides a brief background on Facebook's founding and its significance in tech history.

• Facebook and Goldman Sachs attempted to circumvent securities laws with a special purpose vehicle for investment.
• The SEC investigated, leading to a revised deal excluding U.S. investors, damaging Goldman's reputation.
• Morgan Stanley became the lead bank for Facebook's IPO, with Goldman Sachs demoted.

"In January 2011, Facebook separately did a rather infamous deal with Goldman Sachs that didn't go so well."

This quote refers to the problematic deal between Facebook and Goldman Sachs, which had regulatory repercussions.

• At the time of the IPO, Facebook had no mobile ad revenue, despite increasing mobile usage.
• The mobile app's performance was poor, and the company faced pressure to address this issue.
• Facebook's risk factor was the potential shift from desktop to mobile without a monetization strategy.

"One of the risk factors is growth in use of Facebook through our mobile products, where we do not currently display ads as a substitute for use on personal computers, may negatively affect our revenue and financial results."

Speaker A's quote outlines a critical risk factor for Facebook's business model at the time of the IPO.

• Facebook attempted to stay flexible with a cross-platform HTML5 app.
• The app was intended to work on both iOS and Android by being wrapped and shipped to respective App Stores.
• The HTML5 app was not successful and users preferred the mobile web version over the app.

"But, yeah, it was not working."

The quote indicates the failure of Facebook's HTML5 app strategy, which was meant to be a flexible solution for both iOS and Android platforms.

• Facebook's app was of poor quality compared to competitors.
• Users preferred using Facebook's mobile website due to the app's poor performance.
• At the time, Facebook lacked a monetization model for mobile, generating no revenue from it.
• In contrast, by the third quarter of 2016, mobile advertising revenue was 84% of Facebook's ad revenue.

"So one half of the huge gaping chest wound that Facebook had at this point was the app sucked, and then the other half was they had no monetization model, they made no money from mobile."

This quote summarizes the two major issues Facebook faced: a substandard mobile app and the absence of a mobile monetization model.

• Facebook's IPO was the largest in technology history at the time.
• During the IPO process, Facebook announced the acquisition of Instagram for $1 billion.
• The acquisition was aimed at bolstering Facebook's mobile presence and user engagement.
• Facebook intended to operate Instagram as a standalone entity.

"They announced that they're acquiring Instagram... The entire rationale for the Instagram acquisition was around bolstering their story and their user base in mobile."

The quote explains the strategic importance of the Instagram acquisition in strengthening Facebook's mobile strategy during the IPO period.

• Facebook was preparing for its IPO by presenting to potential large institutional investors.
• The company amended its S-1 registration statement to reflect new information and feedback.
• Facebook emphasized the critical importance of mobile usage for long-term user growth and engagement.

"We believe that mobile usage of Facebook is critical to maintaining user growth and engagement over the long term."

This quote from the S-1 amendment highlights Facebook's recognition of the importance of mobile usage for its future growth.

• Facebook lowered its financial guidance due to the impact of mobile on its revenue and earnings.
• The information about lowered guidance was shared with equity research analysts from underwriting banks.
• Institutional investors were informed about the revised forecast, creating an information asymmetry.

"They were terrified that they were going to come in below expectations because they were behind on mobile and people were switching over to mobile faster than they could get products out the door and get monetization done."

The quote reveals the reason behind Facebook's decision to lower its revenue and earnings guidance, highlighting the urgency of addressing mobile challenges.

• Facebook's IPO faced technical errors on Nasdaq, resulting in trading delays and incorrect order fills.
• Nasdaq faced legal repercussions, including a settlement with the SEC and a shareholder class action lawsuit.
• Facebook's stock experienced significant declines in the days following the IPO.
• The company faced a shareholder lawsuit due to the revised guidance not being publicly disclosed.

"Facebook has literally broken the Nasdaq... Nasdaq actually settles two lawsuits."

This quote describes the technical and legal issues that arose during Facebook's IPO, which had a significant impact on Nasdaq and the perception of the IPO.

• Facebook experienced reputational damage and stock price decline post-IPO.
• The company refocused internally on improving the mobile experience and launched mobile ads.
• Facebook's management team, led by Mark Zuckerberg and Sheryl Sandberg, did not panic and instead focused on mobile as the future.
• The company released native iOS and Android apps and emphasized mobile across the organization.

"They spend the rest of the summer completely focused on mobile... mobile is our future."

This quote captures Facebook's strategic pivot towards mobile following the tumultuous IPO, emphasizing the company's commitment to addressing its mobile app shortcomings and monetization issues.

• Facebook shares hit an all-time low at $17.73 a share, reducing their market cap by approximately $50 billion.
• Despite the low share price, Facebook released a well-received iOS app that could insert ads into the feed, marking the beginning of native advertising on mobile for Facebook.
• In Q4 of 2012, Facebook started mobile advertising, which quickly accounted for 23% of the company's total ad revenue.

"And now the age of the native ad and advertising in the Facebook feed on mobile is born and kind of like a Phoenix rising from the ashes."

This quote highlights the pivotal moment when Facebook introduced native advertising on mobile, which was a significant turnaround point for the company, likened to a rebirth.

• The transition to mobile was challenging for many companies as they attempted to adapt banner ads to mobile, which was largely unsuccessful.
• Facebook's newsfeed ad unit became the most effective mobile ad unit, capturing users' attention as they scrolled through their feed.
• As of the time of the conversation, 84% of Facebook's revenue came from mobile advertising, signifying their success in the mobile advertising space.

"Is a native Facebook ad. And when you're scrolling through that know, you scroll sort of, you stop at every story to pause and look at what it is. And for that brief moment, the advertiser has the opportunity to take over your entire captive attention in a way that they never could on desktop."

This quote explains the effectiveness of Facebook's native mobile ads, which engage users' full attention as they pause to look at each story in their feed, something that was not possible with traditional desktop advertising.

• The Facebook IPO was a significant event, with Mark Zuckerberg admitting that HTML5 was a mistake and the IPO process made the company stronger.
• The IPO forced Facebook to scrutinize every aspect of its business, leading to a much-improved company operation.
• The IPO was a learning experience that pushed Facebook to address its weaknesses, particularly in mobile advertising.

"It was great for the company. It forced them to know, step up and play with the big boys, play in big boy land and big girl land."

This quote suggests that despite the difficulties faced during the IPO, it ultimately had a positive impact on Facebook, forcing the company to mature and compete at a higher level.

• IPOs provide companies with a cash influx, a liquid currency for M&A transactions, and liquidity for shareholders.
• The Facebook IPO showed the risks of delaying going public, as it led to pent-up pressure and inflated expectations.
• The IPO scrutiny forced Facebook to address existential risks, which may not have been as evident without the public market's magnifying lens.

"I really think that the most interesting part of that s one is where they identify risk to the business because truly they probably were working on some of the mobile advertising stuff beforehand. But it is a huge slap in the face and a huge wake up call to realize our business has an existential crisis on its hands."

This quote highlights the importance of the IPO process in making Facebook acutely aware of the risks to its business, particularly regarding mobile advertising, leading to significant strategic changes.

• Facebook's IPO changed the way tech companies approach going public, with many companies now waiting longer and raising more money privately.
• The trend of staying private longer has been linked back to the Facebook IPO, which is seen as a cautionary tale.
• The delay in going public has led to less scrutiny and accountability for companies, potentially contributing to wealth inequality as everyday investors are excluded from early investment opportunities.

"It's so interesting. I think one of the lessons that Silicon Valley and the tech world seems to have absorbed from the Facebook IPO is don't go public. It's terrible."

This quote reflects the misconception in the tech industry that going public is inherently negative, a lesson that seems to have been learned from Facebook's challenging IPO experience.

• Statsig is introduced as a sponsor for the podcast episode.
• The CEO of Statsig, VJ, previously worked at Facebook and was instrumental in developing their mobile app ad product.
• Statsig offers a feature management and experimentation platform designed to help product teams make data-driven decisions.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

This quote describes the services provided by Statsig, emphasizing the benefits of rapid shipping, automated testing, and measurable impact on business metrics for product teams.

• Big institutional investors are coming down market to invest directly.
• This trend squeezes private equity and late-stage venture industries.
• Companies are opting to go public later, creating opportunities for large investments in private markets.

"There's a few things sort of contributing to this trend. There's this notion that we've been talking about that companies want to go public later, but they are investment vehicles where large amounts of money can be deployed. So large amounts of money will be deployed."

This quote explains the shift in investment trends where companies delay going public, thus attracting large institutional investors to private markets.

• The internet has increased the availability of information, making it easier for investors to find companies.
• Institutional investors' claim of unique access to startups is less valid now.
• Greater visibility into company performance allows direct outreach for investment opportunities.

"Since the development of the Internet, one thing has always been true, and that is more information will be more available to more people than previously existed."

The quote highlights the role of the internet in democratizing information access, which impacts investment strategies and opportunities.

• Early-stage venture capitalists are somewhat insulated from direct institutional investments.
• The three disciplines of venture capitalism: finding companies, picking them, and winning deals.
• Winning deals is now perceived as the most crucial aspect, changing the venture capitalist's role.

"And there's sort of three things that a venture capitalist does, and I didn't make this up, but lots of people talk about this. But totally true principle capital. One, find companies great companies. Two, pick them. Decide if you're going to invest or not, if you think the company has high potential or not. But then three, win the deal if it's a competitive deal."

This quote outlines the three fundamental tasks of a venture capitalist, emphasizing the growing importance of winning deals in a competitive environment.

• The emphasis on deal-winning could lead to an entrepreneur-friendly market.
• Investors may have to settle for the minimum acceptable return.
• The Facebook IPO is cited as a significant influence on late-stage venture trends.

"Well, if that's the case and it's really all about just getting the best deal, then it should be more entrepreneur friendly and prices should go up and it should be much more commoditized to the point where. Exactly what's happened exactly, that investors effectively just get the minimum acceptable return that any of them are willing to deal with."

The quote discusses how the focus on winning deals impacts investment dynamics, potentially benefiting entrepreneurs and affecting investor returns.

• IPOs and acquisitions are graded based on the strategic and financial returns for the acquirer.
• The endurance lens is used to assess whether an IPO makes a company more enduring and competitive.
• Facebook's IPO is debated, with differing opinions on its impact on the company's growth and strategy.

"We want to assign this a grade based on the rubric of did it make this company a more lasting and enduring institution, have it a bigger competitive moat, make it a stronger, more viable, long lasting company."

This quote explains the criteria used to evaluate IPOs, focusing on the long-term strengthening of the company's position in the market.

• The Facebook IPO is critiqued for its tumultuous aftermath.
• The urgency created by the IPO is credited with pushing Facebook to address its mobile strategy.
• The acquisition of Instagram and the rapid development of native advertising are discussed as pivotal.

"And I think had they not gone through that year and had this massive 20,000 megawatt spotlight shown on them, they wouldn't have moved so fast to plug the mobile hole."

The quote suggests that the scrutiny following Facebook's IPO was a catalyst for strategic changes that were crucial for the company's success in mobile advertising.

• Twitter's difficulties with monetization and advertising are contrasted with Facebook's success.
• The closure of Vine and layoffs at Twitter are signs of the need for operational streamlining.
• The importance of Twitter as a platform is acknowledged, but its sustainability is questioned.

"So for know, tough to do. You never want to kill products that people love. But I'm rooting for Twitter to survive at all here. And so I think they need a lot more belt tightening to get there because it's not."

The quote reflects the challenges Twitter faces in maintaining its product offerings and the need for cost reductions to ensure its survival.

• Microsoft used overseas capital to acquire Skype, avoiding repatriation taxes.
• The acquisition provided significant tax benefits and strategic value.
• The implications for other companies with overseas cash reserves are considered.

"And it turns out that is indeed the case. Was indeed the case. We were pointed in this direction by Nick Seaguyn, dear friend of Ben."

This quote confirms the strategic financial maneuver by Microsoft in using overseas capital for the Skype acquisition, highlighting the tax advantages of such deals.

• The Internet History Podcast is recommended for its detailed storytelling and historical insights.
• Listener engagement through Slack and feedback is encouraged.
• The book "Connectography" is recommended for its geopolitical insights relevant to tech companies.

"This is so good. If you like acquired, you will love the Internet History podcast, particularly the story part."

The quote recommends the Internet History Podcast as a valuable resource for listeners interested in the backstory of technological developments and companies.