Tuesday, May 22, 2012

FaceBOOK = Full Bullshit

The way facebook's IPO has performed is nothing short of glorious sandbagging to retail clients who have been unawares of how the return profiles of VC ventures have changed over the past few years.  We have seen the bankers sucker punch retail clients by offering stock at 38, quickly hitting 45, before being sold off very very hard to close near it's IPO price - where we saw some suspicious bidding by the investment bankers to keep the price above it's 38 IPO price on the first day.  Second day was horrendous for those who were hoping for a rebound, as we saw prices fall 11% to close $34 last night.

So what gives, despite all this hype?

Firstly and foremost, it's all about pricing and who's eating the cake -
This is not the 90's tech boom where people have no idea how to value stocks pre-IPO; both entrepreneurs and VC's are much more saavy, so most of the equity returns are now being captured earlier in the cycle - the IPO now no longer seems like the best way for entrepreneurs to raise capital AND retain control of their product development.
The greed of the investment bankers made the over-hyped offering to offer more shares - 25% more than originally planned and from an original price of $28 to $38 - effectively raising the IPO valuation by 8bn, from about 96 to 104bn.  It is now well-known that all brokers were were given the IPO have offloaded this stock.

Facebook is just another distribution network, only it's market power isn't as strong as people assume.

FB is that ugly girl that suddenly got popular when everyone realised how witty and laidback she was. Then people realised how conniving and manipulative she really is; and she ends up more unpopular than she was before she started - not before getting her grubby little hands over everyone she wanted.  This all comes back to the nature of how Mark Zuckerberg has been reported to do business - 'legally but unethically'.  His willingness to dilute his founding partner, to do it knowing that someone else would foot the lawsuit is the epitome of unethical but legal behaviour. Facebook is the best social network ever created, and it has given much more value than it's taken out - however, businesses that openly do unethical transactions willingly will ultimately be less defensible against the fast changing online sentiments that can quickly pass on the knowledge through new unbiased and unfiltered online forums - stocktwits, reddit, bloggers, twitter.  If you have a great product, but you don't give a shit about the customer - and they realise they are the product you are selling; you're walking a very thin line with the sustainability of your business model.

The biggest limitation of google+ as a social network, is the very example of what the greatest weakness of facebook is - the broad undefined connectivity nature of it's system makes it both infinitely scalable, but ultimately too unstable for long term equilibrium at it's current userbase.
My best guess is that people will start to move onto social networks that are more defined towards the specific action you want to share - photo sharing through Instagram, financial news through Stocktwits, local recommendations through Yelp,  online gaming through Steam/EA/ATVI/Nexon, professional social networks through Linkedin.

Linkedin, Yelp, ZNGA all proxies for the Facebook IPO have also been getting slaughtered - a case of buy the hype, sell the news.