Facebook's private burden

Summary: Facebook's Valuation, Relevance of IPOs, Goldman's mistake, Risk of frauds despite SOX

The Gods must be crazy

Facebook's recent private placement of $500mn valued the internet venture at $50bn. Of late the stock's been trading around $27 at SecondMarket putting the valuation of company close to $70bn. General Atlantic is planning to buy a small piece too. And... it is yet to hit the IPO. Whether the valuation is justified, remains to be seen. I will write separately on that. Here I argue whether the new age private companies need retail investors? Which also points to the relevance of IPOs in today's post-recession world. 

Equity firms (read Goldman and party) sold "the chance to invest in Facebook" to their private partners as "investment of the decade". Too bad they couldn't keep the event hush-hush like it was planned to be. They are still singing soothing songs for the irate investors. It is likely to draw SEC's attention which might force them to list on the primary market next year. SEC bars unlisted companies to have more than 500 investors and in this case 100s of "sophisticated investors" are hiding behind Goldman in order to be counted as 1 investor. 

Sharespost, one of the major investors, thinks the company would be worth more than $200bn, had it been trading publicly. Really?? Aren't we almost bordering on another 'bubble' like frenzy? With revenue speculated between $1 - 2bn and margin of $200-400mn a valuation of $50-70bn seems pretty high enough already. I repeat again - it is yet to hit the IPO market and there is still time before it does. Whatever may be the true valuation retail investors are going to get an expensive deal when it finally lists itself. 

It's a private matter now?

From Facebook's point of view, it was natural to look for private placement. It saves them the paperwork, reporting, regulations, external control and all-the-jazz that comes with listing publicly. That brings us back again to the same point- is the primary market a burden on companies like facebook? It is pretty expensive to list on the primary market thanks to Enron and Sarbanes-Oxley. Companies like Facebook, Zynga, Groupon are happy staying private till the last moment. 

With back to back crashes in the last decade (20022008) and sweeping corporate frauds, politicians rushed to pass a heap of new laws. In their panic to protect, they might have prevented retail investors from participating in the early growth phase of good companies. If you combine the increased burden of listing and the expensive deal for retail investors, IPOs  are losing their shine. In the 1990s, the number of IPOs used to average more than 400 which came down to 150 in this decade and was less than 100 in the last 2 years combined. 

With stricter rules SEC hoped to prevent companies from committing frauds but the recent Goldman investment proves how easily companies can legally bypass the rules that are put in place. Nyppex estimates that last year nearly $5bn was traded in private stock on the secondary market. I'd say thats a high risk zone for frauds with close to zero regulation. The sophistication of investors has proven to be no match for their greed

Food for thought: If you are one of the 500 million people on Facebook and it's currently worth $70 billion, then your contribution comes to about $140

Update: I had written this post in May 2011. FB was valued at $70B back then (more than what it's today). Exactly a year later it listed with brash overconfidence at $38 (valued @ $104B). Since then it has touched a high of $45 (valued @ $124B) and also fallen to as low as $17.5 (valued @ $48B). Today it is trading at $28.5 (valued @ $68B). Between its high and low, the market value of the company has moved by a staggering $76B. Amazing, isn't it? If you had bought shares in the first 15-20 minutes of its listing (its highest trading volume till date), you are still probably at a loss of more than 35% (better than a loss of 60% a few months back, but still).