Many are calling Facebook’s IPO a bust because it didn’t pop on the first day. Others are decrying the fact that Facebook “took all the profits for themselves” at the expense of individual investors. Facebook’s stock may or may not be overvalued (I think it is, by a lot), but calling it a bust and complaining that retail investors aren’t making the profits they are “entitled to” is ridiculous and misses the larger point. For example, in a Forbes article titled 7 Reasons Why the Facebook IPO was a Bust, Rich Karlgaard writes:
Facebook left nothing for the common investor. The insider pig pile of PE firms and celebrity Silicon Valley angels took it all. This is a rather new, post-Sarbanes-Oxley fact and it should make Americans very, very angry. When Microsoft when public in 1986, its market value was $780 million. Microsoft’s market value would rise more than 700 times in the next 13 years.Bill Gates made millionaires of thousands of ordinary public investors. When Google went public in 2004 at a $23 billion valuation, it left less on the table for you and me. Still, if you had invested in Google then and held your stock, you would be sitting atop a 9x return. Zuckerberg and his Facebook friends took it all.
That Facebook and its investors acted in its self interest shouldn’t be surprising and it shouldn’t make people mad. They have no responsibility to the average Joe clamoring for a quick buck by purchasing Facebook stock. Zuckerberg and his team are thinking “The average investor hasn’t done anything, they didn’t take any risks like our previous investors, they just want to piggyback onto our gains. They’re greedy.”
Facebook sold its private stock at the highest valuation they could, which brought Facebook and its previous investors the most cash possible. It was as if they were selling their company to the public, not opening it as a great investment opportunity. They viewed the new shareholders as suckers, not partners.
With the advent of private equity in the 80s and its explosive growth into the 2000s, the pension funds and institutional investors have gotten more creative and powerful. They invest earlier and in huge amounts, into the multi-billions. The only people who can’t get early exposure are the regular joes who “play the market.” Its now a casino and the game is rigged. Facebook, the banks and the press sold the story using the old narrative, instead of the new role of public capital markets.
Facebook’s IPO shows this new role. In a private equity driven, post Sarbannes Oxley world, the returns are getting shifted to those who took the initial risk, not retail investors. These initial investors are playing a game of musical chairs and retail investors are the last stop, the last idiots to buy into the game. It’s rigged so that the retail investors don’t have a seat if (when) the music stops. And it’s purposely designed that way.
What Facebook, its investors and the banks did isn’t new. It’s just the latest example. Groupon did the same thing, but worse. Months before they went public they took a series G round valued just shy of $1b. The founders and investors took $810m off the table and put it in their pockets. The new investors not only allowed this, they did so enthusiastically because they knew that Groupon would go public at a higher price and the “stupid” general public would be left holding the bag when the price inevitably fell. Groupon is now down 54% from it’s IPO price.
Retail investors should not be mad at Facebook for acting in its self interest and raising as much money as possible. Retail investors should be pissed at the banks who hyped Facebook as the next great investment opportunity and the press who bought into the hype and the outdated narrative. They should be pissed at additional government regulation that makes it hard for companies to go public earlier and leaves more gains for private equity. Anyone who bothered to look at Facebook and Groupon’s previous private rounds and private sales on Secondmarket would have been able to see this coming.
It’s the new normal. Tech companies don’t use the stock market as an efficient way to raise capital like it was intended. It’s a way to cash out previous rounds and leave potential losses with the general public. It’s one giant casino with the public as suckers. This farce will only stop when retail investors realize that tech IPOs are a loser for most of the general public or refuse to play in the casino…er stock market.