The digerati are obsessively focused on the imminent filing of the Facebook IPO. The hope is that it becomes the next Netscape Moment. They also thought LinkedIn might be, but in our view, that IPO reflected a pent up demand for tech IPOs, not a seminal spark to a new boom.
This chart shows that Facebook is no Google – it is growing revenues and earnings slower than Google did. Stock pundits have concluded that at its rumored IPO pricing, it will be vastly over-valued.
Instead of sparking an IPO boom, it might super-charge the Super-Angel bubble. Facebook’s IPO will make a lot of millionaires about six months out, and they will flood the angel market with fresh money, creating even more early-stage startups and exacerbating the coming Series A Crunch. After the lockup, we would get about a year’s pop to the current lean finance boom. This gives it life through 2013.
Facebook’s counter-argument (if it could make it during the quiet period) is that its grand vision is to become the Web, or more precisely, a better social web. They argue that web sites that focus on their Facebook Pages get more traffic lift faster, at least in many cases. (This assertion is controversial, but clearly working for certain categories.) If Facebook pulls this off – providing higher value with its social web than the uncontrolled world wide web – it could meet the high expectations of this offering.
But already it is beginning to be picked apart. GigaOm reported that Pinterest drives more referral traffic than many other sources, and although it remains far behind referrals from Facebook, it is gaining traction faster. For its core demographic, it may already be ahead. More in this infographic. The Internet finds its way around gatekeepers.
The real message of this IPO is that it should have happened two years ago at a much lower value. I have commented on how post-bubble regulations have crushed the small IPO market, the prior lifeblood of tech financings. Simply put, the retail invester used to be able to share in the wealth creation of tech giants like Microsoft, Netscape, Amazon and Apple; but after the demise of the small IPO market, the value all gets sucked up by insiders before companies like Facebook go public. The best the retail investor can do is wait for the big dip and then buy in. This may be clever, but it is not healthy for tech financing, nor is it a fair deal for the retail investor.
The expected one-year pop to angel deals is not a bad bargain for Bullpen – we invest after the Super-Angels and will be provided even more opportunities. But increasing the front-end of the funnel is not as sustainable for the venture industry as increasing the back-end of exits. The lack of IPOs will drive exits even more towards corporate M&A, leading to quicker exits at lower values. (A robust IPO market pulls up M&A valuations.) It puzzles me then how large venture funds expect to deliver venture-style returns to their investors; if the total pool of exits is relatively modest, they have to divide a smaller pie, and will become even more intense in their scramble to jump into the few hot deals.
The primary beneficiary will be the Super-Angel style funds, whose lean finance model seems to be creating an alternative asset class to traditional venture, one that returns capital in four years (via corporate M&A) rather than ten (via IPOs). Since they are get in on the hot deals before the large funds, they will still catch a lot of the big IPOs, getting the best of both worlds – and are in a great position to watch the large funds auction up later-stage valuations to get into those deals.