Episode 25: The Facebook IPO

[0] Hey, Acquired listeners, a note about this show before we get started.

[1] Ben and I recorded this episode the night before the 2016 Election Day in the United States.

[2] At the time, the biggest change we saw coming was adding a new type of content to Acquired in analyzing IPOs, which we introduce in this episode.

[3] Two days later, we woke up to a very different world than the one we were expecting.

[4] Reflecting on what's happened and the past few months of our show, we wanted to say two things.

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

[6] In the Skype episode, I pretty glibly compared the AT &T Time Warner merger to make America great again, arguing that any reactionary force is, quote, on the wrong side of history and cannot be relevant in a changing world.

[7] I was wrong.

[8] That's sentiment is wrong, and it's insensitive to the very real pain that a lot of people are obviously feeling out there on both sides.

[9] 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.

[10] For all its wonderful aspects that we celebrate on the show, there is no doubt in my mind that the tech industry shoulders a lot of the responsibility for the current divide in America, and especially in its contribution to wealth and equality.

[11] Likewise, for all the wonderful aspects to the Facebook IPO story that you're about to hear, there is a very clear dark side as well.

[12] Facebook shareholders, investment banks, and institutional investors raked in billions of dollars at the expense of public retail investors who lost their shirts.

[13] 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.

[14] We hope you'll listen to this episode with that in mind and think about how you and we and the technology industry as a whole can do better in serving everyone in this country and in the world.

[15] Thanks for being on this journey with us.

[16] We're sorry for our shortcomings.

[17] We're going to keep working really hard to do better.

[18] And with that, on to the show.

[19] Who got the truth?

[20] Is it you?

[21] Is it you?

[22] Who got the truth now?

[23] Is it you?

[24] Is it you?

[25] Is it you?

[26] Welcome back to episode 25 of Acquired, the podcast about technology acquisitions.

[27] Today's episode, we're trying something new.

[28] We're piloting a new idea, analyzing IPOs in addition to our normal acquisition format.

[29] When we started the show, our goal was to understand what made an acquisition go spectacularly well.

[30] and over the past 24 episodes, we've started zooming out and asking ourselves exactly why that is.

[31] Both David and I are really trying to understand how to create big, enduring companies, and we know that's why a good chunk of our audience listens to the show.

[32] Oftentimes, you can have these huge successful acquisitions, but that's not the only goal.

[33] The goal, for us and for many entrepreneurs, is to create lasting value.

[34] As we thought about what direction we wanted to take the show, it became more and more clear to us that we should be looking at companies that don't get acquired, but go all the way to going public.

[35] And really, these are even a better example of building hugely valuable companies.

[36] So today, we're starting with a monumental IPO in recent history, Facebook.

[37] Dun -da -da -da.

[38] Oh, yes.

[39] I'm really excited for this, and I hope you guys are too.

[40] Not that we're going to stop doing acquisitions, but we thought this was, as Ben said, just a great direction to take the show.

[41] So let us know what you think in the Slack channel by email on Twitter.

[42] we love feedback here and Acquired.

[43] Very true.

[44] And in typical, I 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.

[45] We love all your criticism and we want to make Acquire the best show possible for you guys.

[46] It helps us make the show better.

[47] True that.

[48] Okay, listeners, now is a great time to thank one of our big partners here at Acquired Service Now.

[49] Yes.

[50] ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

[51] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsoft's at the NVIDias as one of the most important enterprise technology vendors in the world.

[52] And, just like them, Service Now has AI baked in everywhere in their platform.

[53] They're also a major partner of both Microsoft and NVIDIA.

[54] I was at NVIDIA's GTC earlier this year, and Jensen brought up service.

[55] Now and their partnership many times throughout the keynote.

[56] So why is Service Now so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

[57] Well, AI in the real world is only as good as the bedrock platform it's built into.

[58] So whether you're looking for AI to supercharge developers and IT, empower and streamline customer service, or enable HR to deliver better employee experiences, Service Now is the platform that can make it possible.

[59] Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately.

[60] For example, smarter self -service for changing 401K contributions directly through AI -powered chat, or developers building apps faster with AI -powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

[61] With ServiceNow's platform, your business can put AI to work today.

[62] It's pretty incredible that ServiceNow built AI directly into their platform, so all the integration work to prepare for it that otherwise would have taken you years is already done.

[63] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow .com slash acquired, and when you get in touch, just tell them Ben and David sent you.

[64] Thanks, ServiceNow.

[65] All right, you want to go into the IPO history and facts?

[66] With that, this is an epic.

[67] one to start with.

[68] So I'm going to assume that most of our audience is familiar with the Facebook founding story.

[69] You know, if you're not, we highly recommend you go watch the social network.

[70] Or if you'd like a less fabricated version, the David Kirkpatrick book, or there's a variety of good resources, and we would do a much worse job telling that story here than you could get elsewhere.

[71] Yes.

[72] Much ink has been spilled on that front.

[73] But suffice to say that Facebook was founded in 2004 by Marks.

[74] Zuckerberg, Eduardo Savarin, Andrew McCollum, the forgotten Facebook founder, Dustin Moskowitz, and Chris Hughes.

[75] A whole bunch of stuff happened, including turning down several acquisition offers along the way, most notably a $1 billion acquisition offer by Yahoo in 2006, just when the company was two years old, sort of foreshadowing Instagram in years to come.

[76] And I think Mark has talked about turning down that acquisition being one of the pivotal moments in the history of the company.

[77] And that's the kind of like crisis moment in the bathroom.

[78] I think he like there was a point there where he, I'll have to check my facts on this and we can do it and follow up.

[79] But I think this is the one where it was over dinner and he ended up in the bathroom like looking at himself in the mirror and having this emotional crisis of oh my God, am I actually turning down a billion dollar offer?

[80] Yeah.

[81] Crazy.

[82] But he did.

[83] And Facebook went on to much more than a billion dollars in value.

[84] So much so that if you Google the Facebook IPO and you find yourself on the Wikipedia page, there's a whole Wikipedia page dedicated to the Facebook IPO.

[85] And right in the beginning, it refers to it as a quote, cultural touchstone.

[86] Yeah.

[87] And that's no joke.

[88] I mean, it's one of the largest acquisitions of all time.

[89] I'm sorry, one of the largest IPOs of all time.

[90] Indeed, the third largest behind Visa and General Motors, but probably happier than those two.

[91] since those were, at least General Motors was post -financial crisis when the U .S. government was re -IPOing it after the bailout.

[92] But talk about enduring companies to study.

[93] So let's dive into it.

[94] In the late days of Facebook as a private company, which it spent eight years from 2004 until 2012 as a private company, it was a frenzy not just inside the company but outside the company everybody and their mother literally their mother wanted to be an investor in Facebook and at the time there were actually two ways to sites that had popped up that would let you do that there were these these vehicles called second market and shares post and these were startups themselves that facilitated trading private company stock.

[95] Now, you had to be an accredited investor to do this.

[96] This was before the Jobs Act and before a lot of the new equity crowdfunding laws and regulations.

[97] Did you have to be an accredited investor to sell or just to buy?

[98] Just to buy.

[99] But employees could sell on these sites.

[100] And the vast majority of all volume being traded on these sites was Facebook shares in 2010, 2011.

[101] And this was starting to be a really big problem because, um now all of a sudden facebook and other companies that were whose shares were trading on these sites um they'd sort of lost control of these shares and they had all these shareholders out there who they didn't know who they were um and at the time pre jobs act uh the laws were that you had to have less than 500 shareholders as a private company once you had more than 500 um shareholders uh you had to go public and so this was happening uh in facebook more than any other at the time.

[102] And in an effort to sort of try and also get under this 500 shareholder rule in 2011, in January 2011, Facebook separately did a rather infamous deal with Goldman Sachs that didn't go so well.

[103] The first part of the deal went fine, and that was that Goldman invested $450 million itself in Facebook.

[104] that happened but the second part of the deal and that was at a 50 billion dollar valuation the second part of the deal was that Goldman was going to create a special purpose vehicle uh that was going to be one single entity and then it was going to market to its private wealth management clients the ability to invest in this special purpose vehicle um that was going to be a billion and a half in total and then that would invest that would vehicle would invest in facebook and so they sent this email out to select private wealth management clients of Goldman saying, you know, opportunity of a lifetime.

[105] It was like a, like a Nigerian cash scam email that Goldman was sending out to their clients.

[106] They couldn't even, they didn't even, couldn't even say the company by name.

[107] It was a unnamed high growth private company that they were offering the opportunity, once in a lifetime, an opportunity to invest in.

[108] Wow.

[109] But you throw the Goldman brand behind that, and it seems like, yeah, sure.

[110] seemed like a good idea at the time and to Facebook too.

[111] Well, the SEC didn't think it was such a good idea.

[112] So deal book, New York Times deal book actually leaked, scooped that this was happening.

[113] And after that, the SEC started investigating and Goldman ended up, they still ended up doing the deal, but they did it with all foreign clients.

[114] So they decided that it was too risky to have U .S. investors invest in the deal.

[115] And this was a huge.

[116] huge, huge moment, big egg on Goldman's face and on Facebook's face for what came across as really trying to skirt U .S. securities laws.

[117] And up until that point, Goldman had been sort of top bill in the running to be the bank that would take Facebook public.

[118] And this basically killed their chances of being lead left, quote unquote, on the IPO.

[119] And what is, for those of us, like, not from the industry.

[120] What does lead left?

[121] So when investment bankers take a, speaking as a reformed investment banker myself, when investment bankers take a company public, there's usually a consortium of banks that underwrite the IPO, but there's one bank that's the leader, and that's referred to as being lead left, quote unquote, which is on the cover of the prospectus of the IPO, the bank that's at the top and on the left is lead left.

[122] And they get the biggest allocation of the IPO and it's always a huge battle amongst the big bulge bracket banks for hot IPOs and there was never going to be any IPO hotter than Facebook to be the lead left not only because they'd make a lot of money from it but the prestige associated with that well in theory we'll see what really happened live on for a long time so because of these two things that were happening there was immense pressure on Facebook to finally go public in the 2012 time frame.

[123] So late 2011, they start preparing.

[124] They actually select Morgan Stanley, Goldman's longtime rival, to be lead left.

[125] They're deep preparing for the IPO.

[126] And business is going great.

[127] For the year of 2011, they ended the year with 845 million monthly active users, 483 million daily active users.

[128] So doing the math on that, that's over 50 % DAU to MAU ratio, which means over half of Facebook's users used it every single day, which is just incredible.

[129] And still to this day, there's so few products that are like that.

[130] And not just usage, but engagement.

[131] So they were seeing at the end of 2011, over 2 .7 billion, million likes and comments per day, which is crazy.

[132] And by the time they actually went public in 2012, they had amended their S -1 filing to include Q1 numbers.

[133] And in Q1, 2012, they saw 3 .2 billion likes and comments every single day.

[134] Which, those likes and comments numbers, they like to put that in there.

[135] It's like almost an unfathomable, ridiculous vanity metric, right?

[136] Because there's nothing to compare it to.

[137] and we really like, it's hard to wrap your head around what that even means.

[138] Well, but it's engagement, right?

[139] I mean, it's like, people aren't just opening the app.

[140] They're actually doing stuff in the app.

[141] Great point.

[142] And in these days, we'll get to this in a second.

[143] It wasn't so much the app as it was the website on desktop.

[144] And not only, you know, things are going really well for Facebook at this point.

[145] Not only do they have these huge, unprecedented user base, unprecedented engagement, but they are making real money, too.

[146] Yeah, they were profitable by their IPO, correct?

[147] Very profitable.

[148] So in 2011, they did $3 .7 billion in revenue and over $1 .7 billion in operating income, which is really incredible.

[149] When you think of a private startup at that point in time, people had never seen a private company at kind of this scale of both revenue and profitability.

[150] Right.

[151] And that's, let's see.

[152] That's a 45 .9 % operating margin.

[153] Yeah, it's quite good, as we were talking about a bit before the show, hiring Cheryl Sandberg to build advertising at Facebook was one of, if not the best decision that Mark Zuckerberg ever made.

[154] Yeah, this is worth a quick little story, but before March of 2008, Facebook didn't have Cheryl Sandberg kind of at the helm as COO.

[155] and they had no ad product.

[156] Yeah, they were just running banner ads.

[157] Yeah, and they cut some deal with Microsoft.

[158] Mark was totally allergic to, you know, cannibalizing the purity of the site with advertising.

[159] And in March of 2008, Cheryl Sandberg came in, and her goal and her charter was make the company profitable.

[160] So when, before she joined, quote unquote, the company was primarily interested in building a really cool site.

[161] profits they assumed would follow.

[162] And so in late spring, Facebook's leadership team finally agreed that they were going to rely on advertising with the ads, quote unquote, discreetly presented.

[163] And then it was kind of her charter over the next three years to actually build an in -house competency coming from Google of a real advertising platform.

[164] And in three years to go from, you know, essentially nothing.

[165] Like they were making plenty of revenue, but it was low -quality revenue from banner ads, to go from essentially nothing to almost $4 billion in revenue and almost $2 billion in profit.

[166] Wild.

[167] Totally wild.

[168] Interestingly, this is a fun side fact.

[169] This was the days of the Facebook platform and games on Facebook and particularly Farmville.

[170] And they noted in their S1 filing that Zingo alone represented 15 % of Facebook revenue at the time of the IPO.

[171] Oh, that's a huge risk.

[172] Yeah.

[173] That was in the risk factors.

[174] So as we're alluding to, things are going great.

[175] February 1st, the big day, the day that everybody in tech has been waiting for.

[176] They file Facebook files.

[177] It's S1, which happens now it happens before you go public.

[178] You file your registration statement, the prospectus for going public.

[179] In those days, it happened even longer before the actual IPO happens.

[180] Now, it's a fairly short time period after some of the changes made in the Jobs Act.

[181] So February 1st, they file Morgan Stanley is lead left banker and then showing how far Goldman had fallen just a year earlier, you know, they were in the poll position to be lead left.

[182] They actually get demoted to third.

[183] So J .P. Morgan is second and Goldman is third.

[184] So this was a big, big demotion for Goldman.

[185] and but as we shall see Morgan's being lead left on the Facebook IPO wasn't necessarily the golden egg that the banks thought it was so things are great but there's one one problem with Facebook right now and that problem is mobile yeah so fascinatingly enough in the in their S1 when they're listing the summary risk factors to the business.

[186] This one's incredible.

[187] 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.

[188] So the risk factor they're identifying here is not that we don't know how we're going to monetize the phone.

[189] We haven't rolled out phone ads yet.

[190] It's that the risk is that people start using mobile products more than desktop products and we don't have a revenue model there yeah they literally had no revenue model so two huge two two two two two aspects to this very huge problem for facebook right now um the mobile problem one is a usage and engagement problem and they had we just talked about this incredible usage and engagement metrics that they had but that's all on desktop on mobile they have mobile apps for facebook but these are the dark ages of of HTML 5 and the misery of the HTML 5 mobile Facebook app, which was so slow, basically impossible to use.

[191] And as a result, only about half, half to slightly less than half of Facebook's users were active on mobile.

[192] Yeah, and like fascinating to think about all the implications to mobile being an afterthought.

[193] like when you when you opened the app the the news feed as we know it today was not one unified news feed where you would see the the same thing on the mobile app that you would on desktop it was like you would see a completely different set of information like a different algorithm determining what you would see served down to you a different way cashed in a different way obviously not nearly as responsive this was um you know philosophically they wanted to be able to move faster by dynamically controlling the HTML that was served down without having to reset it to the app store and not making a bet on You know, this was, as we've talked about on the show, the age of the mobile platform wars, and is iOS going to win or Android?

[194] And they thought they could be really flexible by having this HTML5 app that was one app that would get put in a wrapper and ship to both app stores.

[195] But yeah, it was not working.

[196] No. And it was funny, even doing the research for this episode, I read a bunch of articles about this, and I remember doing this.

[197] most a lot of people rather than installing or using the the app on their phone for Facebook they would go to m .facebook .com and use the mobile web because it was better than the crappy app that they had yeah shocking which and and I mean this was um in tech years uh you know four years four plus years ago four and a half years ago a long time um but it's not like the mobile ecosystem was undeveloped at this point in time like there were apps like Uber existed, there was no excuse for not having.

[198] I think Twitter had already bought Tweety, so the iOS client for Twitter was exceptional at that time.

[199] Tweedy became the native app.

[200] And to put this in perspective, where they had no ability to monetize on mobile at this point.

[201] And so one half of the huge gaping chest wound that Facebook had at this point was the app sucked.

[202] And then the other half was they had no monetization model.

[203] They made no money from mobile.

[204] And to put that in perspective today, I think David will tell us the story of kind of everything along the way.

[205] Facebook's earnings came out a couple of weeks ago, and mobile advertising revenue represented 84 % of ad revenue for the quarter.

[206] Yeah, so that was the third quarter of 2016, as we're recording this today.

[207] And it's basically the entire business today.

[208] So the story of how we got there is, massively tied up in the Facebook IPO.

[209] And actually, even just a couple months later after the IPO in September 2012, Zuckerberg was on stage at TechCrunch disrupt that year.

[210] And he said, the biggest mistake we've made as a company is betting on HTML5 over native in mobile.

[211] That's how much, over a few short months, he realized what a big problem me had.

[212] Wow.

[213] And it's probably worth before diving back into the story to, like, set some context on the numbers here.

[214] So, IPO, biggest in technology history, you know, third largest of all time, priced at 100, the market cap for Facebook was 104 billion.

[215] Yep, which we'll get into in a sec. Okay, cool.

[216] Yeah, why don't you just dive in then?

[217] Okay.

[218] So we're still on the road to IPO.

[219] and it's now April.

[220] Facebook has been working on its road show and getting presenting to investors, large institutions who will buy into the IPO.

[221] And on April 9th, 2012, they come out with a rather shocking announcement at the time that we've already covered on this show in one of our early episodes, and that is in fact our benchmark of what a. great acquisition is.

[222] They announced that they're acquiring Instagram.

[223] And we talked about this a little bit on the episode, but just to step back again here and put this in the context of how crazy this was that Facebook was, had filed their S -1.

[224] They're in the process of going public, and they acquire a company that has 13 employees for a billion dollars.

[225] That this was just crazy.

[226] But underscores how much, how Mark and Cheryl and the team were coming to realize how big of a problem mobile was for them.

[227] And the entire rationale for the Instagram acquisition was around bolstering their story and their user base in mobile.

[228] Yeah.

[229] And I remember trying to rationalize this at the time and talking to friends.

[230] And I think we even talked about this on the Instagram episode that, you know, there were a few things that Facebook held near and dear.

[231] And one of which was being the source of platform.

[232] an identity, and that was quickly becoming really important to them to get a foothold in that everybody sort of needed a Facebook as infrastructure on the internet.

[233] But the killer app for Facebook was photos.

[234] It was photo sharing.

[235] It's what got by far the most engagement.

[236] It was nostalgic.

[237] All those comments and likes, billions every day.

[238] Yeah.

[239] And so for them to lose that foothold where that's really their core of strength is this is where people share and engage on photos, that's a total existential threat, especially when everyone's attention is shifting to mobile and they don't have a credible offering there.

[240] Yep.

[241] And they actually, you know, in this time leading up to the actual IPO, Facebook was, and most companies do amend their S -1, their registration statement quite frequently as new information comes up and they're working through feedback from investors and whatnot.

[242] And, of course, they amend it for this acquisition that they announce.

[243] And they actually say, it's interesting, they say in the S -1 that they intend to continue, continue operating Instagram as a standalone entity and product, which we talked about on our show.

[244] But interesting that they actually put that in the S -1 for Facebook's IPO.

[245] But then they also say this is after they talk about Instagram, but in the same paragraph, we believe that mobile usage of Facebook is critical to maintaining user growth and engagement over the long term, and we are actively seeking to grow mobile usage, although such usage does not currently directly generate any meaningful revenue.

[246] this is how important they're realizing it's becoming.

[247] Also, interesting side note that I found while I was doing research here, there was a breakup fee on the Instagram acquisition of $200 million.

[248] So if for whatever reason the acquisition didn't go through, Facebook would have paid Instagram $200 million.

[249] Wow.

[250] Wow, that's enormous because Instagram, like a lot of the time, you're going to have a breakout fee like that because of the incredible costs that incur by, you know, opportunity cost and negotiation and, like, the time.

[251] And usually it's, you know, you see those things often when it's like a public company acquiring another public company.

[252] Right.

[253] It's impacting the stock price.

[254] But this was a 13 -person startup.

[255] Right.

[256] And it's not like when we were talking to Zillow, CFO, Kathleen Phillips, how, like, the negative signal that it could send to the market to Trulia's shareholders and to truly as, you know, incredible number of stakeholders from the advertisers to all the people that depended on them.

[257] Like, Instagram didn't have a lot of stakeholders.

[258] Instagram didn't have a high opportunity cost of other things.

[259] They could be doing the tune of $200 million.

[260] It's not like they even had more than a few people, like, working on the acquisition.

[261] It was like Kevin and Mark talking.

[262] And some very excited VCs on their board.

[263] Yeah.

[264] Yeah.

[265] No kidding.

[266] It's wild that it's that high.

[267] So things keep moving along in the process.

[268] On May 9th, Facebook files the 6th.

[269] amendment to its S -1, we're going to come back to that in a minute.

[270] Things keep going along.

[271] And mid -May, they decide that they're going to set May 18th as the day, Friday, May 18th as the day that Facebook goes public.

[272] So the start of that week, though, something that there's an inauspicious start, and that's at the beginning of the week, GM, that we've already talked about on this episode, General Motors, announces that they're going to stop all advertising on Facebook, because it's not actually working that well for them.

[273] And they've been spending $10 million a year with Facebook.

[274] And they wanted flashier ad units.

[275] I mean, their major complaint was, look, on all these blogs, they're letting us take over the whole back page.

[276] We can slide stuff in from the sides.

[277] We can get this big header that pushes all the content down.

[278] And all we get are these crummy little, you know, static ads on Facebook on the side.

[279] And I don't know if they had started news feed ads at that point.

[280] But either way, the ad formats on Facebook have historically been.

[281] and so much more limiting than the kind of arguably user hostile things that you get across the advertising ecosystem on the web.

[282] Yep.

[283] And, but, you know, no matter, $10 million, that's a big account, but Facebook made, you know, $3 .7 billion the past year.

[284] So, you know, drop in the bucket, things proceed.

[285] The night before the IPO, Thursday night, Facebook holds an all night hackathon leading up to the IPO.

[286] And then in the morning, everybody's been up all night.

[287] And The whole company rings the bell for the NASDAQ remotely, remotely from California, and Zuckerberg pushes the button and big fanfare.

[288] And then the company is supposed to start trading.

[289] And so they priced the IPO the night before.

[290] They price at $38 per share, which gives Facebook a market capitalization of $104 billion at IPO.

[291] Again, unprecedented in technology history.

[292] And how many, they sell enough shares to consist of how much value?

[293] They, they sell 421 million shares at $38 a share, raising $16 billion in the IPO.

[294] And about half of that the company keeps, and about half of that is selling shareholders that are monetizing their shares.

[295] So the Zuckerberg presses the button in the morning, everything's supposed to begin trading.

[296] And actually, when, when companies go public on the NASDAQ, they actually, delay trading a little bit so that at the open, the stock doesn't start trading right away.

[297] They have a little time to make it orderly because usually there's a lot of interest in IPOs and a lot of trades that are happening.

[298] So Facebook was supposed to start trading at 11 .05 a .m. Eastern time on Friday, May 18th, 11 .05 comes.

[299] People are placing trades.

[300] No trades are happening.

[301] the NASDAQ is broken.

[302] Facebook has literally broken the NASDA.

[303] I mean, it's functioning for all other stocks.

[304] But what NASDAQ would later describe as a technical error occurs, and this just unleashes mayhem on the Facebook stock.

[305] Traders are placing orders, and they don't know if they're going to get filled at all.

[306] Plenty of orders placed during this time period aren't filled.

[307] Or if they're going to get filled at the wrong price.

[308] Or if they're going to get filled at the wrong price.

[309] So a lot of orders actually get filled.

[310] at the wrong price, at a higher price than what people were placing them at.

[311] This is a disaster of epic proportions on NASDAQ's part.

[312] And actually ends up contributing.

[313] This really hurts NASDAQ.

[314] I mean, up until this point, NASDAQ had always been the place for technology companies and all the tech companies were on the NASDAQ and the old school companies were on the New York Stock Exchange.

[315] After this, I mean, NASDAQ still has plenty of tech IPOs, but the New York Stock Exchange really makes a push.

[316] Yep.

[317] So when Twitter ends up going public, they do it on the New York Stock Exchange.

[318] Fitbit, Grubhubs, Zendesk, lots of tech companies are now using the MYSEE.

[319] And a lot of it is because of this.

[320] So it's pretty bad.

[321] And eventually, NASDAQ actually settles two lawsuits.

[322] The SEC files a suit against them.

[323] They pay $10 million to the SEC.

[324] And then a shareholder class action lawsuit against them because of this for people who lost money in the Facebook IPO.

[325] And NASDAQ ends up paying $26 .5 million to shareholders as a result.

[326] So once it all gets sorted out, though, later in the day, Facebook does begin trading.

[327] And it's pretty clear that things are not going well.

[328] The stock ends the day at 3823, so up 23 cents from offering price.

[329] But that's a really bad sign because that means they didn't get a pop from lots of excess demand and people wanting to buy the stock.

[330] And what that usually means, and this is what happened in this case, that the underrating banks ended up supporting the stock because they've staked their reputation on this IPO.

[331] They don't want to let the price fall below the offering price.

[332] And so they end up, Morgan Stanley, J .P. Morgan, Goldman Sachs, end up buying a lot of shares to support the price on this first day of trading.

[333] Well, that doesn't sound sustainable.

[334] No, and it doesn't because the next trading day, which is the following Monday, um it's a blood bath so market opens on monday and within 15 minutes of trading starts um facebook is down almost 14 percent um which doesn't sound like a lot but like stocks don't fall stocks don't move 14 percent in one day also i mean that if you think about like that that means that like 15 billion dollars of market cap was destroyed just erased immediately i mean that'd be like um if the whole market move that much, that'd be like the day I'll losing like 2 ,000 points in one day.

[335] And this is the second day, Facebook's second day as a public company.

[336] Oh, that's like destroying like 14 Instagrams.

[337] Yeah, immediately.

[338] So not good.

[339] And it's so not good that it actually trips what's called a circuit breaker that stock exchanges have built into them that if a stock starts really getting pummeled like this, they'll stop trading in it.

[340] So that short sellers.

[341] Just for that stock?

[342] Just for that sellers can't like aggressively bash the price down.

[343] So this is this is really bad and ends up closing that day at about $34 a share, which is down 11%.

[344] The next day on Wednesday, I guess Wednesday, two days later, the stock opens closes down another 9, or sorry, Tuesday closes down another 9 % at $31 a share.

[345] Wednesday, the stock opens and news hits that Facebook is getting slammed with a shareholder lawsuit because news is leaked that that sixth revision that I mentioned to the S1 prospectus a couple weeks before the IPO.

[346] Well, it turns out that there was actually a little more to that story than just revising the S1.

[347] And what happens is that that was the first day of the official road show for Facebook on May 9th.

[348] And Mark and Cheryl and the executive team were doing the road show.

[349] And at the end of the day, David Ebersman, who was the CFO of Facebook at the time, takes Morgan Stanley aside and says to them, hey, we're actually going to lower our guidance for what we expect revenue and earnings to be for the second quarter.

[350] Wow.

[351] And you don't do this when you're on your IPO road show.

[352] It's private information.

[353] Yeah, well, it's private information.

[354] but A, you don't, so they were giving guidance as part of the road show to institutional investors.

[355] Sort of like, you could think of it like practicing your earnings calls, but investors are going to want to know what management's outlook is for the future.

[356] Practicing your earnings call, but to one shareholder and not all the other people who are likely buying.

[357] Well, right.

[358] They just given the first part of the, you know, a road show with the old estimates.

[359] And so now they have to figure out what to do.

[360] But the other thing is you don't, you don't lower your guidance during, the road show.

[361] You lower it before you go out on the road show.

[362] Once you started, what would you do in this situation if you got news that you should, like that it's going to come in lower if you were in the middle of your road show?

[363] How do you fix that?

[364] Well, you probably don't do what Facebook and Morgan Stanley did, which is they decide that they're going to call the equity research analysts that are going to cover Facebook and they're going to disclose this news.

[365] And the reason for this, by the way, is that mobile was really hurting them.

[366] So they were terrified that they were going to come in below expectations because they were behind on mobile.

[367] And people were switching over to mobile faster than they could get products out the door and get monetization done.

[368] So they call up the research analysts, but they call the research analysts of the underwriting banks, and they tell them that they're going to revise earnings down.

[369] And so the underwriting banks, Morgan Stanley and J. Morgan and Goldman, they all call their clients, their institutional investors, which are mutual funds and hedge funds, and they tell them, hey, Facebook, you know this IPO that's going to be the IPO of the century next week.

[370] They actually just revise their forecast down.

[371] So you've now got this situation where the public has no idea that any of this is happening.

[372] But all the big institutions know.

[373] But all the big institutions know all the clients of the banks that are doing the underwriting for the deal.

[374] And so we find out much later.

[375] But there was a huge amount of short selling pressure.

[376] on the Facebook stock at the IPO because all these banks are like, well, now there's an information asymmetry.

[377] Like, I know something you don't know.

[378] They should capitalize that on behalf of their clients.

[379] I mean, that's what they do.

[380] So is what they did a securities violation?

[381] Like, is that legal?

[382] Well, it's a very much a gray area.

[383] And they actually, Facebook never gets in any trouble for this.

[384] but Morgan Stanley takes a big reputational hit and ends up settling a lawsuit actually with the Massachusetts state regulators.

[385] I'm not sure why it was Massachusetts and not the federal SEC, but the only lawsuit that ends up getting settled, and it's not that much money Morgan Stanley pays $5 million in the settlement to Massachusetts for this, but they tacitly admit wrongdoing here.

[386] and this is a big a big oopsie for them.

[387] Yeah, it's crazy thinking about in these highly controlled environments like this that a side conversation like the two of them had can create ripples of that magnitude.

[388] Well, when you're talking about a $16 billion IPO that is literally the biggest in technology history and you've just created this information asymmetry and that's going to be the most watched by all parties, including the SEC of all time.

[389] Well, when you phrase it that way, David.

[390] Yeah.

[391] Not a good, not an auspicious beginning.

[392] So all told, when all this is done, the first two weeks of Facebook as a public company are terrible.

[393] The stock goes down during nine of the first 13 trading days.

[394] And by the end of May, so two weeks after the IPO, Facebook had lost a quarter of its value.

[395] And remember, it IPOed at $100 billion market cap.

[396] So $25 billion.

[397] in value, just wiped out.

[398] Wow.

[399] The Wall Street Journal calls the IPO, quote, a fiasco.

[400] And so then what do you do?

[401] So now you're the company, your Mark, your Cheryl, you know, you go from being the most hyped IPO in history to literally a fiasco with all these shareholder lawsuits flying around.

[402] Yeah.

[403] You've got this gaping chest wound of not figuring out mobile.

[404] Yeah, so to me there's two things going on here.

[405] One is the, the, PR thing that you have to manage and the entire like financial ecosystem that you're now a part of and you really have to um you know weave carefully here on on you know your next few quarters are going to be watched so carefully um you've taken a huge reputational hit people are afraid of buying your stock other people are opportunistic and getting in and feeling like it's maybe a little risky but then the other thing that's kind of going on here is you know facebook just needs to inwardly look at their product and, and this is really what they do is say, look, all of this, this, um, these symptoms that are happening in the, in the financial market are because of the problem that one, we don't have a credible, like a great mobile experience.

[406] And, and two, everyone's shifting to mobile anyway, even with our crummy experience.

[407] And we don't have an ability to monetize there.

[408] And, you know, the interesting thing is it doesn't take them too much longer to actually launch, which I'm sure you'll tell us about in a moment, to launch their mobile ads product.

[409] But like it is so interesting that, you know, as a management team, they kind of took a step back, focused on the fundamentals, focused on improving the product, focused on serving their customers, and like actually rebounded from this with, with a, you know, very strong, you know, step into mobile.

[410] Yeah.

[411] I mean, this is, for me and, you know, when we get into grading in a minute here, like, this is the defined.

[412] moment for at least the public company, you know, part of Facebook's journey.

[413] Like, this is what, why they are a great company and why Mark and Cheryl are great leaders.

[414] I mean, it would have been so easy to hit the panic button with everything going on here.

[415] I mean, the amount of pressure was just immense.

[416] But they do exactly what you said.

[417] They, they spend the rest of the summer completely focused on mobile.

[418] And this is, you know, when you hear about, you know, Facebook has a very unique corporate culture, but they have essentially like a propaganda department that makes posters and puts them up around campus in Menlo Park.

[419] And posters all of a sudden went up all over campus like, you know, mobile is our future.

[420] And, and they get the whole company in the period of just one summer basically completely focused on mobile.

[421] They spend all summer working on native apps, August 23rd, they release their native iOS app.

[422] The native Android app comes a little later.

[423] And then shortly thereafter, it's not like they release that and the market's like, oh, great, problems are solved.

[424] On September 4th, Facebook hits its all -time low at $17 .73 a share, which puts their market cap at about $49 billion.

[425] So they just lost $50 billion of market cap.

[426] This is really the depths here.

[427] Wow.

[428] But they release a product.

[429] It's a great product.

[430] People love the iOS app.

[431] And more importantly, it has the ability to insert ads into the feed.

[432] And now the age of the native ad and advertising in the Facebook feed on mobile is born.

[433] And kind of like a phoenix rising from the ashes, it's just incredible.

[434] So they don't turn on advertising in Q3, but Q4 of 2012, they do turn on advertising on mobile.

[435] And they go from literally $0 to 23 % of the entire ad revenue for the whole company comes in via mobile in Q4.

[436] Wow.

[437] Which is amazing, because when you think about where they've transformed to today, they basically have cracked advertising on mobile.

[438] I mean, we, the news feed ad unit is is like the best ad unit and I think that for when we shifted to mobile everybody tried to move their banners down to tiny little banners and that didn't work very well and now publisher remember like millennial media and i ad and ad mob and all that stuff I had launched my career I uh did I ever tell you that's right yeah in C's the day we benefited from Apple which is uh which is an app that you built while you're in college right yep yep uh is kind of one of the early to -do list in the store, we launched and we were one of the first partners to have I ad in there.

[439] And we had like ridiculous CPMs and Apple featured us.

[440] So like there was like, I think Nissan Leaf was like one of three advertisers that actually bought.

[441] Anyway, so banner ads like didn't work very well.

[442] Apple has sent sunset at I ad.

[443] A lot of publishers are moving to just putting their square desktop ads in the middle of articles.

[444] People are getting closer with these sort of like native ads embedded into, you know, publisher, um, publisher formats, but really, like, what really works on mobile is, is a native Facebook ad.

[445] And like, when you're scrolling through that news feed, well, you know, you scroll sort of at every, or you stop at every story to pause and look at what it is.

[446] 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.

[447] Yep.

[448] And like, Facebook cracked it.

[449] And it's, they're, the fact that 84 % of their revenue today, and as a hugely successful company comes from mobile advertising is a huge testament to them turning it around.

[450] They cracked it.

[451] I mean, in a period of about six months, while going public and while acquiring Instagram, they basically invented the mobile ad industry.

[452] And I think a really nice way of putting a bow on and tying up the Facebook IPO story is that the next year, um, tech crunch disrupt 2013.

[453] So in 2012, Zuckerberg had said, Facebook, uh, said, um, Zuckerberg said in an interview on stage that HTML 5 was the biggest mistake that he'd made in the history of the company.

[454] Yeah.

[455] Uh, 2013 tech crunch disrupt.

[456] Um, Michael Arrington asks, uh, Zuckerberg on stage, you know, so how about that IPO?

[457] And, uh, um, Zuck says, you know, this is a quote.

[458] He says, I'm the person you would want to ask last.

[459] on how to do a smooth IPO.

[460] But, and this is, you know, this is a year later.

[461] He says, but it's actually a valuable process.

[462] Having gone through a terrible first year, as it made our company a lot stronger, you have to know everything about your company.

[463] It took us to the next level and we run our company much better now.

[464] Pretty interesting.

[465] Pretty interesting.

[466] Yeah.

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[485] So should we go into what would have happened otherwise?

[486] What would have happened otherwise?

[487] Well, I think this is a kind of a natural point of segue because in one of the things that I was thinking about and what would have happened otherwise is sort of three things that that you get when you IPO, three sort of advantageous components to it.

[488] The first is an influx of cash.

[489] Obviously, Facebook's going to raise $6, $7 billion in cash that goes directly to marketable securities or cash on hand for the company.

[490] The rest obviously goes to investors who are existing investors who are cashing out.

[491] The second is the fact that if they're going to do M &A transactions in the future, having public company stock way more valuable than difficult to value private company stock.

[492] Not necessarily more valuable, but the industry term is it's a liquid currency in that you can assign a value.

[493] You can say like one share of Facebook stock is worth, you know, X on the public market.

[494] I can tell you with certainty it is worth $17 .73 on September 4th as opposed to, I don't know, what's a share in PSL worth, Ben?

[495] That's a little speculative at this point, David.

[496] And that ties into our third too is liquid.

[497] for shareholders.

[498] So when you, when you IPO, you know, you've got all these employees that have been working for private company stock options for years, a lot of them having purchased them, and, you know, they can't really get liquid.

[499] They can sort of use the second market.

[500] Using shares post and second market.

[501] Yeah.

[502] So it's interesting that like some of the trials and tribulations of the IPO can be attributed to the fact that there was a sort of a value assigned to the company by the transactions that were going on in second market, but there were so few of them that it was a pretty illiquid marketplace.

[503] So you've got this very rough estimate of what the company is worth, sort of setting and guiding what they're going to IPO for.

[504] And, you know, if they hadn't IPOed, you could have even more of this going on.

[505] And the longer they wait, the more difficult it gets because people are super anxious to get liquid on this, you know, part of their compensation that they held for years, a lot of it, life -changing amounts of money.

[506] Yeah.

[507] I mean, I think I'd say here that a lot of the clear, just bungling of the IPO was probably a result of just waiting too long, and there was so much pent -up pressure there, you know, pressure to perform, pressure to, the last, that round that Goldman had done, that they botched with the, um, letting private wealth management clients invest via the special purpose vehicle.

[508] That was at a $50 billion valuation.

[509] So, you know, Facebook want to deliver a 2x return on that and wanted to hit the mythical $100 billion market cap.

[510] Um, I think there was just a lot of, and then they were forced to by second, by, um, second market and shares post and the job, the lack of having the jobs act.

[511] Which is funny because you were saying that that while they were on the road show is when the jobs act got signed.

[512] Yeah.

[513] So the jobs act actually gets passed into law while they're working on the IPO.

[514] So ironically, they could have avoided a lot of this pressure if they just waited a little bit, but they didn't know that at the time.

[515] Yeah.

[516] And it really did seem like what would have happened otherwise.

[517] Like if they had stayed private, you know, to their knowledge, it wasn't going to get passed and they shouldn't count on it and they sort were forced to IPO.

[518] If they had continued to wait longer, like actually we're seeing a lot of companies do today, you know, you run into these sort of issues where early investors need to get their money out.

[519] And they're going to, I don't know, do big secondaries and you're going to have the same sort of issues that we're having today with the super unicorns, which we should talk about in tech themes.

[520] But another big one that I think is worth talking about is the fact that they went under a tremendous amount of scrutiny by going public.

[521] Like this really forced management to understand every facet of the business and understand where there are huge key risk factors were.

[522] I really think that the most interesting part of that S1 is where they identify risk to the business because truly like it they probably were working on some of the mobile advertising stuff beforehand but like it is a huge slap in the face and like a huge wake up call to realize our business has an existential crisis on its hands and so many other companies got destroyed in the wake of mobile and it was interesting that Facebook was able to kind of like keep their head above water until they really kind of came out and thrived.

[523] Yeah.

[524] Well, and I think it's such a testament to Mark and Cheryl leading this company to do that because, you know, it's kind of like a running joke in the industry that like, you know, risk factors, quote unquote in S -1s are like a joke.

[525] Like, you know, you have to put them in there.

[526] So let's make up some like phony risks to our business that actually make us sound stronger.

[527] But as part of, you know, I think because of all this disaster that the IPO process became, they had to really answer to like what these risks meant and they saw literally half of the value of the company evaporate before their eyes and you know what what stronger wake -up call to could there be to understanding that they had a big problem they had to fix right and I guess you know they could have priced lower and gotten the pop that they were looking for maybe they just got out ahead of their skis a little bit and could have like weathered this first year by you know pricing at 70 % getting a little pop up to like 75 % and then you know over the next 18 months then really kind of turning the gas on but and it's interesting they definitely could have done that but like to what would have happened otherwise would they then have noticed like would the magnifying lens have been shown as brightly on how big a problem mobile was right and would they have again fixed like fix the product fix the ad model fix the monetization model invented a new ad unit within six months.

[528] Yeah.

[529] Pretty crazy.

[530] Pretty crazy.

[531] All right.

[532] Tech themes?

[533] Yeah, let's do it.

[534] The biggest thing that I think we both really want to talk about here, we were chatting a little bit before the episode, this totally changed the way that tech companies IPO.

[535] It was a cultural touchstone, according to Wikipedia.

[536] Which is, of course, according to something else, because Wikipedia makes no claims to be correct, but rather referenceable.

[537] It actually was a reference to, I forget, what article labeled it a cultural touchstone.

[538] Yeah.

[539] Yeah, but I mean, we, we, companies that were IPOing before were averaging three, four, five years before they IPOed.

[540] Facebook went eight and had this total calamity on their hands.

[541] And, you know, we went through a pretty rough patch last year where there were just not a lot of tech IPOs and bleeding into early this year.

[542] And I think you can probably speak to this better than I can, but we're definitely in a period where people are waiting longer now.

[543] And that seems like you can kind of trace that back to Facebook.

[544] It's so interesting.

[545] 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.

[546] It's terrible.

[547] And the IPO was indeed terrible, as we've said.

[548] But what's so interesting is, like, Zuck would be the first one to refute that, right?

[549] Like in his quote at, you know, a year later at TechHunch Disrupt, like, it was great for the company.

[550] it forced them to really, you know, step up and play with the big boys, playing big boy land and big girl land.

[551] And but the lesson that's been taken is totally the opposite.

[552] So Ben, you were referencing this.

[553] I pulled some numbers on some tech companies, well -known tech companies that went public before Facebook and how long between founding and when they went public.

[554] So Zingo went public before Facebook a couple months before, four and a half years from founding to IPA.

[555] Which is crazy to think about.

[556] Zingo was built on the back of exploiting opportunities within Facebook, right?

[557] Like, Facebook may have been, whatever, 12 % or something, like, uh, or 16 %?

[558] 15 % relying on Zinga, but Zinga was like 100 % relying on Facebook.

[559] And then when they moved, like, ran into big troubles when they tried to move off of Facebook and kind of control their entire ecosystem with their own website.

[560] Realized they had no control.

[561] Um, another company similarly Groupon, three years from founding to IPO.

[562] I think I was at the TechCrunch Disrupt when Andrew Mason was on stage and said, never take your company public.

[563] Yeah, right.

[564] This was what people were, entrepreneurs were internalizing from this.

[565] You know, Zillow, which we covered six years, Pandora, seven and a half years.

[566] People thought that was a really long time to go from founding to public.

[567] You know, the VCs were dying to get out of that company.

[568] LinkedIn that we covered six and a half years.

[569] So that was kind of like the normal before Facebook.

[570] after Facebook like you said Ben you know there's the really great companies haven't even gone public but the ones that have like Etsy 10 years Shopify 11 years Fitbit eight and a half years um atlasian 13 and a half years Twilio nine years this year um people are staying private a really long time and and not just not just staying private but raising just absurd amounts of money.

[571] So, you know, Google, right, like, it's so funny to see the evolution of the generations of tech companies and how they treat, you know, behave in the private markets.

[572] Generations in the last 20 years.

[573] Well, generations in tech companies are about four years.

[574] It's like going to college.

[575] Google raised $25 million before they went public.

[576] Facebook raised, you know, kind of two to three billion dollars when you include that Goldman round before going public without the Goldman around, you know, somewhere around a billion or so.

[577] Uber has now raised $11 .5 billion over the eight years or so that it's insane that you can raise $11 billion without having to like be under the scrutiny of a public company.

[578] And I guess I mean that's that's totally the cited advantage, right?

[579] It's like we don't have to disclose all these things.

[580] It's better for competitive reasons.

[581] But like really it's for a lot of these companies.

[582] But the reality it's just worse for everybody.

[583] Yeah, yeah.

[584] It's worse for the companies because you're not accountable to these massive challenges that you're facing.

[585] Like, what if, like, let's imagine, let's do another, what would have happened otherwise for Uber?

[586] Like, let's say instead of raising the last couple billion dollars, Uber had gone public and was staring down this DD situation in China as a public company and would have been forced to really fix it.

[587] Yeah, I mean, it turns out that hundreds of, of years of standard accounting principles and having to disclose in this very standard format is actually like quite good for keeping discipline for the business.

[588] And it's not, you know, it's not good for investors, right?

[589] Because investors now, the reason, you know, what you've seen since the Facebook IPO is obviously like the age of the unicorn has existed.

[590] And that's twofold.

[591] You know, it's one company staying private longer and not wanting to go public.

[592] But then related is that.

[593] that investors, all the people that were investing in these IPOs, like, their business model is predicated on getting cash into companies at this stage.

[594] So you've seen Tiro Price, you've seen Fidelity, you've seen Tiger Global, the hedge fund, you've seen Dragonere and, you know, X, Y, Z other public companies, public markets investors start doing late stage private venture rounds.

[595] Yep.

[596] Because that's what they've always done.

[597] It's just now those deals are happening in private instead of in public.

[598] It's bad for the company.

[599] It's bad for the investors because they don't get the disclosure.

[600] And it's terrible for the public because you can't buy these stocks.

[601] It's really kind of anti -patriotic.

[602] Follow me on this.

[603] But the American prosperity is built on the fact that for hundreds of years, American corporations have innovated.

[604] Like we, you know, the computer, the internet, like all these things that like we conceived of and, you know, brilliant.

[605] innovators in the US, often because of our great public education system and a lot of the kind of shared values of our culture, like having public markets allows for the everyday person to, you know, now it's more like through mutual funds and index funds or if you want to take a flyer on a company, but like benefit from the aggregate innovation that comes out of the American corporation.

[606] And like it really freezes those people out.

[607] And it's really, I mean, if you want to, like, really carry it forward, like, sort of contributes to wealth polarization.

[608] Yeah, I think it absolutely does.

[609] Like, I think there are, you know, there are two elements of, as we are seeing in this election cycle play out so viscerally, like, income inequality and wealth inequality in America is more polarized than it's ever been.

[610] And here's the crazy thing.

[611] We're sitting here on Monday night.

[612] Our listeners will know the outcome of this election where we do not.

[613] Yeah, we're literally the night before the election.

[614] here, um, which is, uh, also crazy.

[615] Um, all that rioting outside that you hear all the sirens and stuff is because the Seahawks Monday night football game here in Pioneer Square, not because of the election night before the election.

[616] Seattle has its priorities either straight or, or completely wrong, depending on how you view things.

[617] Um, but yeah, like, part of that is that these entrepreneurs are creating these tech companies and like they're getting massively wealthy, you know, Mark Zuckerberg and, you know, Travis and the Airbnb guys and whatever, but, um, but But it's equally on the investor side, too.

[618] Like, the people that are investing in these companies are so much more institutions now and for so much of the wealth creation period of these companies than they ever were, so much more.

[619] Yeah, when you restrict the access to invest to people that already have the information and means to do so and large enough amounts of money to deploy, it's like it's a rich get richer scenario.

[620] And that's pretty good.

[621] crazy.

[622] And actually, to kind of continue this, like thinking about tech trends or really like investment trends, with big institutional's coming down market and investing directly rather than deploying that capital into private equity and late stage venture, it kind of puts the squeeze on those industries.

[623] Oh, yeah, absolutely.

[624] There's a few things sort of contributing to this trend.

[625] 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 so there's that thing going on.

[626] And the private markets.

[627] Exactly, exactly.

[628] Simultaneously, you have this other market force that's fueling that, which is over the sensitive element of the internet, one thing has always been true and that is more information will be more available to more people than previously existed.

[629] And so now it's so much easier to get information than it previously was that you institutional investors, VCs and private equity firms would make the case to their limited partners and their investors saying, look, I have information access and connections to these startups or these late -stage companies that I will deploy this capital into, and I have unique access to that, whereas, like, that's becoming less and less true.

[630] Yeah, absolutely.

[631] There isn't, there's much more visibility into what companies are performing well and people can kind of go find them directly.

[632] And obviously, that's not entirely true.

[633] Like, there's still a very human element to all of this.

[634] But it is, in general, it's easier to find out who is running a company and if that company is doing well and reach out to them if you have an attractive offer to invest than it ever has been before.

[635] I mean, I think about this every day in, you know, being a venture capitalists.

[636] And at the early stage, we're somewhat insulated from this somewhat, but like, only somewhat.

[637] And, you know, there's sort of three things that a venture capitalist does, and I didn't make this up, but, you know, lots of people talk about this, but it's totally true.

[638] You know, you find company, one, find companies, great companies, two, you know, pick them, decide, you know, if you're going to invest or not, if you think the company has high potential or not.

[639] But then three, win the deal, if it's a competitive deal.

[640] And, you know, it used to be that, like, those three disciplines were, like, all really important.

[641] And now, like, at least the belief is that it's all about winning the deal.

[642] You know, it's like, oh, yeah, yeah, like, you can find companies easily.

[643] And, like, yeah, yeah, you can tell, like, what's going to be successful and what's not.

[644] I mean, like, there's some judgment there.

[645] But, you know, it's kind of a commodity.

[646] But, like, winning, like, that's, it's all about winning now.

[647] If, well, if that's the case, and it's really all about, you know, just getting the best deal, then it should be more entrepreneur -friendly.

[648] and, like, prices should go up, and it should be much more commoditized to the point where...

[649] Which is exactly what's happened.

[650] Exactly.

[651] That investors effectively just get the minimum acceptable return that any of them are willing to deal with.

[652] Yep.

[653] At the late stage venture, this is 100 % what has happened over the last few years in the market.

[654] And it's changing slightly on the margins, but this has been a powerful force across all of venture and especially late stage venture in the past few years.

[655] Hmm.

[656] All because of the Facebook IPO.

[657] Thanks, Mark and Cheryl.

[658] I don't know if we're saying that exactly.

[659] All right.

[660] Should you bring it home?

[661] Yeah.

[662] Yeah, yeah.

[663] Do you want to talk about how we thought about what our criteria would be for grading IPOs?

[664] Yeah, absolutely.

[665] So, you know, the way that we normally grade an acquisition is through the lens of, was it a good way to deploy that capital for the acquirer?

[666] So we kind of close our eyes and don't really care about, was it a good thing for the acquiree because, like, they're getting a bunch of money.

[667] It was a great thing.

[668] Their investors are cashing out.

[669] And almost every time that we analyze it, it was good.

[670] Yep.

[671] And we think a little bit about like the financial, you know, returns to the acquirer, but, you know, we're not spreadsheet jackies here.

[672] Right, right.

[673] We think strategically was this, was this a good move for the acquirer?

[674] Yeah, and we think about did that acquisition both provide that that financial return, but sort of in a longer lead time scenario, was it something that made that a better, more lasting, more enduring, more, more valuable for longer, more valuable for longer company.

[675] And so the way that we decided that we're going to grade IPOs is through that same endurance lens.

[676] 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.

[677] Yeah, the way we were talking about it before the show and I want to think about it is like, was the IPO a springboard for the company or a diving board?

[678] A lot of people thought the Facebook IPO was going to be a diving board.

[679] Yeah, yeah.

[680] And so what that allows us to do is sort of zoom out from that terrible plunge in the first week plus the ensuing months.

[681] Really, the whole year.

[682] Yeah.

[683] For the first year, I mean, the stock was below the IPO, below the IPO price.

[684] Right.

[685] And it allows us to look at the company as it exists today and look at that moment of IPO and say, was that the right move for the company or not.

[686] With that rubric in mind, what's your grade on this?

[687] I am going to call this an A -minus.

[688] A lot of that is based on how bullish I am on Facebook today, how great their strategy has been since the IPO, correcting for a lot of those blunders.

[689] minus is because I am not convinced that all of the tumultuous times that they went through contributed to the success that they are today.

[690] I think that they could have gotten here.

[691] They definitely needed to IPO.

[692] I think that was no doubt about it.

[693] They needed to do that situation.

[694] But I think that they could have gotten to this point of, you know, hyper growth and like kind of saturating the addressable human race with Internet crux that they're at today.

[695] I think they could have done that without such a bungled year.

[696] No doubt it was a bungled year.

[697] I'm not so sure.

[698] I am going to give this as probably unsurprisingly giving my enthusiasm during the history and facts.

[699] I'm going to give this an A -plus because I think they wouldn't have.

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

[701] It wasn't just a hole.

[702] Like, it was a chest wound.

[703] And built, like we said, not just the product, but the whole business and advertising model and invented native advertising practically within 60s.

[704] months.

[705] I think they, I agree with you.

[706] I think they could have done it eventually, but had they not move so fast because of this, would they have lost?

[707] And the other thing that's in my mind here, clearly May was the pivotal moment for the Facebook IPO when things really started to go south and these cracks started getting exposed.

[708] But I got to imagine that the whole process was really in Mark and Cheryl's minds starting to expose some of this stuff and what if they had not bought Instagram in April and if they had not bought Instagram and not moved so quickly to plug these holes would there be a future where or an alternate present today where Instagram had remained an independent company had become the face of mobile had figured out native advertising and completely eaten Facebook's lunch.

[709] I mean, because if you look at, so if you look at Facebook's revenue over the last couple of years, essentially the desktop Facebook is completely flat to down over the last four years.

[710] What was their whole business, this meteoric rise that made them the most hyped IPO ever, the largest technology IPO ever, that business is essentially dead.

[711] and like you said, 84 % of their advertising now is mobile.

[712] What if that were, you know, half, a third, a quarter, a fifth or a tenth of what it is today and Instagram were the gorilla in mobile advertising?

[713] Yeah, I mean, there's a whole lot of things they would need to go right there, right?

[714] A whole lot of things for sure.

[715] It's they would need, you know, to have a Cheryl Sandberg, right, who's going to build this like operational advertising sales business right you would need um well it's actually really interesting looking at uh so twitter didn't have this crux yep right like twitter and twitter was always you know if not mobile native like it was built for mobile text messaging right like yeah and and you look at their transition to the the smartphone world and um i mean twitter is still like still doesn't have a great ad unit.

[716] Yeah.

[717] And there's a lot of problems going on there, and we're kind of seeing it all fall apart in front of our eyes.

[718] But, like, a large part of it is, like, it's just never, like, Facebook ads are way more compelling, particularly on mobile.

[719] And, like, if Facebook, you raise this interesting point, like, if Facebook didn't feel this existential crisis, could they wind up in a Twitter -like situation, at least with their, maybe not with engagement, but with monetization.

[720] Yep.

[721] Or even, you know, maybe not Instagram, but I'll throw it out there.

[722] You know, it was February 2012 when Facebook filed its S -1.

[723] One year later, February 2013, Snapchat's founded.

[724] So, you know, a lot of possible.

[725] One of the greatest things that I love the most about our industry is it is so hyper -competitive.

[726] And I think this is just such a great case study of why you can't rest on your heels, even when you are the largest tech IPO in history.

[727] Yeah.

[728] Because, man, the next generation is coming right after you.

[729] Yep.

[730] All right.

[731] Speaking of Twitter, follow -ups.

[732] Twitter, lots going on on Twitter these days.

[733] But they're shutting down Vine, potentially selling Vine.

[734] Yeah, no surprise there.

[735] I mean, it's shocking to me that they haven't, and I think these will come, but they had like 9 % layoffs.

[736] like it seems like there's a lot more of that to come.

[737] They've got to streamline their products.

[738] Like it's kind of shocking to me that they didn't do Periscope 2 and one fell swoop.

[739] I think the reason that's probably living on is because Facebook Live is proving so the future of Facebook that Twitter is really afraid to exit that race when Facebook is making such a big bet on it.

[740] Yeah.

[741] Total aside, by the way, related to Facebook doesn't get, it gets a lot of press, but not.

[742] in this context like Facebook is kind of trying to do this again everything we're just talking about and it's reinventing itself around video i think yeah i think there's an existential thing where they totally and vr right like they totally feared like missing the the next boat since they almost missed the mobile boat so like buy oculus and be way ahead of the curve on that try to buy snapchat yep and and you know snapchat is mobile and i just made that analogy like oh could snapchat have killed facebook and mobile but like snapchat's also video right yeah yeah so for me uh You know, tough to do.

[743] You never want to kill products that people love.

[744] But, like, I want, I'm rooting for Twitter to survive at all here.

[745] And so I think they need a lot more belt tightening to get there.

[746] Because it's not, to me, they're in this very difficult situation where all the investors are super excited that they might sell.

[747] So that sort of pushes the price up.

[748] And then that price tag ends up being too expensive.

[749] So they're in this, like, weird catch -22 where they were unsuccessful in finding a buyer.

[750] And now they have to, like, go figure it out.

[751] And they've already gone public.

[752] Right.

[753] We need to add a third category to the show, which is, like, what happens if you've already gone public?

[754] You have no buyer.

[755] Like, what then?

[756] Plan C. Yeah.

[757] It's an invaluable product to the world.

[758] And it, like, I really want it to endure.

[759] And it's actually a pretty good business.

[760] Like, they sell a lot of ads and there are reasons why people use Twitter ads and can't necessarily satisfy that on any other platform, it's a good business.

[761] It's not a Facebook -sized business, and they really need to reduce their costs to get it to a place where it can actually live on sustainably.

[762] Yep.

[763] I agree.

[764] Quick follow -up on Skype, our last episode, we speculated on the show that Microsoft might have used foreign cash to buy Skype, which was a non -U

[765].S.