Facebook's IPO: Foreshadowing a bubble?

Published on February 03, 2012 under Technology, Business, Social Media

Facebook bubble

The day has finally arrived. A day Facebook founder and CEO Mark Zuckerberg has been teasing us with for years. He's finally opened up his company to an initial public offering (IPO) where anyone out there can buy stock in Facebook. Before this day, Zuckerberg would only have private stock sales to investors when he needed money. Unless you were a wealthy investor, you were left out.

Facebook's IPO was hearty, thus adding new members to the "1%" the news media talks about. Billions of dollars were collected in sales of stock, but already journalists are asking if this will be a sign of a new tech bubble.

I can't blame them. The last time we really saw tech companies blow up on the stock market was the dotcom era, which ended up in a crash a short period later. I could see why the speculation will happen, but this time I think it's different.

Let's go back to 2000

Remember the dotcom era? That time around the turn of the century when the internet grew to the point that some could viably see a means to make money. So we saw everyone and their mother buy a dotcom address (domain) and go to town. I remember Super Bowl XXXIV when practically all of the commercials were for dotcoms.

Everything seemed amazing. People left their suits and stale offices for open space loft environments where workers could dress as they do at home and work at a place with a pool table or foosball table as well as a coffee/liquor bar. Everyone seemed to appear to be heading towards a new era of success.

Then reality hit. Those companies went to IPO and the hard questions came out. Potential investors wanted to know details of the actual revenue stream, and how these companies make money. That was the point budding CEOs couldn't come up with cloudy details or promises of success. Most of the dotcoms hit a brick wall and initial angel investors were left with losses and useless stock.

When you think about things in that sense, I can see why journalists and bloggers will get an eerie feeling when a dotcom or tech company goes to IPO. Plus, if you imagine a massive giant like Facebook going under, it would be a hard hit to the economy and this industry.

However, I don't think this is the case now in 2012.

Things are different now

E-Trade Dot Com Graveyard
Shades of the past: A screen shot
from E*Trade's infamous 2001 "Dot
Com Graveyard" commercial spot.
Click to watch it.

Back in the dotcom era, most non-techies had no clue about the internet. It was still this new thing where people could connect to others around the globe. I mean, social media didn't even really exist at the time.

The ignorance and lack of real knowledge of the industry led to many investors just throwing money at entrepreneurs without really thinking about it. We would see guys scribble out ideas on napkins, toss together a short proposal, and walk out with millions of dollars to get started. The IPOs happened really when the sites were launched with no real look at how they initially did.

I think this is one of the reasons why Mark Zuckerberg held off for so long on taking Facebook to IPO. Back in the dotcom era, some entrepreneurs were looking to build new empires, but many were just looking to scam venture capitalists (VC). They simply started a business to get VC's to give them money on the hope of a new product, and while some development did happen, many times we would see more of that money go towards a nice car for the CEO, parties at the loft office, and new gadgets for employees.

Many "experts" though have been pushing on Mark Zuckerberg for years to take Facebook to IPO, but he didn't until now. I believe part of it was that he wanted to be in a spot where he could keep evolving the site without having to answer to stock holders, but I also think he himself wanted to see if his creation was going to last, or just be a fad.

Investors and entrepreneurs see the same logic, thus the rules have changed. Now you can't just walk into a board room with a 10-page proposal. You need a working product. That means your brilliant idea has to be built and running if you're going to lure VC's into giving an angel investment. You open up any blog like TechCrunch, and all those guys getting funding are those with working products. The goal now isn't to get funding to get started, but now to get funding to take it to the next level.

I think that's the case with Facebook, Groupon, and all the other tech companies who are going to IPO. They've done all they can with angel investment, but they have bigger plans in order and thus need larger amounts of money to make it happen.

Granted there are still some who can play the old games and fail, but that's the chance one takes in investing in a startup. I just don't think we're headed towards another dotcom bubble. The entrepreneurs now know they have to bring it to the table, and investors are smarter about the internet and have access to counsultants to look over the proposals and thus assess if it's viable or not. It's just different and more stable this time.

What do you think? Are we headed towards another bubble? Or have things changed?

Tags: facebook, social media, business, ipo, bubble

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