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Five Reasons Zuckerberg Is Wrong to Take Facebook Public

Posted: 02/ 3/2012 1:46 pm

If you believe Mark Zuckerberg's sanctimonious letter to prospective investors, Facebook apparently is all about altruism -- not turning profits. According to Zuck, "We don't build services to make money; we make money to build better services."

This passage, and other parts of the letter, raise some serious questions about Zuck's true plans. There are a number of very difficult contradictions that arise -- not the least of which is whether Facebook can maintain its purported mission of social advocacy while mucking around with fat cat investors on Wall Street after its IPO.

Here are some hard questions Mr. Zuckerberg has to answer after his recent letter, which amount to five very big reasons Zuckerberg was wrong to take the privately-held Facebook into the public arena:

If it's not about money ... why go public at all?

Zuckerberg's letter begins, "Facebook was not originally created to be a company. It was built to accomplish a social mission -- to make the world more open and connected."

So I'll start with the $5 billion question everyone should wonder: If it's not about getting filthy rich or turning Facebook into a corporate monstrosity, then why go public at all?

Why not go the route of Wikipedia or Firefox or WordPress, digital creations that are open source and not-for-profit? Or why not stay a private company, turning a small profit but answering only to yourself?

Take Craigslist. It's a true social company -- Craig Newmark barely monetizes the classified ad and message board giant. Profitable? Not so much. Social legacy? Mission accomplished.

Zuck writes, "These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits." But unfortunately, maximizing profits (for investors, of course) is the nature of a publicly traded company. The reality is that Wall Street punishes growing companies all the time simply because they aren't growing fast enough. Take Ford , which was rewarded with an 8% slump in stock recently as thanks for posting $463 million in profit growth.

Let's not be naive, Zuck. You're really waltzing into the greedy world of Wall Street and pretending like money doesn't matter?

If it's about making money only to plow it back into the company... don't you have enough cash already?

Facebook financials show $3.5 billion in cash on hand for the social media giant. It will turn roughly $1 billion in profits this year. It is going to raise $5 billion in an IPO.

So I have to ask: How much money is "necessary" to make Facebook services tip-top? This isn't a capital-intensive business like manufacturing. There are no raw materials to buy or costly production machinery to upgrade. Where's that cash going?

Tech companies are exciting because they can start from nothing and succeed simply on a good idea and a lot of hard work. Take the flagship product of Google, its search algorithm. Now that it's the gold standard of search, I suppose there's "upkeep" in the form of programmers tweaking the code and server space to make AdSense work. But it basically runs itself.

Why else do you think Google has a staggering $44 billion in cash on its balance sheet? It literally has more money than it knows what to do with, toying with cars that drive themselves and offshore windfarms and still turning an obscene profit anyway.

In short, either Zuckerberg is eager to hoard cash like other firms, or Facebook is daydreaming about its own self-driving vehicle projects to bankroll despite limited results.

If Facebook indeed needs huge capital for a dramatic evolution ... what's the plan?

But let's give Mark Zuckerberg a break for a moment. Let's assume Facebook is an altruistic company that just wants to facilitate information sharing and make the world a better place. It went public not to make anyone rich, but to fund a brave new mission to take Facebook's current operations to an even more dramatic scale.

OK. Then what's the plan, Zuck? What comes next in this big scheme of global interconnectedness?

Just about the only concrete growth plans I can find are reports indicating India is a big opportunity for Facebook. Its user base in the country has more than doubled in the past year. However, signing up more people isn't a step change -- even if there's the potential for significant growth this way. China growth is the same story, if and when Facebook makes a push into Asia. Same product, different store.

There are hints at news aggregation or even original reporting, judging from a variety of domains registered around the phrase "Facebook newsroom." Construction planning documents from the city of Menlo Park, Calif., also hints Facebook intends to house about 9,400 workers by 2017.

But nothing concrete has emerged, and certainly nothing that sounds worth $5 billion.

If the plan was just to do business as usual ... what the heck is the $5 billion IPO for?

Other than funding the vanity of a massive corporate campus, of course.

If there is no massive evolutionary plan ... when will there be one?

Maybe I'm expecting too much, and a blueprint of the future isn't necessary just yet. After all, it's impossible to get a handle on many Facebook metrics. But here's one that, while slippery, is at least worth acknowledging:

A 2011 report from Inside Facebook says the social network's growth has slowed down in the mature U.S. market. The service saw nearly 6 million users depart in a single month last year. A drop in the bucket, sure, since Facebook has some 150 million folks in the U.S. with profiles. But not a good sign. Canada, the United Kingdom, Norway and Russia all lost more than 100,000 users each in the same period.

Even if we grant Facebook some continued organic growth and discount this report, eventually growth will reach critical mass. Not because Facebook is a bad product , but because that's how these things work.

All fast-growing tech companies experience a flattening out of growth eventually in their core products. They need a second act -- for Amazon it was the movement from books into flat-screen TV sales, then into ebooks and currently into streaming video. Steve Jobs didn't turn Apple into a powerhouse thanks to its Macs alone, but thanks to the iPod followed by the iPhone followed by the iPad.

Admittedly, you can make plenty of money on a mature product. Microsoft and Windows are the perfect example of this. But Microsoft also is the perfect example of a stagnant, mature company without a second act -- which Wall Street has written off as dead money, with its best days behind it.

Once you take a company public, investors demand growth even for a dominant company. So muddling through with India and China signups might work for a few years ... but what's next?

Does Zuckerberg understand what leading a publicly traded company is like?

Investors might pooh-pooh some of Zuckerberg's letter as just sound bites for the PR machine, the musings of a silly twentysomething who doesn't understand big business.

But what if Zuck really means what he has written?

Remember, Zuckerberg will maintain more than half of the voting rights for this company after its IPO. He also will not answer to an independent board, as CEOs of other publicly traded stocks do. So he could conceivably tell investors to shove it if they complain about profitability or revenue growth.

If that happens, then the idea of an IPO really becomes absurd. Why create the media circus and Wall Street shenanigans if you never intended to allow public shareholders a say in your company? Why welcome in money-hungry investment banks and then get upset when they inevitably ask for bigger profits?

Investors who truly believe in the Zuckerberg way might be pleased to see that he has a large amount of control in the company he created from scratch. And surely other tech entrepreneurs dating back to the time of Bill Gates figured it out.

But the difference is Bill Gates saved his altruistic mission for his foundation, and the noble work he provides with his wife, Melinda. He was a businessman at Microsoft, and a humanitarian outside of the office.

It's awfully idealistic of Zuckerberg to pretend like he can achieve both roles at Facebook. It's also more than a little naïve.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP.

 

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