02/01/2012 04:47 pm ET | Updated Apr 02, 2012

Facebook's IPO 101: What Does It All Mean?

Leading angel investor and tech commentator Hussein Kanji explains what it means now that Facebook is going public.

Named as one of the 100 most influential technology investors in Europe, he's an advisor and angel investor to several early stage start-ups. Formerly of Accel Partners, he helped the firm make investments in Playfish, Dapper, OpenGamma, and United Mobile. He's personally invested in startups such as, Llustre, GoCardless, and Signpost. He previously worked in Silicon Valley where he held strategy and product management roles at Microsoft.

You've mentioned the endless potential Facebook has such as eventually replacing companies like Netflix, could you elaborate more on its potential?

HK: One out of every seven minutes online is spent on Facebook. In October 2010, the average user spent 4.5 hours a month on Facebook. In December 2011, 6.5 hours a month.

It is the largest source of referrer traffic on the Internet. To media sites, Facebook controls 30-50% of referrer traffic.

I think it has a highly engaged audience that is looking to consume other services. Some of those services can be brought in, enhancing the user experience and generating revenue for Facebook.

The company has 800 million people. It grew by 1.4 million in November alone. That said, U.S and UK traffic slipped 2% for the first time.

If it's a 100 billion dollar valuation for instance, is it a somewhat more risky investment even though you're bullish on Facebook?

HK: Simple math. If Facebook grew to the value of Apple, or $425B in the next five years it would yield a 34% return to shareholders. I think growing to the value of Apple is pretty aggressive given that Apple generates $25B in net income (and Facebook does $6B in revenue alone). I think there are other securities/assets you can buy that deliver better returns with less risk. That said, if you bought Google at the IPO and held, you would have yielded 40%.

Could Facebook fall under the same fate of being a company with great potential but ending up not being as dominant 5 or 10 years down the line because their best and brightest moved on?

HK: That's a big question. Some of Facebook's brightest employees have already left, as they cashed out. Chamath Palihapitiya runs a new venture fund; Dustin Moskovitz left to found Asana; Matt Cohler is at Benchmark, etc. That said, a lot of these guys left earlier and Facebook is still going strong. The question is what happens when a lot more of the A+ players leave and the company, in the words of Steve Jobs, starts getting staffed by bozos. There was a time at Google when almost everyone was A+; and you definitely see bozos in that company nowadays.

What are the benefits of Facebook going public?

HK: As a user, we get to see more information about the company (financial returns, growth projections). For employees, they get to cash out (not always a good thing). For them, apart from having a liquid currency to fund M&A, it also ends up with a big cash horde to spend.

How are things going to change at Facebook and for Mark Zuckerberg when they become a public company?

HK: They will have to manage to quarterly earnings. It will be harder for them to be focused on the long-term.

Other companies have wanted to buy Facebook in the past, would it have evolved the same way had Mark decided to sell it to Microsoft for instance?

HK: I doubt Facebook would have been able to preserve its vision (which changed in line with growth and became more ambitious) if it was managed as a division of another company. Certainly not Microsoft, which apart from its stake in Facebook (both strategic and financial) has proceeded to wash more money down the toilet in the internet space than it's made.

Why did Facebook take so long to file?

HK: What's the incentive to file and become a public company? They don't need the capital; they don't need the high public awareness or managing earnings every quarter; etc.

Do you think it's a good idea for them to file now or could they have gone on longer without?

HK: The biggest explanation is that they need to register under the Exchange Act and start filing, which carries all the costly disclosure of going public and none of the upsides. The Exchange Act is a 1964 amendment to the Securities Exchange Act of 1934 that requires companies with over USD 10 million in assets and 500 shareholders. Facebook has far more than USD 10 million in assets and exceeded the 500 shareholder limit last year, even though it got a waiver from the SEC that it's restricted stock units don't count towards the 500 shareholder limits (most employees outside of the first 200 have RSUs). The company is required to register with the SEC by April 29, 2012.

Follow Hussein Kanji on Twitter @hkanji