TECH
02/03/2012 11:38 am ET

Facebook's Post-IPO Challenge: 'Stay Focused And Keep Shipping'

Several hours after Facebook filed papers for its highly anticipated initial public offering, CEO Mark Zuckerberg posted a photo of his desk. Next to his MacBook Air computer and a bottle of Gatorade was a large sign with the order to "Stay focused and keep shipping."

The mandate points to new challenges Facebook will face in the months before and years following its IPO. Though the public offering is set to reap billions for Facebook, the move from private firm to public company also risks delivering new distractions, more bureaucracy and a brain drain as entrepreneurial employees and newly minted millionaires head for the exit, analysts say.

"It’s not a risk, but a guarantee that Facebook won’t innovate the way it has in the past," said Vivek Wadhwa, the director of research at Duke University’s Center for Entrepreneurship and Research Commercialization. "Public companies generally don’t innovate. That happens when you’re young."

As Facebook expands its operations and opens itself up to new scrutiny from shareholders, it may become harder for it to stay nimble, experts warn. Especially in Silicon Valley, a place that eats its old, a slowdown in the pace of progress and the loss of top talent could put Facebook’s fortunes and future on the line. Facebook acknowledged these risk factors in its IPO filing: "As our organization continues to grow […] we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products."

This predicament isn’t unique to Facebook, and most public companies suffer a drop-off in innovation, according to research by Harvard University doctoral candidate Shai Bernstein. Bernstein compared patent filings by companies that stayed private with those by firms that went public, and found that an IPO was accompanied by a 50 percent decline in innovation. The drop, Bernstein concluded, was driven by the departure of talented employees and productivity declines among those that stayed.

Facebook, like other tech companies before it, is likely to face both issues. Some estimates suggest that as many as 1,000 Facebook employees, or around one-third of the company, will become millionaires when Facebook makes its Wall Street debut. The cash infusion risks setting off an exodus of talented, startup-inclined staffers, as well as decreasing the motivation of remaining employees, who may be more concerned with decorating their dream home than revamping Facebook features.

"There’s an exodus of talent that tends to happen post-IPO," said J.P. Eggers, an assistant professor of management and organizations at New York University’s Stern School of Business. "The big leaders that came up with the biggest, most innovative ideas initially are more likely to leave after an IPO. You’re left with the incrementalists."

Rebecca Lieb, an analyst with the Altimeter Group, notes that employees with startup streaks, like those who joined Facebook in its early days, often balk at the prospect of working at a public company and may move on to new endeavors. Or, rather than help Facebook get bigger, the company's new millionaires may use their payouts to fund their own attempts to build the next Facebook. Some of the social network's top talent left larger companies, such as Google, to join forces with Facebook. Sheryl Sandberg, Facebook’s chief operating officer, was previously Google’s vice president of global online sales and operations, and Greg Badros, Facebook’s director of engineering, previously served as Google’s senior director of engineering. Lars Rasmussen, one of the pioneers behind Google Maps and Google Wave, also came to Facebook from Google, complaining that Google’s unwieldy size had made his work "very challenging."

"[Facebook] is clearly not a startup or anything close to a startup anymore and there are people who are serial startup junkies and they’ll want to jump back into the startup world," said Lieb.

Facebook’s IPO has invited comparisons to Google’s own nearly a decade ago -- both are internet behemoths and, like Google, Facebook looks poised for a record-setting IPO -- and Facebook may face the same challenges the search giant confronted earlier this decade.

Ex-Google employee Dan Daugherty, who joined Google in 2002 and quit a year after its IPO, recalls that Google lost talented employees to startups and suffered a decrease in productivity after it went public.

"I think productivity fell afterwards because when you feel rich, or are rich and are able to sell shares, you don’t tend to want to go to work anymore if you’re unhappy. I remember a lot of individuals talking about that," said Daugherty.

Daugherty was among those who launched his own company, rental property search engine RentBits, rather than stay at Google.

"We saw a lot of individuals with an entrepreneurial mindset leave the company after four years or even before the four-year vesting period because they had so much capital," recalled Daugherty. "I think you’ll see a lot of people start leaving to start their own companies because Facebook is getting so large and is becoming more bureaucratic. We saw that at Google as well. It became very large."

While losing employees becomes easier following a public offering pop, attracting them becomes more difficult without the promise of pre-IPO stock options and the allure of being the hot new thing in the Valley.

"Not only is it going to cost more to attract talent, but there’s a vicious talent war in the tech sector right now and that won’t make it any better," said Lieb.

As a public company, Facebook will also face unprecedented levels of scrutiny. Its chiefs will have to focus not only on its mission to "make the world more open and connected," but they will also need to work to keep investors happy and deliver growth. This need to please Wall Street can thwart innovation by causing leaders to focus on short-term tweaks over more ambitious, long term changes, experts say.

"After going public, the firm switches from going after massive high risk, potentially high rewards innovation to more conservative innovation that fits within a smaller time horizon," said Eggers. "The short term accountability increases dramatically after going public. The need to file quarterly earnings reports becomes a bigger distraction that leads to more of a short term focus for publicly traded companies than private ones."

Yet Facebook, having watched other tech companies struggle with their size and employee exodus, is aware of the risks it faces and has already taken steps to streamline its operations, reorganizing its corporate structure to focus on key areas.

In his letter to investors, Zuckerberg stressed his desire to keep moving quickly and stay bold.

"[A]s most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly," Zuckerberg wrote. "We have a saying: 'Move fast and break things.' The idea is that if you never break anything, you’re probably not moving fast enough."

"We have another saying," Zuckerberg added, "'The riskiest thing is to take no risks.'"

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