Right now, in the wake of the Facebook IPO and the downward drift in its stock price since, you can hear the spluttering everywhere:
“This is bullshit!”
Um, well, yeah. What did you expect? A 7-year-old company going IPO at over 100 times revenue (not earnings) per share, with controlling interest still left in the hands of a 28-year-old? Own up, people: if you were desperate to lay your hands on this stock as a “can’t lose” proposition, you were just shitting yourself. And of course you’re shitting yourself now, albeit in another way.
The fecomantic question is: what can one foretell from this shit? (Unfortunately, this divination means leaning over and looking down at it. Ew. Hand me that clothespin.)
First, some historical and personal background. This whole episode is upside-down when I compare it to the understanding I gleaned while working in Silicon Valley in the 1980s and early 90s. Then, the system (which I hope still mostly works) ran like this:
(1) Venture capital is pieced together by the VC firms from little slivers that are mostly shaved off of highly regulated institutional investment funds — the bigger ones being state government employee pension funds. These funds are forbidden by law from risking very much. But “little” is relative. These institutional funds have walloping amounts of money under management. What’s a little for them goes a long way for the rest of us.
(2) Your founding team would get options on maybe 10% of the company; maybe another 5% goes to others who follow. The rest is reserved for the open market upon IPO. As the VCs liked to put it, “Do you want 1% of a very successful company, or a controlling interest in nothing?”
(3) If you IPO (most startups don’t), you start at maybe $8-$12/share. In your wildest dreams it goes up to something like FB’s initial $38, over a period of years, after proving that there’s something to the promises and that there’s a clear path to profit after only a few years.
(4) During those years, you wear “golden handcuffs” — that is, your stock options don’t fully vest for a while. To leave the company earlier is to abandon any possible winnings from as-yet-unvested options.
(5) These are options, not actual stock; they are worth only the value of the stock (at some point in time after vesting) minus your exercise price.
(6) Your technology is something truly new and clever that no competitor can properly replicate for a while, except perhaps by licensing your patents or by inventing improvements that work around your patents. Very likely, much or most of it spent its embryonic phase in a government-funded research lab.
(7) You went to Harvard? Or to some other Ivy League school? Who cares? This game is all about what you can do with technology, and your Valley connections, not with old-school East Coast elite collusion. If you went to San Diego State, or some cow college in the Punjab, you’ve still got a shot.
The Facebook story? At best, only #4 and #5 apply.
To be clear: I’m not mistily nostalgic for The Old Way. It’s ugly, intensely stressful and demeaning in countless ways. I had to get out of it in part because of these aspects. But I have to admit it worked.
Facebook might faceplant, but in the meantime it stands as an unfortunate model to young entrepreneurs, as did so many of the dot-com payouts.
And, as usual, the salutary role of government is obscured. Essentially all of the technology upon which FB is built was developed by a combination of government-funded research and the venture process I outline above. And it’s not just R&D, corporate and otherwise. Follow the money. If it weren’t for a very stable form of employment — working for the government — and regulation of the pension funds for such employees, the institution of venture capital would probably be vestigial. Forbidding institutional investors from taking a lot of crazy risks with the bulk of Other People’s Money is, over the long term, the only way to ensure the freedom to take any crazy risks with any part thereof. It’s also pretty hard to pile up enough risk capital in any other way.
The only thing Wall Street brings to the table, in terms of offering eventual value to us hapless end-users, is that it can establish a given company’s offerings as the de facto standard for the industry. These standards help economize on further development, and help level the playing field for new entrants. (Somewhat, anyway — but are we really better off that MS-DOS, then Windows, became de facto standards?)
And my fecomantic prognostication? Well, the not-very-tech-savvy used to tease any would-be tech entrepreneur with “So you want to be the next Bill Gates?” This caused those among them who passionately hated Microsoft and all its works to bridle and sneer. Now, for a little while at least, it’s going to be this: “So you want to be the next Mark Zuckerberg?”
And too many young sociopaths, only too happy to trade on people’s class insecurities, will say, “Yes.” In all seriousness.
And they’ll violate privacy, copyright, patents, confidentiality agreements, non-compete agreements and their friends’ trust, if that’s what it takes. Yes, the movie was just a movie. No, Mark Zuckerberg is not a sociopath. But there’s much in the real story that was bad enough.