Facebook's IPO Pipe Dream, Up in Smoke

Starry-eyed tech investors have been dreaming of Facebook's IPO party for years. My Foolish colleague Anders Bylund and I, especially, dream of piles and mountains of cash. The kind that you swim in. The kind you get when Microsoft (Nasdaq: MSFT  ) says you're worth $15 billion.

Mr. Softy had me convinced. But then Facebook executives began selling stock. (A selling plan for all employees is in the works and ready to go active on Nov. 1, according to The Wall Street Journal.) Key staffers left. More key staffers left. And then, last week, co-founder Dustin Moskovitz -- the guy CEO Mark Zuckerberg teamed with while still at Harvard -- decided to ditch Facebook to create a new Internet service, the Journal reports.

Holy Schnikies, Tommy Boy! Is this the end of Facebook? Hardly. Moskovitz's departure was probably motivated by one of three issues:

  1. Facebook is feeling growing pains. Hiring is a priority when you're growing as quickly as Facebook is; 100 million users can't just serve themselves. The downside? New blood can annoy the old blood, especially when the new blood isn't that new, but rather veterans of Yahoo! (Nasdaq: YHOO  ) , eBay (Nasdaq: EBAY  ) , and other stars of earlier Web wars.
  2. Facebook's culture is changing. Somewhat like the new-blood/old-blood scenario, Silicon Valley has a history of established companies that give birth to start-ups. Oracle (Nasdaq: ORCL  ) executive Marc Benioff created salesforce.com (NYSE: CRM  ) , for example. Moskovitz, like Benioff before him, may believe he has a better idea, and that Facebook's time has past.
  3. Facebook won't go public for at least another 24 months. This is the most likely scenario, in my view. Job hunting is like treasure hunting in Silicon Valley. You're looking for the Next Hot IPO -- a place where options are like gold, tickets to the rarefied realm of real estate in the San Francisco Bay area.

Put differently: If a payday really were looming, Moskovitz would be crazy to leave. Yet he did.

We don't know why. All we know is that Moskovitz is a co-founder, and that he attended Harvard with Zuckerberg, so he's probably a smart guy. And smart guys weigh risks before taking them. In Moskovitz's case, it's likely that he did the math and concluded that he had more to lose by staying at Facebook. Not good.

But not necessarily awful, either. A credit crunch has cut off capital, which just adds sand to an already-dry IPO well. Zuckerberg has no choice but to wait for the markets to get unstuck before filing for a stock offering. Now, if only he could figure out how to get his top talent to wait with him.

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Fool contributor Tim Beyers owned shares of Oracle at the time of publication. He also hunts for the best of tech as a member of the Motley Fool Rule Breakers team. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2008, at 11:57 AM, TheFrugalOne wrote:

    Tim,

    Consider this: Moskovitz might already be vested in as many options as he'd care to have. Maybe he just wanted to go on and do his own thing and be his own top dog. Or maybe, if the rumors are true, he also wanted to get away from Zuckerberg.

    Just a thought, or two.

  • Report this Comment On October 07, 2008, at 11:59 AM, nance60 wrote:

    I do not like Facebook at all. I have added all kinds of advertisements for contests on my page that I have entered, then removed them when the the promo is over. Don't ask me what the worth of doing this is- I'm giving free advertisement on my facebook page. The same thing I do when I wear a Polo shirt. And I do not get paid a cent, but I do identify myself as an upper-middle class (rightly or wrongly) member. All this money investing in brand names, faces,etc. is a waste of capital. Maybe, the economy would be doing better if this Harvard Facebook guy finished school, and invested more money on his mind. I have found these "social" pages devoid of meaningful content. When is someone going to just invest in a plain piece of paper you can write upon and save with no hi-tech gizmos. These pages are alienating. But this is from just a UCLA fool.

  • Report this Comment On October 07, 2008, at 9:35 PM, brianpendowski wrote:

    Tim,

    If Dustin has been with Facebook since the beginning he has almost certainly vested all his shares, which means he has nothing left to gain by sticking around because he won't be able to aquire any additional equity in the company. If he already owns as much Facebook stock as he will ever own, why not go out and try to build a new company and generate equity in that company as well as what he already owns in Facebook.

    For you to comment that he is crazy to walk away unless something is wrong makes me think that you think he won't get paid out on the stock he already owns. How does someone get a job writing for the Fool when they don't understand the basics.

    Either one of two things happened, He realized he already owns as much stock in Facebook as he will ever own and now he wants to go build another company with its own payout, or the new leadership which is much more experienced with a much better credentials than the best friends of the guy that started Facebook pushed him out. Either way, Dustin owns as much Facebook stock as he ever will.

  • Report this Comment On October 08, 2008, at 9:33 AM, TMFMileHigh wrote:

    'Morning all. Thanks for writing. A pair of misconceptions I'd like to comment on. First, that Dustin Moskovitz has reached his limit and is unable to ever get another share of FB. Wrong. When founders become employees they're eligible for incentive stock options like everyone else. Second, that somehow leaving to create a new company says nothing about FB. Of course it does. FB is in a fragile place. Competitors are everywhere and employees are leaving. Now is the time excellent leadership is needed for value creation. Either the payoff to provide leadership is big enough, or it isn't. Fair or no, Moskovitz, by leaving -- esp. by leaving to start a *new* venture, which by definition entails huge risks -- has said the effort isn't worth it.

  • Report this Comment On October 08, 2008, at 10:29 PM, brianpendowski wrote:

    Just admit you are wrong. You were writing like Dustin wasn't already rich in Facebook stock. Even if he could get a few more shares, he is already filthy rich with the shares he currently owns. You also are assuming Dustin was a good leader and that he left on his own, maybe now that Facebook has some worldclass managers, Dustin doesn't cut it.

  • Report this Comment On January 31, 2012, at 12:03 AM, MHedgeFundTrader wrote:

    The street is chattering today over the prospect of an enormous payday with the imminent IPO for the social media company, Facebook. Price talk is valuing the company as high as $100 billion, making it the largest such floatation in history. Could the mega deal spell the end of the current bull market?

    Look at it this way. That is $100 billion that gets sucked out of the market. It is $100 billion that gets diverted away from existing equity allocations. Many investors will need to sell existing positions in other companies to pay for their new Facebook shares, especially in the technology sector.

    Can the market afford to lose $100 billion in buying power in its current fragile condition? I think not. Take a look at the chart below which has the (SPY) making a near parabolic move since the beginning of the year. At the very least, we need to pull back to just above $126, which takes us down to 1,256 on the S&P 500, smack dab on the 200 day moving average. If you don’t believe me, then take a look at the chart for the financials sector ETF (XLF), which has led the market this year and is clearly rolling over.

    I’ll tell you who the big winner in a Facebook IPOP will be. The San Francisco Bay area. $100 billion is a ton of money to pour into a single urban area. The issue is expected to create several billionaires and as many as 3,000 new millionaires in my neighborhood.

    The last time that happened was when Google (GOOG) went public, creating a wealth effect that never went away, taking the waiting list for a new Ferrari or Tesla out two years. Better buy real estate near Facebook’s Menlo Park headquarters, such as in Atherton, Palo Alto, and Mountain View. The bidding wars are about to begin!

    The Mad Hedge Fund Trader

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