Facebook: Seriously, How Did This Become Such A Mess?

By Sarah Lacy , written on May 24, 2012

From The News Desk

I haven't written anything amid the whole post-Facebook IPO debacle for one main reason: I'm just watching it, agog, trying to figure out how the most meticulously over-planned IPO in Valley history turned into such a complete and utter mess.

A month or so before, I was at a Wealthfront event on why more companies should go public and not just focus on an easy flip. Frank Quattrone was the opening speaker and he emphasized just how much was at stake for the whole Valley in this IPO. How it was absolutely essential that it go well. And a later panel said that going public really wasn't that hard. You had to get buy-and-hold, big institutions on board, and the rest would take care of itself. That's the job of bankers. "They'll get it done," several people shrugged.

A vast majority of the power players in Silicon Valley were directly or indirectly counting on this to go well. Almost all the top spots on Forbes' recently released Midas List were put there by Facebook investments, and many more investors had bought shares in the heady secondary market. In the days before the offering, you could see companies like Rovio and Box -- arguably on the early side of going public -- starting to make noises that they were "prepping" to file. That timing wasn't a coincidence. If Facebook had done well, the narrative would have been that investors were hungry for Web stocks and wanted more.

On a broader cultural level, Facebook was rewriting the rules of building a company. This delayed IPO was a litmus test of whether secondary markets were an effective place for pre-IPO trading -- or a place where constrained supply and demand would warp valuations and expectations. Worse, would secondary markets allow too many of the investors who were hungry for the stock to buy it before an IPO and then look to the IPO to dump it on the public?

Having put this off for years, Facebook was well aware of how much pressure was heaped onto this moment -- not just for them but all of the Valley. You can never control the markets, and the company wants to optimize an IPO to make money, not create a huge pop, a new bubble, and a wild media circus. And as I've argued before, Facebook started its IPO long ago with its endless secondary market transactions that were designed to satisfy just enough liquidity to put the real thing off longer than nearly any other Internet company of this magnitude ever did.

That said: These are smart people. They knew the stakes. They planned this for years. How on earth could it have gone this badly?

The New York Stock Exchange and the Nasdaq were fighting over this listing so intensely that billboards were erected near Facebook's headquarters to woo them. And the Nasdaq had bizarre technical glitches? It couldn't even get the start of trading right?

The bankers -- who again were going crazy trying to get portions of this deal -- agreed to sell 25 percent more shares when there was, in hindsight, not the demand? Really? The job of the roadshow is to assess demand. How could it have gone that wrong? I talked to a friend who said his broker was cold calling him, asking if he wanted some Facebook days before -- a sign he took to mean people weren't biting. If I was hearing this anecdotally, how was Facebook and its bankers not hearing it?

Then there are the allegations that a Facebook executive told some investors information about the next quarter but not others. That's been unproven and could well be a case of a banker trying to cover his own ass by pushing blame off on the company through "off the record" leaks. There is no way of knowing right now.

But there's enough amateur hour surrounding this whole thing that someone, somewhere should get fired.

The last time I sat this shocked at something Facebook-related (and frankly, probably the only time) was the Burson Marsteller debacle, where the company launched a pathetic covert campaign to smear Google. Mark Zuckerberg took the amazing step of not firing the person responsible for that one -- a controversial decision inside and outside the company. The PR firm didn't follow the responsible parties either. I know Zuckerberg has said repeatedly that he will not run this company any differently than he ran a private Facebook.

But the reality is this is different. When thousands of people believe in your company enough to put their money into your stock, you owe them something. That is part of being public. You don't have to play the Wall Street game, you don't have to give guidance, you don't have to give up your long-term focus. But you do have to respect the trust between people who put money into your company.

There are three options here: One is that the whole system is just outrageously fucked up. In that case, no company should go public. I don't see how that's the case. Too many issues have gone well lately. The second is that Facebook didn't take this as seriously as it should have. There's no way that's the case. The third is that some person just royally fucked up. And that person -- whoever he or she is -- should be fired. The stakes were just too big for the company, for innocent investors, and for the rest of the Valley. Pop or no pop -- who cares. Facebook the public company will be fine in the end, one way or another. But this mess just didn't have to happen.

Can we all finally agree on one thing? We're not in a bubble.