Five reasons the Facebook IPO bust was a blessing in disguise

By Sarah Lacy , written on December 24, 2012

From The News Desk

One year ago, I was in the process of raising millions of dollars to start a new media company. I had no idea who would write for it. I had no idea how it would be received. But I did know one thing: The biggest story of the year would be Facebook's IPO.

We did an extensive ebook around it, and it was a huge month traffic-wise. Some blogs lost their minds so much they replaced their own logo with Mark Zuckerberg's face. (Still astounding to me.) But absolutely no one expected how badly the IPO would flop.

Part of that was because we couldn't. The flop had little to do with market demand for the stock, and had everything to do with arguable missteps made by the banking team and one big definite screw up in Nasdaq deciding to debut Facebook on a new trading platform that had never been tested. It's only the most anticipated offering since Google, so why would you want reliable technology? Who could have anticipated Nasdaq CEO Robert Greifeld had learned absolutely nothing from the thousands of technology companies his exchange had taken public over the years?

There are many bad things about billions in market cap evaporating. That's been covered to excess here and elsewhere. But I am not a Facebook investor (or an investor in any other tech companies) so my only real bias here is in what is good for entrepreneurship and the Valley. And if you step back and look at how the year played out, Facebook not having a bubblicious reception was actually a good for us on a number of levels.

1. It was good for Facebook. There's the obvious here: Ego aside, no one wants a stock to have a massive pop on the first day, because it means they left a lot of money on the table. Facebook certainly didn't want to lose half its value. But at least it maximized the cash it got to continue running its business.

But the IPO debacle was good for Facebook in another big way: It galvanized the company and made it the underdog again. This wasn't a given. In fact, from what we've seen on the outside and what I've heard from the inside, it hasn't happened at Zynga or Groupon.

If you look at when Facebook made its biggest strides -- and actually innovated -- it was when it was counted out. Mark Zuckerberg has a bit of the Jeff Bezos in him. He wants to do things his own way, whether they make sense or not to outsiders. And that's easier when he's not the darling. When someone doesn't believe in you, there are no expectations. The right leader can make this feel freeing to a team, not depressing.

It also kept the culture at Facebook from becoming hopelessly mercenary. One of the biggest challenges after an IPO is keeping employees from watching the stock price minute-to-minute. I don't care what any CEO says, when it's soaring, there is simply no way to keep employees from looking at it.

And when you start out with that culture, it's hard to turn it off when things turn south. Back in the 1990s, companies had CNBC on all over their campuses, and Yahoo even had its stock price displayed on its printers in its headquarters. By starting life believing the market just didn't get them, Facebook culturally avoided that trap, even if there were other very real cultural ramifications from the disastrous fall.

Facebook has always had a long term vision. The botched IPO wound up forcing all the cliches that CEOs say when they go public about this only being one more step or one more financing to be true.

2. It was great for Google. Our own Kevin Kelleher has already dissected this from a stock point of view. While it may seems obvious from a Valley point of view that Google and Facebook are very different companies, many investors look at these stocks as places where they can put huge allocations that want to go into growing tech companies. With Facebook not soaring, Google didn't become yesterday's news.

It's always silly to call any company "the next" anyone. But it was obvious how much the hype that Facebook was "the next Google" was really misleading. What made Google so great wasn't its dominance with consumers; it was the fact that it had discovered, copied, and exploited one of the best business models in the history of the Web, certainly, and maybe the world. Facebook simply did not have that.

On a cultural level, the stumbling of Facebook made Google employees feel like they weren't all has-beens. And I believe it has had a profound impact on Larry Page as CEO. In the build up to Facebook's IPO there were signals everywhere that Google was absolutely locked in self-flagellation at missing social. Eric Schmidt seemed downright depressed at his AllThingsD talk the year earlier -- despite all he'd accomplished as Google's CEO. Page called Search Plus Your World -- its pathetic attempt to force Google+ results higher in organic search results -- core to the company's future, never mind it betrayed the company's stated core values. But when Wall Street deemed social not such a great business after all, Google seemed to snap back into doing what made it great to begin with.

The company appears to have gotten its second wind, not so coincidentally just after Facebook's struggles set in. Google Fiber is a crazy audacious bet, the kind of thing only Google could pull off. Google has been going crazy with mobile software, allowing people to write headlines like this with a straight face.

Yes, they are continuing to work on Google+, but the better parts of it are morphing into something very different than a Facebook clone. It's becoming a Skype competitor, too, with Google Hangout and even a workplace productivity app. And there doesn't seem to be the total bet-the-company attitude on Google+ that there was pre-Facebook's stumble.

Why should we care if the Facebook IPO was great for Google? Because Google is still one of the anchor companies in Silicon Valley and, along with Apple and Amazon, it's one of the only ones from a previous wave that's more powerful than it was in its heyday. The Valley needs strong technology anchors, not companies who flame out in one cycle.

3. Stopped talk of a bubble (and one actually forming). If you look at the root of everyone saying we were in a bubble since 2007 or so, most of it has always gone back to Facebook. The mainstream press (and, truth be told, a lot of the tech blogosphere too) has been incapable of separating one company that was always an outlier by any definition from any sort of macro-economic trend.

Every time someone rational tried to make the point that a bunch of VCs and insiders valuing an illiquid asset at a high price wasn't a mass economic phenomenon, people convinced we were in a bubble would always answer the same thing: Just wait. Wait until Facebook goes public.

The intensity was at a level where they were almost perversely rooting for one, as some way of making this entire generation of tech companies look as silly in the final analysis as those of the late 1990s. The need by so many pundits to "call it!" this time was pathetic and clouded a lot of very smart people's ability to actually look at what was going on.

Following LinkedIn's soaring debut, these people were all convinced -- convinced -- that Facebook would be the Netscape of this wave, ushering in a flood of new IPOs. When it didn't happen, some still tried to find ways to say we were in a bubble. But most accepted they were wrong and slunk off.

The overwrought talk of a bubble has pissed me off for years, mostly because it's lazy analysis that doesn't help anyone. It's about as sophisticated as someone writing "FIRST!" in the comments. As a series of very rational corrections ripple throughout the private capital landscape -- with limited economic repercussions -- this embarrassing meme that was rooting in nothing but people's bad memories of the past is finally over and was proven to be wrong from the beginning.

4. Good for entrepreneurial culture. Mark Zuckerberg is an amazing entrepreneur. But he was a fluke. He was one of those people who come to the Valley once a decade and just hit on something and have an almost crazy determination never to sell it. He is the exception. Most entrepreneurs are the rule.

And because he sort of made it look easy, people kept drawing the wrong conclusions from his success, that being young was the only thing that mattered, that you could be flippant with authority. I literally saw people wearing hoodies and flip-flops and saying they were the "next Mark Zuckerberg" before their seed funding was even wrapped up. (I'll be polite and won't name names in the spirit of Christmas, but the ones I recall have already pivoted multiple times or shuttered their businesses. It seems it takes more than wardrobe.) The movie of course made this worse, as people were aping the Mark Zuckerberg from the movie, and not even the real guy.

As I wrote just before LinkedIn went public, the person that entrepreneurs who want to build a big company should emulate is Reid Hoffman, not Mark Zuckerberg. Hoffman had nothing handed to him, no zeitgeist. And LinkedIn was always the unsexy company compared to everyone: Friendster, MySpace, Facebook. People still keep writing stories about LinkedIn being dead.

Hoffman and the various CEOs who have rotated in and out of the company over the last decade pioneered a culture of heads-down building value, because they didn't have a wave of hype to carry them. And guess which is the only big social media company that has maintained a value well over its opening price? Hoffman proved that nothing is an overnight success and that hard work, determination, and a founder who refuses to hop onto the next bandwagon or pivot when things get tough is what entrepreneurship is really all about.

Also, money that comes too quickly makes people into jerks. When there's an IPO this big, not everyone who profits are the people who painstakingly built the company from nothing. There are a lot of hangers-on. Pre-IPO I was already starting to hear things like, "Oh, he's not worth that much money, only about $20 million after next week." You don't hear that much anymore.

5. Doesn't distract from real issues with liquidity. Just before and just after Facebook's IPO it seemed a clear loser were the secondary market exchanges. After all, the bulk of their business had been selling shares of Facebook. Indeed, many of them did layoffs afterwards.

In fact, a company like Facebook was the biggest reason exchanges like SecondMarket and Shares Post rose to prominence. It was a pioneer in employees, founders, and VCs expecting pre-IPO liquidity, for better or for worse.

But had Facebook's IPO gone rip-roaringly well, things would have been far worse for secondary markets, because companies would have been enamored with going public. Facebook made it look ugly, again. And if it was ugly for Facebook... well, most companies didn't have numbers close to Facebook. Companies who were already winding up their IPO rhetoric chilled it immediately. And that gave a company like SecondMarket credibility when it says the IPO markets are broken and there needs to be an alternative for liquidity.