On August 4, according to Beijing time, a piece of news reported that Facebook's stock price went above its IPO price for the first time last Friday. Glenn Solomon, managing partner at GGV Capital (GGV Capital), an American investment firm, wrote an article on Techcrunch summarizing three lessons that Facebook has taught technology companies and investors. Below is the main content of the article.
More than 14 months after its IPO began, Facebook's stock closed at $38.05 last Friday, surpassing its IPO price of $38 for the first time. After more than a year, Facebook has returned to the starting line. Therefore, now is the time for us to distill the lessons learned from Facebook's IPO.
A bad start is half the failure. If Facebook had priced its IPO lower, say at $20-$25, and set its revenue expectations lower initially, its stock price would be much higher now, possibly close to $45. Although I cannot prove this point, most public investors I have interacted with agree with my view.
If Facebook's IPO was priced lower, it could attract and retain those largest and most enduring institutional investors by allowing them to hold stocks from an attractive entry point. Similarly, if Facebook maintained a more conservative revenue expectation, providing greater room for future performance and upward revision of expectations, potential buyers of its stock would be more confident. Ultimately, Facebook’s IPO buyers would consist of more of the largest and best (i.e., most enduring) institutional investors.
If the IPO price was lower, it would undoubtedly attract many retail buyers, but their short-term behavior would decrease. Additionally, if Facebook's revenue expectations were lower, shareholders would have greater confidence in outperforming the market, thus solidifying the shareholder base.
Facebook is a once-in-a-century company. If combined with an extremely attractive IPO price and lower revenue expectations, which would better defend against early instability in the mobile market, it would have started off with a strong and loyal shareholder base, and its stock price today would undoubtedly be much higher.
Predictability trumps everything. Facebook is an extraordinary company, almost impossible to replicate. For years, the growth of its revenue and profits has been unmatched by few other tech companies. Nevertheless, what Wall Street values most is a company's predictability.
Despite Facebook having performed strongly in many quarters since its IPO, its IPO journey has been bumpy. Recently, Facebook's strong performance in mobile apps has had negative effects because investors are worried that mobile monetization might affect the realization of Facebook's revenue expectations. If Facebook had been more cautious, giving investors more confidence in its core business, the situation would be somewhat better than it is now.
The danger of disconnection between Silicon Valley and Wall Street. Facebook's dominant position in social networking and its growing importance in the internet advertising market have earned it staggering revenue and profits, also causing its stock price to rise continuously in the private market. The things that excite Silicon Valley investors—rapid growth, enormous market opportunities, great entrepreneurial teams, and competitive advantages—are often also factors considered by institutional investors in the public market.
However, public market investors can buy or sell any stock every day, enabling them to constantly compare stocks of different companies. As a result, public investors on Wall Street tend to focus more intensely on price as another variable. For public investors, the signals conveyed by Facebook's trading situation in the private market—many of which were at high prices—have limited predictive value. Everyone knows that Facebook is a very attractive company, but relative to Wall Street, Silicon Valley analysts lack accurate assessment of Facebook's stock, which is a key factor.
The challenges faced by entrepreneurs running private companies are similar to those of public companies like Facebook. Each round of financing represents an opportunity to recruit new investors. The key is identifying who the right investors are. Essentially, long-term investors are the best investors. Entrepreneurs need to listen to the market, but the most profitable ones aren't always the best. Facebook has shown us that pricing shares near the market's limit sometimes leads to catastrophic consequences.
Although Facebook's management team may have made some mistakes, it is undoubtedly an extraordinary company. The Facebook team has consistently created something even more special with incredible focus. Perhaps within the next 14 months, Facebook will reward those patient original shareholders.