The Facebook IPO: too little, too late.

Thursday Feb 2, 2012 by Todd Dagres - General Partner, Spark Capital

What’s wrong with the Facebook IPO?  The fact that the Company is coming Public at $70 Billion or hgher valuation.  That means the Public, your average Joe, has to wait until the Company is worth tens of Billions of Dollars before being able to invest.  Unless you’re among the Employees, Angel Investors, Venture Firms or Institutional Investors that bought Facebook stock you’re out of luck.  You missed the first $70 Billion in value creation.  Some individuals, let’s call them Dentists, were able to buy stock on private exchanges such as Second Market and Shares Post.  The Lion’s share of these purchases were at a value of $20 Billion or more.  The same can be said for recent IPOs of LinkedIn and Groupon, as well as a host of fast growing Private Companies that remain Private.

So what is wrong with the Facebook IPO is a microcosm of what’s wrong with the Stock markets.   Government Control and the resulting overhead associated with “going public” has robbed the average investor of the ability to invest in the massive growth and value appreciation of Companies such as Facebook.  Ironically, Facebook is going public more because it triggered a Government Regulation limiting Private Companies to 500 investors that due to the desire of its CEO, Mark Zuckerberg.  Government Regulations such as Sarbanes- Oxley and the pressure placed on Public Offering Underwriters has crimped the Public markets for over a Decade.  The Government’s primary goal is to protect the average person (Widows and Orphans included) from losing their savings on risky little companies.  The problem is that the protection, while lowering risk, is robbing most investors of substantial upside.

There is no question that there is demand and supply for public offerings.  The reason private exchanges like Second market arose was to capitalize on the demand for private company stock.  The Government Regulations favor “Accredited Investors” deemed by the Government as more sophisticated and more likely to be able to sustain losses.  For example, Accredited Investors” are able to invest in private companies through Private Placements of stock.  This further limits the ability of the individual to invest in growth companies before they become Public stocks. 

Not so many Years ago, 1970’s to 2000, companies such as Cisco, Intel, Apple, Starbucks, Home Depot, and Federal Express would go public and the vast majority of their appreciation would be after the IPO.  Small Investors were able to enjoy this value creation.  Naturally there was a risk of losing money.   Of course some companies acted badly and people lost money.  Without risk there is lifted upside.  They are two sides of the same coin.  But a lot of people changed their lives by making smart investments in a host of great little companies that became big, valuable companies.  Today, this investment opportunity doesn’t exist.  Investing in great little Companies is limited to Institutional Investors and rich people.  That’s not the way it should be in a Country that prides itself on freedom, opportunity and equality. 

So the notion that the Government knows best and is effective at helping Citizens invest and manage their wealth is debatable at best.  In a free Country that is characterized by opportunity and freedom, protecting School Teachers, Plumbers and Bartenders from investing in high-growth companies seems counter-productive.  I am in favor of protecting the Public from wrong-doing and bad intentions but not at the current expense.  Preventing the average person from access to the massive value creation that is occurring before IPOs is limiting upward mobility and keeping small investors small.

So what’s the solution?   It’s fairly simple.  It requires the Government to do as little as possible and get out of the way.  Keep prison cells open for those that abuse the system and help educate people on how to manage their money.  People deserve more credit.  Let them invest their money, build their wealth and change their lives. 

Todd Dagres is a General Partner with Spark Capital.  You can find this blog post, as well as additional content on his blog called Venture Verite.  You can also follow Todd on Twitter (@ToddDOwl) by clicking here.

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