In Mark We Trust

Why Facebook Needs to (Really) Open Up its IPO

In Mark We TrustThis morning I followed a link to an article on ZDNet, somewhat disingeniously titled “Zuckerberg says it’s time for Facebook to become a “Social Business.” Wow, I thought, could Facebook really be up to something innovative here – a breakthrough in governance and funding to better align the firm with the long-term interests of its customers who already invest so deeply in the service in non-financial ways?

Turns out my hopes were misplaced.

It’s gone already, but yesterday someone figured out how to post a fake entry on Mark Zuckerberg’s Facebook page:  

If you can’t read that, this is what it said:

“Let the hacking begin: if facebook needs money, instead of going to the banks, why doesn’t Facebook let its users invest in Facebook in a social way? Why not transform Facebook into a ‘social business’ the way Nobel prize winner Muhammad Yunus described it? http://bit.ly/fs6rT3 What do you think? #hackercup2001″

First question – how the heck did Mark Zuckerberg’s page get hacked?

Second, and more interesting question, asked by the hacker – what do I think? What do I think? I think YES! It would be an awesome idea for Facebook to flip traditional funding models on their head and go directly to its user base for micro-finance-based funding. If just 5% of Facebook’s 600 million users invested just $50, it would match the $1.5 billion Goldman Sachs was originally hoping to raise through a private placement with the super rich.

Isn’t that just called an Initial Public Offer (IPO)? Isn’t that just taking the company public, or wouldn’t that at least be an easier route than trying to manage a rabble of millions of small-scale micro investors? And what about the legal issues? Securities investments are highly regulated in general and even more tightly controlled with IPOs. One of the biggest hurdles is the “sophisticated investor” test, which usually translates into a minimum income of $200,000 in order to be a qualified investor. OpenIPO has the infrastructure in place for democratizing the IPO process, but it’s still subject to these constraints and oriented to a much higher-end clientele (just applying for an account requires a $2,000 deposit).

There are examples of companies, such as the Market Creek shopping center in San Diego that have been able to work around these constraints. Yes, financing Facebook is a whole order of magnitude higher complexity than funding a $50 million shopping center development. But dammit, this is Facebook: a once-in-a-generation communications/computing breakthrough. Surely, there is room for financial innovation.

Why is this important? It’s important because Facebook users are the ones investing their time, energy and social capital in building the underlying value of this service. The “third-order” engagement that makes this possible is what defines the underlying value of the Facebook business model. In the 1980’s, in our last once-in-a-generation communications/computing breakthrough, Bill Gates realized it was the intellectual capital of his employees that was building the company. Bill Gates went beyond just recognizing these contributions; he actually rewarded them handsomely with a stake in the company. He was quite generous with employee stock options, and in so doing, built deep loyalty among those early employees and helped develop a generation of ‘Microsoft millionaires’ who continue to give back to the Seattle-area in numerous ways.

Third-order engagement flips traditional business models on their head, by blurring the role of employees, partners and customers. Through it, Twitter, Facebook and other social network services are able to engage a much broader base of people in building the value of their services. Eventually, that value translates into monetary value – or the service goes under. In Delicious, we saw the widespread outrage users felt at having contributed so much time and energy into supporting the service, only to hear rumors that Yahoo was considering shutting it down (Yahoo has since reconsidered, and is now looking for a buyer).

This is the other side of the third-order engagement coin – the one most companies fail to see. When users invest heavily in a product or service, they feel a certain level of ownership in it. Tell them you’re going to shut it down and squander all that investment of their time and money, and they’re going to be mad.

But what of the other scenario – what of the times, like Facebook, when all those individual user investments build something extremely valuable in a monetary sense? Shouldn’t that investment of time and energy and social capital translate into at least some opportunity for a financial stake? Bill Gates built Microsoft on the contributions of his employees and rewarded them handsomely for it. Could and should Mark Zuckerberg do the same thing for the employees and users responsible for Facebook’s success?

Facebook is a very innovative firm. But might the “Bank of Facebook” be something even more innovative; something that builds even more longer-term loyalty to the service? I’m not sure, but I think it’s time to start asking these kinds of questions more seriously.

Thank you, anonymous Facebook hacker, for asking what we think about this. I’m glad you did.

4 comments

  1. Sounds like a place that could become the new facebook if Yahoo would sell what they consider a white elephant, and there was an innovative attempt to buy it. Look to the program called Blender and how it was purchased by the entire internet collective to become a GNU powerful 3d design engine.

  2. Gideon Rosenblatt

    Interesting. Thanks. Here’s more on that story:

    http://en.wikipedia.org/wiki/Blender_(software)

    Blender was developed as an in-house application by the Dutch animation studio NeoGeo and Not a Number Technologies (NaN). It was primarily authored by Ton Roosendaal, who had previously written a ray tracer called Traces for Amiga in 1989. The name “Blender” was inspired by a song by Yello, from the album Baby.

    Roosendaal founded NaN in June 1998 to further develop and distribute the program. The program was initially distributed as shareware until NaN went bankrupt in 2002.

    The creditors agreed to release Blender under the terms of the GNU General Public License, for a one-time payment of €100,000 (US$100,670 at the time). On July 18, 2002, a Blender funding campaign was started by Roosendaal in order to collect donations and on September 7, 2002 it was announced that enough funds had been collected and that the Blender source code would be released. Blender is now free software and it is being actively developed under the supervision of the Blender Foundation.

    The Blender Foundation initially reserved the right to use dual licensing, so that, in addition to GNU GPL, Blender would have been available also under the “Blender License”, which did not require disclosing source code but required payments to the Blender Foundation. However, this option was never exercised and was suspended indefinitely in 2005. Currently, Blender is solely available under GNU GPL.

  3. Gideon, like i said over on FB but feel like I should post here on your blog as well…

    I love it. Just imagine if Zuckerberg and his gang really were working for their users/owners. Imagine if their User Investors had a representative on the board helping keep things pointed in the right direction for them. I love it.

    That said, I am not sure more than about a dozen of their users have even the slightest clue how to assess why FB would be an investment worthy of their retirement accounts. Oh, and none of those dozen are accredited or work at Goldman Sachs. 🙂

    Now, let’s talk about Groupon…

  4. I’d love to see facebook suceed along with all the people that put their time and effort into building it. Everybody wins is always a great business policy. Building partnerships is frequently better suited to weather future down turns then trying to compete and take over your competitors.