7 ms·

The market doesn't care about your overpriced valuation (Failbook)

23 points by wkasel 14y ago

azat_co 14y ago
Nice article, William! :)
- wkasel 14y ago
  Thanks Azat!
- ChuckMcM 14y ago
  Seems a bit snarky to me. Engineers don't price IPOs, bankers do. And because of that it reads more like "I'm really pissed off you are now rich and I am still not rich." or perhaps "I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place." I've mentioned elsewhere that when I read stuff like this I feel sympathy for the Author because I think they might be in a lot of pain over something and trying to work through it. Not everyone has good tools for that, sometimes just screaming at the top of your lungs makes you feel better. As a person who lives in Silicon Valley and could easily be painted by William's broad brush strokes as someone who "has their head so far up their ass that they are eating their own bullshit" I regret to say that I've not lost (or gained) any money on Facebook stock, don't own a single share, and like a lot of people here don't own it because I didn't feel it merited a price over $30 a share. This isn't because I'm a genius and or smarter, its because I looked at the business and said, "You know I don't think it supports that valuation." But that said, its a hell of a business. Facebook made over a BILLION dollars last quarter, that is over four billion a year at those rates. I was at Sun 10 years and it just just crested $3B on its ways "hopefully" to $5B and folks were estatic. It is pretty impressive what these Facebook folks are doing. But what William is so upset about is its stock price. And to that I'd say why the hell do you care what the price of Facebook's stock is? What does it matter? Smarter people than you are evaluating it every day and making bets on whether its priced higher or lower than its future value, as they play that game they exchange money, it's sort of a score keeping system with them, and they have more strategies than a roulette player has ways to "beat the house." Now if you're an executive at Facebook you care because it limits your options when it goes down, as an employee maybe it changes the model plane or boat you can buy, as an outside observer it means nothing. So why the angst?
  - wkasel 14y ago
    Interesting assessment. I live in Silicon Valley, I don't own a share of FB, I do trade frequently. Like you, I made an assessment. My frusteration comes mostly from reading on tech blogs what Facebook "needs to do". Techcrunch acts like they are Bloomberg or something, which goes exactly with my broad brush stroked point as you said. It's actually the valuation I care about vs. the stock price, but people tend to understand that better, so I use that as a unit instead of valuation. The bottom line is yes, I write pointed, and passionately, I'm not personally at a loss for FB, I'm just tired of hearing "expert opinions" even on Bloomberg.
    - ChuckMcM 14y ago
      Ok, I think it would be more effective for me then if you started with what you cared about and why you cared about it. So your frustration is with blogs, written by people who are paid in proportion to how angry or scared they make their readers, using Facebook as a stalking horse to drive page views? I can certainly understand if that is the case, why not say that? Instead you said this : "The root of this problem is core to the DNA of Silicon Valley types. " You didn't say the people who blog about Silicon valley (heck they may not even live here) you just said "Silicon Valley Types" which covers a lot of people, many of whom like the folks who founded Y-Combinator probably don't think of themselves a collective that "These character flaws are why we (the collective known as Silicon Valley) thought that a company with piss-poor revenues could IPO at an overpriced valuation, and have the same fan fare for over-valuation as it did in the valley. " You impeach yourself by calling Facebook's revenue 'piss poor', it isn't, and then accuse "us", those who live in Silicon valley, with 'over valuing' when in fact that was the work of a collection of banks, based primarily in New York city. I would love to hear passionate, pointed, editorial about how bankers and journalists unknowingly (or perhaps knowingly if you are the conspiracy type) in the creation of a value perception, but its a hard case to make here. There were literally years of trades in FB you could look at from SecondMarket, and there are a number of pretty cogently written analyses of their business model and the potential of their business. The Techcrunch whine about how it's not the bubble they were hoping for, and were so sure it was, will pass. And a lot of young people who weren't here for the dot com fiasco (or at least they weren't watching it closely) could learn from clear insights about what really makes a company worth a billion dollars to investors, or worth a hundred billion. You could do that instead, start from what you care about and bring us along as readers, telling us why you care and perhaps educating us as to why we might want to care as well. That may or may not be effective, but it certainly would be less snarky I expect.
goodcanadian 14y ago
My only comment is that if you can make an overpriced IPO, that is good for you. It is bad for the suckers who were dumb enough to buy in, but that is a different story. If the share price goes up quickly after an IPO, the price was too low. If the price goes down quickly, it was too high, but why should you care? If you want to pay me $1.50 to buy $1 bills, I will sell as many as you will take. The current market valuation only really matters when you want to trade. Otherwise, worrying about your stock price is a bit of a pissing contest. BTW, I did not buy Facebook or Zynga. They were both pretty obviously over-hyped and overpriced (it seems most IPOs in most industries are), but the stock holders prior to the IPO made out like bandits during the IPO.
- wkasel 14y ago
  Logical explanation, however the point of an IPO is not just liquidity in for your employees, but also to raise money for the company, and allow the public to buy in. If you don't price it so the price goes up, then you're doing everyone, even your shareholders a dis-service because they have a 180 day lockup period, so when the stock is at $15/share at the end of lockup, you actually screwed employees as well. The only person who actually made money on this was Merrill Lynch.
  - goodcanadian 14y ago
    Facebook got a huge injection of capital at very favourable rates which was good for all holders prior to the IPO. I understand that it might be disappointing to see your stock go from $38 to $15 over the lockup period, but my point is that it was never worth $38 in the first place, so by getting new buyers to pay $38 for a $15 stock, the current owners increase the real value of their own stake for free. I will agree, however, that the biggest winner is and probably always will be the investment bank. Well . . . sometimes the bank loses, but not very often if they do their job right.
  - wkasel 14y ago
    Fair, but the only problem I see with your reasoning is stock grants were being issued as far back as 18 months ago at $25/share, which means that those employees DID lose money.
robbiep 14y ago
I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising firms to create new ventures (Think infrastructure - the golden age of rail, factories, etc) is an interesting side-note. Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company. 3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value. The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.
- wkasel 14y ago
  With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
  - 14y ago
PaulHoule 14y ago
SV was the leader in social media three years ago but today the interesting companies, like Pinterest, are run out of places like Iowa.
- rdl 14y ago
  I think the people who work at Pinterest's HQ in downtown Palo Alto would say they're not in Iowa anymore.
RockyMcNuts 14y ago
Blodget made some good points: http://www.businessinsider.com/facebook-lockup-release-2012-8 http://www.businessinsider.com/facebook-lockup-release-2012-... You want a high IPO price, but not so high that you can't meet expectations and disappoint. Get tagged as an underperformer and it makes it hard to do future stock acquisitions, financings, hires.
pbreit 14y ago
This is a stupid argument. The character "flaws" the author cites are basically why much of the technological progress of the past several decades originated in Silicon Valley.
- wkasel 14y ago
  Let's not use the word stupid. I live and work in this ecosystem. If you saw what I saw you would agree.
  - pbreit 14y ago
    You're lecturing me about language? I've seen as much or more and I think "stupid" is the correct word. The supposed "flaws" you mention are the exact attributes that have made Silicon Valley the originator of much of technological progress in the past few decades. Selecting a once-in-a-decade company to extrapolate from is, well, stupid.
joshuahong100 14y ago
Wow.. to the top level commenters who rationalize the merits of the Facebook IPO as successful in extracting the maximum amount of money for investors and employees.. this is the type of logic that warrants the criticisms thrown at Silicon Valley. Not withstanding the fact that the redistribution of wealth was based on 'hype' and just a douchy move, does no one seem to understand that the IPO market will inexorably implode yet again through such self-serving actions, thereby closing future IPO opportunities for companies with real revenues and growth?

23 points by wkasel 14y ago

azat_co 14y ago

Nice article, William! :)

wkasel 14y ago
Thanks Azat!
ChuckMcM 14y ago
Seems a bit snarky to me. Engineers don't price IPOs, bankers do. And because of that it reads more like "I'm really pissed off you are now rich and I am still not rich." or perhaps "I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place." I've mentioned elsewhere that when I read stuff like this I feel sympathy for the Author because I think they might be in a lot of pain over something and trying to work through it. Not everyone has good tools for that, sometimes just screaming at the top of your lungs makes you feel better. As a person who lives in Silicon Valley and could easily be painted by William's broad brush strokes as someone who "has their head so far up their ass that they are eating their own bullshit" I regret to say that I've not lost (or gained) any money on Facebook stock, don't own a single share, and like a lot of people here don't own it because I didn't feel it merited a price over $30 a share. This isn't because I'm a genius and or smarter, its because I looked at the business and said, "You know I don't think it supports that valuation." But that said, its a hell of a business. Facebook made over a BILLION dollars last quarter, that is over four billion a year at those rates. I was at Sun 10 years and it just just crested $3B on its ways "hopefully" to $5B and folks were estatic. It is pretty impressive what these Facebook folks are doing. But what William is so upset about is its stock price. And to that I'd say why the hell do you care what the price of Facebook's stock is? What does it matter? Smarter people than you are evaluating it every day and making bets on whether its priced higher or lower than its future value, as they play that game they exchange money, it's sort of a score keeping system with them, and they have more strategies than a roulette player has ways to "beat the house." Now if you're an executive at Facebook you care because it limits your options when it goes down, as an employee maybe it changes the model plane or boat you can buy, as an outside observer it means nothing. So why the angst?
- wkasel 14y ago
  Interesting assessment. I live in Silicon Valley, I don't own a share of FB, I do trade frequently. Like you, I made an assessment. My frusteration comes mostly from reading on tech blogs what Facebook "needs to do". Techcrunch acts like they are Bloomberg or something, which goes exactly with my broad brush stroked point as you said. It's actually the valuation I care about vs. the stock price, but people tend to understand that better, so I use that as a unit instead of valuation. The bottom line is yes, I write pointed, and passionately, I'm not personally at a loss for FB, I'm just tired of hearing "expert opinions" even on Bloomberg.
  - ChuckMcM 14y ago
    Ok, I think it would be more effective for me then if you started with what you cared about and why you cared about it. So your frustration is with blogs, written by people who are paid in proportion to how angry or scared they make their readers, using Facebook as a stalking horse to drive page views? I can certainly understand if that is the case, why not say that? Instead you said this : "The root of this problem is core to the DNA of Silicon Valley types. " You didn't say the people who blog about Silicon valley (heck they may not even live here) you just said "Silicon Valley Types" which covers a lot of people, many of whom like the folks who founded Y-Combinator probably don't think of themselves a collective that "These character flaws are why we (the collective known as Silicon Valley) thought that a company with piss-poor revenues could IPO at an overpriced valuation, and have the same fan fare for over-valuation as it did in the valley. " You impeach yourself by calling Facebook's revenue 'piss poor', it isn't, and then accuse "us", those who live in Silicon valley, with 'over valuing' when in fact that was the work of a collection of banks, based primarily in New York city. I would love to hear passionate, pointed, editorial about how bankers and journalists unknowingly (or perhaps knowingly if you are the conspiracy type) in the creation of a value perception, but its a hard case to make here. There were literally years of trades in FB you could look at from SecondMarket, and there are a number of pretty cogently written analyses of their business model and the potential of their business. The Techcrunch whine about how it's not the bubble they were hoping for, and were so sure it was, will pass. And a lot of young people who weren't here for the dot com fiasco (or at least they weren't watching it closely) could learn from clear insights about what really makes a company worth a billion dollars to investors, or worth a hundred billion. You could do that instead, start from what you care about and bring us along as readers, telling us why you care and perhaps educating us as to why we might want to care as well. That may or may not be effective, but it certainly would be less snarky I expect.

goodcanadian 14y ago

My only comment is that if you can make an overpriced IPO, that is good for you. It is bad for the suckers who were dumb enough to buy in, but that is a different story. If the share price goes up quickly after an IPO, the price was too low. If the price goes down quickly, it was too high, but why should you care? If you want to pay me $1.50 to buy $1 bills, I will sell as many as you will take. The current market valuation only really matters when you want to trade. Otherwise, worrying about your stock price is a bit of a pissing contest. BTW, I did not buy Facebook or Zynga. They were both pretty obviously over-hyped and overpriced (it seems most IPOs in most industries are), but the stock holders prior to the IPO made out like bandits during the IPO.

wkasel 14y ago
Logical explanation, however the point of an IPO is not just liquidity in for your employees, but also to raise money for the company, and allow the public to buy in. If you don't price it so the price goes up, then you're doing everyone, even your shareholders a dis-service because they have a 180 day lockup period, so when the stock is at $15/share at the end of lockup, you actually screwed employees as well. The only person who actually made money on this was Merrill Lynch.
- goodcanadian 14y ago
  Facebook got a huge injection of capital at very favourable rates which was good for all holders prior to the IPO. I understand that it might be disappointing to see your stock go from $38 to $15 over the lockup period, but my point is that it was never worth $38 in the first place, so by getting new buyers to pay $38 for a $15 stock, the current owners increase the real value of their own stake for free. I will agree, however, that the biggest winner is and probably always will be the investment bank. Well . . . sometimes the bank loses, but not very often if they do their job right.
- wkasel 14y ago
  Fair, but the only problem I see with your reasoning is stock grants were being issued as far back as 18 months ago at $25/share, which means that those employees DID lose money.

robbiep 14y ago

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising firms to create new ventures (Think infrastructure - the golden age of rail, factories, etc) is an interesting side-note. Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company. 3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value. The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.

wkasel 14y ago
With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
- 14y ago

PaulHoule 14y ago

SV was the leader in social media three years ago but today the interesting companies, like Pinterest, are run out of places like Iowa.

rdl 14y ago
I think the people who work at Pinterest's HQ in downtown Palo Alto would say they're not in Iowa anymore.

RockyMcNuts 14y ago

Blodget made some good points: http://www.businessinsider.com/facebook-lockup-release-2012-8 http://www.businessinsider.com/facebook-lockup-release-2012-... You want a high IPO price, but not so high that you can't meet expectations and disappoint. Get tagged as an underperformer and it makes it hard to do future stock acquisitions, financings, hires.

pbreit 14y ago

This is a stupid argument. The character "flaws" the author cites are basically why much of the technological progress of the past several decades originated in Silicon Valley.

wkasel 14y ago
Let's not use the word stupid. I live and work in this ecosystem. If you saw what I saw you would agree.
- pbreit 14y ago
  You're lecturing me about language? I've seen as much or more and I think "stupid" is the correct word. The supposed "flaws" you mention are the exact attributes that have made Silicon Valley the originator of much of technological progress in the past few decades. Selecting a once-in-a-decade company to extrapolate from is, well, stupid.

joshuahong100 14y ago

Wow.. to the top level commenters who rationalize the merits of the Facebook IPO as successful in extracting the maximum amount of money for investors and employees.. this is the type of logic that warrants the criticisms thrown at Silicon Valley. Not withstanding the fact that the redistribution of wealth was based on 'hype' and just a douchy move, does no one seem to understand that the IPO market will inexorably implode yet again through such self-serving actions, thereby closing future IPO opportunities for companies with real revenues and growth?