Facebook has millions of "friends" -- but when the company goes public this spring, the big question will be whether shareholders are among them.
Investors are hungrily anticipating what is expected to be the biggest initial public offering for a tech company in history. But the imperviousness to criticism that helped the website become a global sensation can be a drawback for a publicly traded company.
As the IPO hiccups of Groupon, Zynga and others have demonstrated, there are big differences between a Silicon Valley supernova and a Wall Street darling.
When Mark Zuckerberg and his cohorts open their books to the public, they will face a new and less-patient constituency of investors, many of whom will be more interested in short-term share price than in building a constantly evolving company.
Zuckerberg has demonstrated his business acumen with Facebook's growing revenue and user base of more than 800 million people. But investors might prefer a CEO who is more press-friendly than the sweatshirt-wearing, socially awkward Zuckerberg. They might also be put off by challenges from privacy watchdogs and major players like Google.
"After a company goes public, it’s subject to the whims and desire of its shareholders," Michael Yoshikami, founder of the investment firm YCMNet Advisors, told TheWrap. "That is really the cost of getting public money -- but they’ve concluded they need it to continue their expansion and they’re willing to live with the consequences."
A Facebook spokeswoman declined to comment for this story.
Investors gobbled up public offerings from Pandora and LinkedIn during the first half of 2011, but following the debt ceiling stalemate in Congress and the European financial crisis, the market for IPOs iced over. In a volatile stock market, timing is essential.
"An IPO is really the tail of the dog, and the overall market is the dog," said Bob Gelfond, CEO of the hedge fund MQS Asset Management. "There’s a lot going on in the global macro economy that continues to dominate the news. Even though companies can tell great stories, if the macro environment deteriorates, all bets are off."
If Facebook miscalculates, it could lose billions.
"Last year, we saw that the windows for IPOs open and close very quickly and a company is going to be carefully scrutinized by the [Securities and Exchange Commission] and investors, so a company has to have its game on before it enters the marketplace," said Steve Hobbs, a managing director at Protiviti, a risk-management consulting company that specializes in IPO preparedness.
It also helps if a company can develop a thick skin before going public. Zynga and Groupon have suffered through withering press coverage and analyst criticism about everything from their accounting practices to their stock compensation packages.
Just this week, Zynga CEO Mark Pincus and Groupon CEO Andrew Mason sat down with the Wall Street Journal and "60 Minutes," respectively, to offer partial mea culpas for their shaky market debuts.
Pincus, whose stock has languished below its $10 offering price, told the Wall Street Journal that he was pleased with the money his social gaming company had raised, but conceded it wasn’t a good idea to renegotiate his senior employees' compensation packages.
"I realize that that wasn't a model that had been done in Silicon Valley, and we're always as a company trying to invent new models, and not all of them are worth keeping and repeating," Pincus said.
On "60 Minutes," Mason conceded that it probably wasn’t a wise idea to have a porta-potty in his office or to upload a video of his underwear-clad yoga routine to YouTube.
"Smart people can get this stuff wrong," Mason conceded.
Although Zuckerberg has had more experience in the public eye than Pincus or Mason -- he is, after all, the subject of the hit film "The Social Network," and was named Time's "Person of the Year"in 2010 -- there will still be a learning curve.
"I would not say that Mark Zuckerberg is the prototypical smooth-talking CEO that investors want to hear from," said Tim Stevens, editor-in-chief of the technology blog Engadget. "Being a public company requires a very different culture than the one at Facebook. I think he’s a strong leader, but he’s not as PR-friendly as he needs to be."
One thing Facebook has going for it, analysts say, is that it has taken its time to build up its user base and advertising revenue before going public. The company has also brought on experienced hands like former Google executive Sheryl Sandberg to serve as chief operating officer in anticipation of its public debut.
And with estimated revenue of $4.27 billion that keeps it very much in the black, Facebook has something that many of its fellow tech companies could only dream of: profits.
Facebook will reportedly raise $10 billion on a $100 billion valuation, based on the strength of its balance sheet. Amazon, by comparison, is currently pegged at an $81 billion valuation.
"It’s the first Google class company seen since Google," said Vivek Wadhwa, vice president of academics and innovation at Singularity University and advisor to startups. "I’m normally negative about most of these companies, like Zynga and Groupon, because they are just get-rich-quick schemes, but they have waited a substantial amount of time to build real momentum and create a real platform."
The company has increased advertising rates 23 percent since this time last year, but may need new revenue sources if its number of users plateaus. That carries potential hazards: The company will be accused of Big Brotherism if it goes too far in mining users' personal data to help advertisers better target them.
Then there’s a spirited challenge from Google+. The social network, which debuted in June, now has 90 million users, up from 40 million as recently as October.
That means that creativity and ingenuity will continue to be key. But more input from more investors could stem the flow of fresh ideas. Then Facebook will have to use its checkbook to innovate.
"The period of innovation will end," Wadhwa said. "The employees are going to get very rich and they’re going to be much more concerned about the color of their Ferrari than they are about the next feature or product. Facebook will not innovate like a startup, but Google doesn’t either. It buys innovative companies."