by François Longin
, 18.09.12
For all the high expectations and anticipation surrounding Facebook going public this past May, the ensuing debacle has resulted in an over 50% loss in value for the company’s stocks in just three months. For a company initially valued at a colossal $104 billion, the biggest initial public offering (IPO) in history, Facebook fell from high. Why the nosedive?
A multitude of factors explain the rocky start: not least the company’s overvaluation, technical glitches at Nasdaq and other internal challenges like how to tackle mobile advertising. However, François Longin would also argue that the firm stumbled because it failed to take into consideration its own particularity as a social network, that is to say, the investment of its over 900 million users in building the network.
“The Facebook IPO was executed in a traditional way and was opened first and foremost to institutional investors. The vast majority of Facebook’s members were left out of the loop,” explains Professor Longin. “They forgot that social networks define themselves by their very strong links with clients/members. Social networks just can’t afford to ignore the human factor. They could have adopted a more innovative approach by associating members who are the basis of the company – its main asset – to its financial structure (the other side of the balance sheet) ”.
According to Professor Longin, a best-case scenario would have meant Facebook’s capital would have come from its users. As emotionally invested members of the network, they should have had the option of being financially invested in the future of the company.
“Beyond the traditional business model of the company, future profitability for shareholders depends on a human factor – the relationship between the entrepreneur and his investors. Investors must have confidence in the management to carry out the project of the company to deliver the expected profitability. In the long term, a trusting relationship must be maintained including regular communication between the company and its investors.”
A trend that capitalizes on this relationship is the association of community members around the product as shareholders of the company – a members buyout (MBO). “An MBO makes sense when members have a particular interest in the product of the company and accordingly wish to have a say on its management. This transforms the community that has developed around the product into shareholders. As an added bonus, in this way members become more than just users or anonymous shareholders; they become true brand-ambassadors.”
Is MBO only about financial marketing? According to Professor Longin, it runs much deeper than this. He argues that when a user is fully invested – in the non-financial sense – it can be a huge blow if the business fails. The product is important to him so he should be able to have a say in its future. This argument is in line with more traditional examples. For instance, a technology company will be likely to invest in supplying firms as they have a vested interest in their success. If that supplying firm were to fail, it would have a negative effect on their own financial success.
Furthermore, the concept of MBO is not only applicable to the example of social networks in the digital sense. Groups like the freemasons, the alumni of a particular school, are also invested in the outcome of their association and have an impact on its functioning to a certain extent. These members are the owners of their own social network. Why should this not be the case in today’s modern financial markets?
Professor Longin looked deeper into the problem of promoting investment in social media platforms with his case study “FinLink” - a social network with a financial focus. Its mission: to offer its members a safe environment in which to grow their business. In terms of financial participation, FinLink adopted a clear rule: all members of the network must pay an annual fee. But at the same time, members would have the option of becoming investors in the firm and actively engage in its success.
Ultimately, Facebook’s failure on the public market has cooled down the market for other social media platforms – as new players launch their IPO, will they go about things differently? One thing is clear: there are lessons to be learned from the Facebook’s rocky start on the public market. François Longin believes that the human factor needs to be taken into consideration by social media’s other key players. Otherwise, they will risk alienating the member from which they derive th.
