I can think of nothing that could be more irritating than feeling you had been tricked into paying more for something than it was worth and feeling like someone who you admired and supported ripped you off. I imagine there are a lot of Facebook users/investors this week who are slowly turning from Facebook fans to Facebook haters because they lost a ton of money to the Facebook executives, listing bank, and investors, all of which knew to sell while the Facebook fans foolishly bought.
I think as stories proliferate about Facebook insiders buying expensive fancy houses, cars, yachts , and jewelry for their significant others, while those soon to be ex-fans lament the loss of their college and retirement funds, a little animosity will likely build, maybe more than a little. I know I’d be pissed and given the number of people who were ripped off, Facebook itself may eventually get unfriended.
Let’s talk about that.
From a financial perspective the setting of a very high IPO price was brilliant. The extraordinary price which initially was supported, not by financials, but buy how badly Facebook users wanted to invest in the company they loved. The excitement was over the top. For instance one of my neighbors tried to give my wife $1,000 so we could invest for them at the reported (but untouchable) $38 price point. We don’t invest for others and since I knew this stock was going to be a train wreck, I did everything I could to discourage the folks I knew from investing in it.
Morgan Stanley, which is trending to be the most hated of U.S. banking firms, appeared to step in on Friday to give people hope and get more investing at unsustainable prices before letting the value of the Facebook shares crater on Monday and with it the estates of many of the once loyal Facebook fan base.
I think screwing the Facebook fans in this way will have negative implications for Facebook long term.
Money is kind of a strange tool when it comes to motivating people. Maslow argued that it was at the core of our hierarchy of needs and Hertzberg suggested that as a motivator it wasn’t very good but as a de-motivator there were few more powerful. What both of these leaders in human behavior appeared to agree on is that, if you take money away from someone it pisses them off massively and they don’t forget it anytime soon. In fact it is likely, given how many people invested in the $40s only to see the stock trend to pass into the $20s will get increasingly upset and many may take out their anger on Facebook.
With the right marketing campaign Google (with Google +, or some other global networking service or services) could step in and, with moderate execution, steal Facebook’s growth or even their share. You piss off customers enough and they will move but much like getting burned and then thinking twice about putting your hand in the fire they could both sour on all social networking or investing in tech stocks, which could become a problem for the segment.
Death by Arrogance
I think this all comes down to recurring problem with young firms, particularly tech firms, and that problem is arrogance. I think we got a taste of this when we saw GM cancel their Facebook advertising. Facebook’s response seemed to be that GM was clueless, and was a doddering firm which didn’t understand the value of being associated with such an amazing firm like Facebook. It seems likely that when GM first brought their concerns about poor sales conversion numbers to Facebook, that Facebook execs likely said something similar about GM being clueless, which could be the case, to them which is why GM announced their pull out before, rather than after the IPO. That announcement soured the IPO. But, let’s be clear, if Facebook understood advertising better, GM likely wouldn’t have had an issue in the first place and/or Facebook would have moved to delay GM’s announcement more successfully than they did.
In addition, during the IPO tour, Zuckerberg, Facebook’s CEO, went to analyst meetings in his signature hoodie which was seen as an insult to the analysts, and some folks got pretty pissed. This likely helped explain why so many aggressively spoke out against the firm and helped drive the stock down. This too was arrogance and I can recall similar stories about Netscape and even one about Microsoft in the 1980s.
Now post IPO with most of the Facebook fans losing their shirts this behavior in both cases likely doesn’t look that funny or acceptable. It is one thing to act out when it’s with your own money, or that of a small number of rich guys, it is something else when that behavior costs you, your friends and neighbors, or your family, money they can’t afford. Eventually it is likely to occur to people that this quirky behavior is costing them money and they’ll likely not tolerate it as well.
Wrapping Up: Next Google or Next Netscape
I think this IPO suggests that Facebook is on the cusp of failure or of becoming a great company just like most firms that transit into a public firm. However with behavior that appears to suggest executives don’t care about their fans, investors, or customers the path they are currently following isn’t a successful one and could not only crater them but kill the segment.
Rest assured there will be a lesson here; I’m just hoping you and I won’t be paying a bigger price for it than we already have. Unless Facebook gets its act together it will be the next Netscape and recall that at least Netscape made its initial public investors money, something Facebook has failed to do.
In the end, I think people will eventually realize that virtually all of the wealth that the founders got was at the expense of Facebook fans, folks who believed so strongly in the company they put up money they couldn’t afford to lose and lost much of it. I think it is likely that those folks will eventually figure out a way to get even and I don’t envy Facebook employees or founders when that happens. I don’t envy them at all.
President and Principal Analyst, Enderle Group
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