The IPO model

I recently read an article in Wired Magazine saying that Mark Zuckerberg must be furious about Facebook getting ready for its IPO. This first stunned me because how could someone be mad that they are about to be a multi billionaire? However, as I continued to read I began to understand why a tech company going public may not be as celebratory as one would expect.

            The article titled Why Going Public Sucks discussed how venture capitalists have a way of forcing companies to grow too fast, which in turn causes their demise. The author, Jesse Lenz, said that Facebook is somewhat of a different case because Zuckerberg will still have 56.9 percent of all votes on company business, so in theory it is still his personal private company.

            Lenz says that for some companies going public causes a “death spiral of unsustainable growth.” The article says that when a company goes public, it becomes too caught up in stock prices and only focuses on short-term moves that will boost stock and make the investors happy, instead of focusing on more long term goals to make the company more stable. Companies like Google and Facebook don’t have this problem because they were so big by the time they made an IPO, but this hasn’t worked out so well for others.

            The article sits Groupon as an example of a company that skyrocketed after its initial IPO then started to lose revenue. In the first quarter of 2011, Groupon’s revenue was $645 million or a 1,357 percent increase in one year. However, recently Groupon reported a loss of $146 million in one quarter. Groupon wasted a large amount of money on advertising rather than looking at its expansion for the long term.

            After bashing the IPO model, the article does look at the multiple positive benefits that it brings as well. By going public, the company can now offer stock options to new employees rather than giving them a bigger paycheck, thus saving money in the process.

            The main point of the article is looking at how Facebook was basically forced into going public by the SEC. Lenz believes this is an unfair pressure to put on new tech companies, which can result in the loss of a lot of money.

Billy Crosby