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Facebook IPO: Lessons For Small Businesses

Written by Ken Gaebler
Published: 2/2/2012

As Facebook files a monster IPO, small and medium-sized businesses can learn important lessons from the risks that are inherent in the social media giant's investment strategy.

On Wednesday, Internet icon, Facebook, filed papers for an initial public offering worth $5 billion -- the largest IPO since Google went public in 2004.

Facebook IPO: Lessons for Small Businesses

Facebook's valuation is expected to come in at around $100 billion, which is nearly half of Google's $188 billion valuation despite the fact that Facebook rakes in just a tenth of Google's annual revenue.

While armchair entrepreneurs are drooling over the sheer dollar value of Facebook's IPO, startup veterans know that the IPO will force Zuck and his team to walk a fine line, embracing several risks that are just as relevant to SMBs as they are to the world's largest online social network.

Stockholders

For the first time, Facebook will be forced to answer to shareholders. Although the site's 2011 net income was $1 billion, its operating philosophy has been ad-adverse, prioritizing the user experience over a proliferation of click ads. Stockholders are sure to increase the pressure on Facebook to maximize income through additional on-site ads and other revenue streams.

Facebook's revenue concerns should remind small business owners that investment capital usually requires the business owner to cede a certain amount of control to investors. In scenarios where the business founder retains a majority ownership stake, the pressure from investors to maximize revenues and profits can still undermine the company's core operating principles.

Employee Retention

Facebook is already preparing for the exodus of talent that will occur when employees who have been awarded equity shares cash out and step away from the hamster wheel behind Facebook's phenomenal success.

For small and medium-sized companies, rewarding key employees with company equity can be a double-edged sword. Although it is an effective strategy for tapping into top talent during cash lean startup years, influxes of investment capital can result in a talent drain that makes it hard for the business to achieve its strategic objectives post-investment.

Competitive Pressure

Right now, Facebook is the undisputed king of social media. With 845 million active users, if Facebook were a nation it would be the third largest country on the planet. However, competition is fierce in the social media universe and Facebook's IPO will only increase the intensity of the battles waged in the social space.

When SMBs receive investment funding, the expectation is that new capital will result in market gains. At the same time, when competitors see that the SMB is attracting investment dollars, they redouble their efforts to surge in the marketplace by duplicating the SMB's business model.

The Tech Factor

Savvy investors are aware of the potential for Facebook and other tech companies to tank, with little or no warning. The textbook example of the tech phenomenon is Facebook's predecessor, MySpace, which plummeted from its perch atop the social media space overnight.

It's critical for small and medium-sized companies to paint an honest picture of their risk environment when they pursue investment funding. Downplaying the risks associated with the investment opportunity serves no useful purpose and may actually deter investors, especially if it is perceived that company leadership is forecasting through rose-colored lenses.

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