Acquisitions
" In terms of doing work and in terms of learning and evolving as a person, you just grow more when you get more people's perspectives, I really try and live the mission of the company and keep everything else in my life extremely simple." - Mark Zuckerberg
If you are unsure about how to develop your income streams, or even what those streams should be, ask for expert advice.
Once Facebook became profitable, it was in a position to start investing in order companies and to make wholesale acquisitions when it was useful to do so. These acquisitions were usually of competing products, or services which could be added to Facebook's portfolio to make their own offering more attractive.
You do not need to build every aspect of your company from scratch.
Examples of early acquisitions include FriendFeed, a real-time news feed aggregator which brought together users' feeds from multiple social media platforms, blogs, etc., and was the brainchild of Bret Taylor (co-creator of Google Maps) and Paul Buchheit (the lead developer of Gmail, who also prototyped Google AdSense); Octazen Solution, a Malaysian start-up whose software could be used to import contacts from multiple sources; photo sharing system Divvyshot' and the team behind Storyline, a start-up which allowed users to share their interests with a given community.
Such acquisitions made Facebook increasingly attractive to investors as they enriched the platform's portfolio and technical capacity. After the company had its IPO in February 2012 ( see IPO, below) Facebook had a much larger pool of cash to draw from, and the board decided to make two further, phenomenal acquisitions: Instagram and WhatsApp Inc,
Only buy into other companies which enhance your core offering.
First released in October 2010, Instagram is a social network focused on photo and video sharing. Its square, Polaroid-style images were distinctive (though in later versions of the app, alternative aspect ratios were also popular), and users also liked the fact that they could add filters to their images. The free app had 100 million users in its first 18 months, and in April 2012, Facebook acquired Instagram for $1 billion in cash and stock. It was a shrewd investment: Instagram trebled its number of users over the next two-year period, a growth rate that even Facebook could not much.
If you see a company that has significant growth potential and is cash generative, think about adding it to your portfolio.
Although Facebook paid a gargantuan sum for Instagram, it would shell out even more money for messaging service WhatsApp. Created by two former employees of Yahoo!, who had ironically enough been turned down for jobs at Facebook, WhatsApp launched in November 2009. By spring 2014, it had 500 million users a month, and today that figure is estimated at around 1 billion users. Facebook acquired WhatsApp in February 2014 for $19 billion, of which $4 billion was paid in cash, $12 billion was in Facebook shares, and the remaining $3 billion was in restricted stock options for WhatsApp's founders.
Communications are key to everyday life.
Immediately after the acquisition of WhatsApp, Zuckerberg gave the keynote address at the Mobile World Congress in Barcelona. He explained that the acquisition of WhatsApp was a key component of his Internet.org vision (see Internet.org), later explaining in an interview with TechCrunch that:
The idea... is to develop a group of essential internet services that would be free of charge to use a 911 for the internet.' These could be a social networking service like Facebook, a messaging service, maybe search, and other things like weather. Providing a bundle of these free of charge to users will work like a gateway drug of sorts- users who may be able to afford data services and phones these days just don't see the point of why would pay for those data services. This would give them some context for why they are important, and that will lead them to pay for more services like this- or so the hope goes.
Even if you think that something you have done or plan to do, is a good idea, you need to be able to explain it in a cohesive, convincing way to other people.
Developments in WhatsApp subsequent to the application's acquisition by Facebook include the ability to handle voice calls, and the dropping of its annual $1 subscription charge. Both of these changes increased its appeal to customers, with Forbes magazine predicting that WhatsApp and Skype would have lost conventional communications companies a combined total of #386 billion between 2012 and 2018. Facebook and its subsidiaries, once again, are changing the way in which we communicate, and in which money is made.
Initial Public Offering (IPO)
Despite Zuckerberg's own initial resistance to the idea of an IPO (see Sales Negotiations and profitability), it was inevitable that Facebook would one day have a public share offering: a single company could not afford to buy Facebook in its entirety, and yet the investors had to somehow to realize their investment.
Zuckerberg's leadership, and conviction about the potential of Facebook, were essential because they enabled him to grow the company to well beyond the size estimated, and valuation offered, by Yahoo! Microsoft, and Google. His confidence, and his faith in his product, paid off, and by ensuring that he assembled around himself a world-class team, he was able to gain the largest valuation to date for a newly public company. Facebook's IPO raised $16 billion, making it the third largest in US history.
So how did it happen? What steps did Zuckerberg take?
By resisting both buyouts and taking the company public for a protracted period, Zuckerberg was able to grow Facebook (increasing its ultimate valuation), and create an appetite in the marketplace for its shares: numerous investors wanted a piece of the action, but couldn't buy in, and this made the company even more tantalizing. He told Pc Magazine in 2010, "We are definitely in no rush."
Binde your time
On 1 February 2012, Zuckerberg filed Facebook's S1 document with the US Securities and Exchange Commission in Washington DC. Key points of the document were an outline of the company's current position (845 million active monthly users; 2.7 billion daily likes and comments; and an increasing but decelerating increase in the number of users and income); a statement that Zuckerberg would retain 22% of Facebook's shares, but 57% of the voting share; and an indication that Facebook expected to raise $5 billion from the IPO. It would therefore be one of the largest IPOs in history.
Zuckerberg personally led the roadshow for the Facebook IPO, and he did it in his own inimitable way. He turned up at the first investors' meeting wearing a hoodie, not a suit, which caused consternation in more conservative business circles and generated plenty of column inches. Perhaps that was the idea o fit. One investor described the move (which may or may not have been deliberate) as a "mark of immaturity," but it could also be seen as Zuckerberg reminding would-be investors that the ball was in his court, and he would run the roadshow and the IPO as he saw fit: he didn't need the money and therefore had power
You need to strike a careful balance between being yourself and doing what investors and customers expect.
During this period, though overall they increased. The low initial estimate was $28 to $35 per share, but this was quickly revised up to $34 to #38 per share. This top estimate gave a total valuation for the company of $104 billion, and yet there was still strong demand from would-be investors, especially from retail investors. The previous strong performance of Google and LinkedIn has investors' confidence, and no one wanted to risk missing out.
You can make predictions about how your company will fare based on the performance of other similar companies, though this is by no means a fail-safe strategy.
Two days before the IPO, Zuckerberg announced that due to high demand, 25% more shares would be released. The stock would debut with 421 million shares. Some analysts did express concern, thinking that the estimates overvalued Facebook, especially given concerns about the company's advertising model: just days before the IPO, General Motors announced publicly it was going to cancel its $10 million advertising campaign on Facebook due to underperformance.
The Facebook IPO was fascinating to watch as it was a cultural event as much as a business one: Reuters declared it to be "a cultural phenomenon", and Zuckerberg, ever the showman, ran a series of events in the run-up to the IPO. The night before it was due to take place, he led an all-night hackathon; CBS coined the word Zuckonomics to describe the way in which the IPO was playing out; and Zuckerberg rang a bell in the Facebook campus's Hackers Square to announce, in a time-honoured fashion, that the company was going public.
Even fairly standard financial transactions can appear exciting if marketed correctly.
Trading in Facebook shares was due to begin at 11 a.m. on 18 May 2012, but it was delayed by half an hour due to technical issue to be technical glitches throughout the day, and buyers couldn't always see whether or not their trades had been successful. The opening share price had been set at $38 and shot up as high as $45, but Facebook couldn't maintain this price. When the price fell below #38, the underwriters had to wade in to keep the price steady, and the day's trading closed with a disappointing share price of just $38.23. The stock did set a new record for the trading volume of an IPO (460 million shares), and it raised $16 billion. The IPO confirmed Zuckerberg's own stake as being worth $19 billion, so all in all, it wasn't a bad day for him.
Be prepared to be pleasantly surprised on some occasions, and sorely disappointed on others.
In the fortnight following the IPO, Facebook's share price declined. Trading curbs were used to slow the decline, but Facebook closed its first full week of trading down at $31.91, and after two weeks, the share price was just $27.72. It would be four weeks before the company made a modest gain, and when the wall street Journal described the IPO as a fiasco, they weren't the only ones holding that opinion. More than 40 legal suits against Facebook's lead underwriters, Morgan Stanley, JP Morgan, and Goldman Sachs, followed, with Morgan Stanley being forced to settle allegations of improperly influencing research analysts for $5 million. The reputation of both Morgan Stanley (the primary underwriter) and NASDAQ was damaged due to the botching of the IPO.
Those investors who did keep their Facebook shares (and nerve), rather than dumping them in panic and fury shortly after the IPO, made a shrewd decision. Today the share price stands at $111, and it has been growing consistently since it hit an all-time low of $18.06 in August 2012. The current forecast, drawn from 54 polled investment analysts, is that Facebook will outperform the market in the coming year, and they have a median 12-month target of $135, with some predicting the share price could go as high as $170 by the end of that period. It seems that the IPO wasn't such a fiasco after all.
You need to be in business for the long haul.
Legal Disputes
The extraordinary success of Facebook, and the wealth which the company has generated for Zuckerberg, have meant, perhaps inevitably, that there are plenty of people who are extremely jealous of what he has received. Some of them believe that they are entitled to a slice of the Facebook pie for their early involvement or ideas; others are just chancing their luck. Whatever the background, such individuals are canny enough to realise that whether their claim is valid or not, simply making allegations will quite likely catapult them into the limelight, giving them their 30 seconds of fame. For the Winklevoss brothers, that period of fame has lasted even longer, though it hasn't exactly shown them in a good light.
"When I was in college I did a lot of stupid things and I don't want to make an excuse for that. Some of the things that people accuse me of are true, some of them aren't. There are pranks, IMs."
From the week of Facebook's launch, until June 2008, Zuckerberg was at loggerheads with twins Cameron and Tyler Winklevoss, and their classmate Divya Narendra, all three of whom had studied alongside him at Harvard. The plaintiffs alleged that they had hired Zuckerberg in 2003 to help them build a campus dating site called Harvard Connection, but that he had stalled their project and ultimately stolen their idea, turning it into Facebook. Zuckerberg filed a countersuit, accusing the plaintiffs of unfair business practices, and the case was settled out of court.
Be prepared for people you have worked with in the past to turn against you when you start to taste success.
But the story doesn't end there. The settlement was based on stock, and by extension, Facebook's valuation. The plaintiffs argued that Zuckerberg had fraudulently misrepresented the value of Facebook stock, and took him back to court. It was a public relations nightmare and one which Zuckerberg surely thought he had seen the back of.
Thankfully for Zuckerberg, Judge James Ware of the Federal District Court in San Jose sided with Zuckerberg, enforcing the earlier decision. The judge noted that the plaintiffs were upset that Facebook's valuation was not the $15 billion that recent media reports had suggested, but that Facebook's own valuation was fair. He also suggested that the Winklevoss twins' father, Howard Winklevoss, was the main force behind the dispute. The Winklevosses and Narendra took their handout and slunk away, and Facebook issued the following statement:
We are happy that Judge Ware enforced the agreement settling our dispute with the ConnectU founders [ConnectU is the company founded by the Winklevoss twins]. ConnectU's founders were represented by six lawyers and a professor at Wharton Business School when they signed the settlement agreement. The ConnectU founders understood the deal they made, and we are gratified that the court rejected their false allegations of fraud. Their challenge was simply a case of "buyer's remorse," as described by the Boston court earlier this month.
We were disappointed that we had to litigate the settlement, as we believed we were caught in the middle of a fee dispute between ConnectU's founders and its former counsel. Nevertheless, we can now consider this chapter closed and wish the Winklevoss brothers the best of luck in their future endeavours.
When you win, be gracious, and humble.
[Redacted] "This email should probably be attorney-client privileged, not quite [sure] how to do that thouh. Anyhow, Sean and I have agreed that a price of one-half cent per share is the way to go for now. We think we can maybe almost justify and if not, we'll just deal with it later. We also agreed that if the company bonusing us the amount we need for the shares, plus tax, is a good sloution to the problem of us being completely broke. As far as Eduardo goes, I think it's safe to ask for this permission to make grants. Especially if we do it in conjunction with raising maoney. It's probeably even OK to say how many shares we're adding to the pool. It's probably less OK to tell him who's getting the shares, just becasue he might have adverse reaction initially. But I think we may even be able to make him understand that. Is there a way to do this without making it painfully apparent to him that he's being diluted to 10%?
Ok, that's all for now. I'll send you the list of grants I need make in another eamil in a seocnd. Sean can send you grants for his people when he stops coughing up his lungs. Hope you guys both feel better
His lawyer's response made it explicitly clear to Zuckerberg that as Saverin would be the only shareholder diluted by the grants issuances, he would have a legitimate claim to Facebook breaching fiduciary duty, and recommended that to avoid this happening, Zuckerberg should get Saverin's consent for the issuances in writing. Zuckerberg did not heed his advice, and Saverin successfully sued Facebook for approximately 5% of the company. At the IPO, that stake was worked around $5 billion.
Treat those you work with fairly
A number of smaller lawsuits have also been brought against Facebook, by users and their representatives. A brief summary of two of the more interesting cases has been provided below.
Lane v Facebook was a class action challenging Facebook's privacy settings. When Facebook launched Beacon (which broadcast users' purchases from Facebook's affiliate sites), the default privacy settings required users to opt-out, out rather than opt-in. Many users were unaware of this fact, and as their purchases were then broadcast to their social and professional networks via their Facebook newsfeeds, they felt that their privacy had been breached. The lawyers representing the plaintiffs claimed that Facebook had broken Electronic Communications Privacy Act, Video Privacy Protection Act, and California Consumer Legal Remedies Act, and also violated the California Computer Crime Law and the Computer Fraud and Abuse Act. Facebook denied wrongdoing
but did establish a cash settlement fund of $9.5 million. This was used to open and run a privacy foundation designed to educate users. Facebook terminated the Beacon program, paid the lawyers' fees, and made small compensation payments ($1,000 to $15,000) to the class representatives.
Legal cases can be expensive, and even if they don't upset your firm financially, they do no good for your reputation in the public eye.
In recent years, Facebook has collaborated with academics to conduct a number of experiments on its users. These include "A 61-Million-Person Experiment in Social Influence and Political Mobilization," which Facebook ran during the 2010 Presidential election in the US; and "Emotional Contagion Through Social Networks", a controversial study in 2014 which manipulated the balance of positive and negative messages which 700,000 users saw. The study was criticised for its ethics, causing the privacy watchdog group Electronic Privacy Information Center (EPIC) to file a formal complaint with the Federal Trade. They alleged that Facebook had conducted the study without the knowledge or consent of their users, and secretly conducted a psychological experiment on their emotions, breaching their privacy. The outcome of this case is as yet undecided, but law professor James Grimmelmann has stated that he believes the action is "illegal, immoral, and mood-altering".