The Facebook IPO

After 24 episodes focused on acquisitions, the hosts add IPOs as another way to study how durable companies are built. Their premise is that a company reaching the public markets can reveal how it created long-term value, not merely what a buyer was willing to pay. Facebook is their first case because its 2012 offering was one of the largest in technology and followed an eight-year period as a private company.

Before the IPO, employees could sell shares through secondary marketplaces such as SecondMarket and SharesPost, while buyers generally had to be accredited investors. Because private companies faced a 500-shareholder threshold that could trigger public reporting, the growing number of Facebook shareholders became a governance problem as well as a source of liquidity. The hosts describe those private trades as influencing the company’s expected IPO valuation, even though the market was relatively illiquid and the price signal was rough.

Goldman Sachs invested $450 million at a reported $50 billion valuation and planned to pool additional private-wealth clients into a special-purpose vehicle targeting $1.5 billion. The proposed offering drew scrutiny after Goldman marketed it without naming Facebook; the eventual investment was limited to foreign clients. The hosts say the episode damaged Goldman’s standing as a potential lead underwriter. Their account frames the arrangement as an attempt to manage shareholder limits, but also shows how a private financing structure can trigger regulatory and reputational risk just as a company approaches an IPO.

Facebook entered its IPO process with exceptional scale: 845 million monthly active users and 483 million daily active users at the end of 2011, with billions of daily likes and comments. The hosts interpret those interactions as evidence of engagement rather than mere app openings. They also point to $3.7 billion in 2011 revenue and more than $1.7 billion in operating income, an operating margin of about 46%. These metrics help explain the market’s interest, while the S-1 also disclosed a concentration risk: Zynga alone accounted for 15% of Facebook revenue.