Facebook, and defining Return on Illiquation

The debate is raging about the impending failure of Facebook, fueled by a rapidly declining stock price and uncertainty over future revenue, much less profitability. It’s nonsense.

The unforgiving equity markets, demanding transparency and quarterly results, are very uncomfortable with the lack of guidance or even a story on revenue coming from Zuckerberg and his team. They are only briefly placated when insiders say they won’t sell their shares. The chatter won’t stop about the IPO being priced “wrong”, and pundits equate the fall in share price with the company being doomed to #fail.

The purpose of the equity markets is for companies to raise capital. It seems we, with our lust for short term gratification and immediate ROI (return on investment) in nearly all things, have lost sight of that. If you ask an average person, an IPO is for 1) enriching the founders and employees, and 2) creating an immediate profit for the first wave of shareholders, who can liquidate shares to someone willing to pay even more.

BREAKING NEWS: Facebook raised cash via its IPO to fund operations well into the future, with a vision for redefining itself from a web-based social world to a mobile-based world of transactions. The issue at hand is nobody knows what the mobile-based transactions world ultimately looks like.

While I don’t agree with his view on the IPO itself, Jim Cramer had a great rant on Mad Money yesterday. His astute observation that Facebook is doing with mobile what Amazon did to retail and Apple’s iTunes did to music is dead on.

Mark Cuban, writing in “Facebook Handled Their IPO Exactly Right” responding to the same NY Times piece by Andrew Ross Sorkin that Cramer referenced, is also dead on:

As far as traders who bought the stock hoping for a pop. No one cares about them. Seriously. You trade, you know you are going to lose on trades. That is how things work.

Much like the folks who complain when Albert Pujols doesn’t hit a home run every time at the plate, and how that negatively impacts their fantasy baseball team, folks now complain that Facebook won’t succeed because their revenue picture is uncertain and the stock is falling. Facebook has admitted the mobile wave has accelerated even beyond their expectation, melting away existing web-based advertising strategies and replacing them with … well, TBD, but we know it’s mobile.

Below are three charts for consideration, from their inception. The first, while having a fervent religious following, was left for dead by investors several times in the early years.

The second faced catcall after catcall for the better part of five years in the beginning from impatient investors waiting for the company to turn a profit, and survived the 2001 dot-com implosion while sticking to its plan.

The third owned its market, but as Cuban points out had a serious gut check as it sloughed value with a murky outlook in 2009, when it repriced employee stock options to balance things out.

The difference is these three stocks didn’t stumble right out of the gate, however they did stumble and bumble along the way before catching this mobile wave and taking off beyond expectations.

Advertisers and investors crave ROI. What’s the Return on Illiquation, when one way of doing business dissolves into something bigger, without shape or obvious boundaries?

Facebook has raised capital to attempt to define the mobile future. No other media outlet – not print, not cable, not even search – has the combination of audience, stickiness, and massive amounts of capital and technology needed to define what mobile viewers will see from content creators and advertisers of the future. This doesn’t guarantee they will succeed, but proclaiming a #fail based on a dated view of ROI as demanded by investors at this point is silly.

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