Why the Facebook IPO Bust Wasn’t Hard To Predict

I flew to Chicago on the morning of the Facebook IPO. The lady next to me asked me what I did and when I told her, she asked me what I thought of the Facebook IPO. So I told her.

I told her that in my opinion, given what I’d seen of a long history of companies doing debt leveraged buy outs as a means of paying off the company creators and sticking the new owners and investors with the bag of debt (usually via over-valued stock) which I expected would continue with this offering, coupled with the recent propensity of internet IPO busts, my knowledge of Facebook’s current revenue generation via ads, the slowdown in its user growth, the high cost of servers and infrastructure, the increase in users relying on mobile Facebook platforms which don’t have ads (as opposed to laptop and desktop platforms which do) and the changes in Facebook’s news feed which guarantees selective posting in the newsfeed and the increasing backlash from companies which now must pay FB for the privilege of their hard earned fans (which most certainly have an acquisition cost) being able to see what they’re saying, well, it quite frankly added up to major danger signs.

I told the lady that quite frankly I wouldn’t touch it with a 40 foot pole if it were me. As it turns out, I was right. Certainly, it seems easy to monday morning quarterback this, but the warning signs were there. I hadn’t even paid that much particular attention to the IPO, I simply knew how Facebook worked and I recognized what I thought were weaknesses in the business model (if you were an investor) and coupled that with previously observable patterns.

I’m sorry that people lost money in the IPO – I really am – but I don’t feel sorry for them. I can’t. The warning signs were there. They should’ve taken the responsibility to do minimum due diligence on the transaction they were considering making. I’m not going to claim that I’m even really all that smart on investing. If I were, I’d have shorted it. I just recognized warning signs. I wasn’t alone. Mark Cuban did too.

Mark hit the nail on the head in his note picked up by Forbes  contributor Eric Jackson in his article here: http://www.forbes.com/sites/ericjackson/2012/05/24/mobile-is-going-to-crush-facebook/

The problem is the ad revenue – or rather, lack thereof.

Because Facebook currently generates no ad revenue via mobile platforms, it will either adapt or fail. If it fails to create some type of ad format for it’s mobile users, an increasing number of mobile users will create a continued decrease in revenue. If Facebook continues to exist for the long-term, my prediction is that they will roll out some sort of ad format similar to what you see with Google Ads on mobile apps. Sure, it will clutter the clean layout, but when institutional survival is at stake, it’s necessary.