Facebook recently went public. Mark Zuckerberg and the other owners might not have wanted to open the company up to a wide pool of investors, but the company had grown so large in terms of the number of private shareholders that it would have needed to release its financial statements publicly anyway. Through this process, a company that was founded as a social online hang-out and meeting place, not a money-making business, is forced under Wall Street pressure to have a better revenue strategy.
In Facebook’s case, it may be too soon to judge whether going public would have a positive effect on the company. Certainly, from a business perspective, additional pressure to generate revenue increases the value of the company, and that’s what shareholders, including the original owners who still have a large portion of shares, want. Users don’t notice when Facebook takes a percentage of every financial transaction in every game, but that isn’t generating the bulk of the company’s revenue. Other companies pay Facebook for advertising, and users generally notice advertising. And when under pressure to generate more revenue, Facebook will emphasize advertising further.
Rather than focusing on the core mission, Facebook engineers are developing more ways to take users’ money. Recently, the company has starting moving towards becoming a payment processor — accepting credit card transactions from users directly. This change in focus is typical when building a business, but is certainly more apparent when Wall Street analysts are breathing down the management’s neck. With 900 million users globally, Facebook doesn’t have much room to build its user base unless astrophysicists discover an intelligent extraterrestrial life form interested in socializing with Earthlings. The only solution is to grow revenue from each user, and depending on how aggressive the company is in answering Wall Street’s demands, users might be driven away to a competitor who isn’t digging in users’ pockets for lunch money.
Working with Wall Street means your business must answer to analysts — whose petty words can greatly affect the value of a company on paper, the capital that company has available for reinvesting in itself, and the company’s ability to borrow money at good rates — on a quarterly basis. Some companies, particularly those in a growing stage, need to be able to focus on a more distant horizon. Facebook may have passed the growing stage of its business many years ago, so perhaps the time is right for that company to face the music every three months.
When a company goes public, it’s like there are new people in charge, people who care about nothing other than impressive results every three months. They don’t want to hear excuses about poor investments or low consumer confidence, but if you pay attention to companies’ earnings reports, you’ll find they mostly follow a pattern: Unless a company had a widely publicized problem, public companies attribute any good financial results to their management and practices while they attribute bad financial results to external forces like the economy or government regulation.
I don’t see how this behavior is good for a business. It’s a waste of time of energy, it encourages creative accounting to make results look for favorable, it gives too much power to Wall Street analysts and takes that power from the company’s management, and it stifles serious long-term planning. The upside of going public is that it can raise a significant amount of money for a company to grow in ways the founders might have only dreamed of, but there’s a cost.
The management of Peet’s Coffee and Tea recently decided that the company would have better success if it operated outside of Wall Street, so it engineered a deal to go private, taking the company’s shares off the market. Shareholders were paid a premium over the stock price and thanked for their time. Rather than being owned by the public at large, a German conglomerate already deeply involved in the food sector will have the final say in the management and operation of Peet’s Coffee.
The drive for quarterly results can occasionally conflict with the need to build a meaningful business or a financially successful business in the long-term. Companies give up their flexibility in return for access to a significant amount of money through Wall Street. Not every company will find the trade-off worthwhile.
Published or updated July 25, 2012.