Why the Facebook IPO Needs to (Really) Open Up

This morning I followed a link to an article on ZDNet, somewhat disingenuously titled “Zuckerberg says it’s time for Facebook to become a “Social Business.” Wow, I thought, could Facebook really be up to something innovative here – a breakthrough in governance and funding to better align the firm with the long-term interests of its customers who already invest so deeply in the service in non-financial ways?

Turns out my hopes were misplaced. He, like others, were defining “social business” as something else.

It’s gone already, but yesterday someone figured out how to post a fake entry on Mark Zuckerberg‘s Facebook page:

If you can’t read that, this is what it said:

“Let the hacking begin: if facebook needs money, instead of going to the banks, why doesn’t Facebook let its users invest in Facebook in a social way? Why not transform Facebook into a ‘social business’ the way Nobel prize winner Muhammad Yunus described it? http://bit.ly/fs6rT3 What do you think? #hackercup2001″

First question – how the heck did Mark Zuckerberg‘s page get hacked?

Second, and more interesting question, asked by the hacker – what do I think? What do I think? I think YES! It would be an awesome idea for Facebook to flip traditional funding models on their head and go directly to its user base for micro-finance-based funding. If just 5% of Facebook‘s 600 million users invested just $50, it would match the $1.5 billion Goldman Sachs was originally hoping to raise through a private placement with the super rich.

Isn’t that just called an Initial Public Offer (IPO)? Isn’t that just taking the company public, or wouldn’t that at least be an easier route than trying to manage a rabble of millions of small-scale micro investors? And what about the legal issues? Securities investments are highly regulated in general and even more tightly controlled with IPOs. One of the biggest hurdles is the “sophisticated investor” test, which usually translates into a minimum income of $200,000 in order to be a qualified investor. OpenIPO has the infrastructure in place for democratizing the IPO process, but it’s still subject to these constraints and oriented to a much higher-end clientele (just applying for an account requires a $2,000 deposit).

There are examples of companies, such as the Market Creek shopping center in San Diego that have been able to work around these constraints. Yes, financing Facebook is a whole order of magnitude higher complexity than funding a $50 million shopping center development. But dammit, this is Facebook: a once-in-a-generation communications/computing breakthrough. Surely, there is room for financial innovation.

Why is this important? It’s important because Facebook users are the ones investing their time, energy and social capital in building the underlying value of this service. The “third-order” engagement that makes this possible is what defines the underlying value of the Facebook business model. In the 1980’s, in our last once-in-a-generation communications/computing breakthrough, Bill Gates realized it was the intellectual capital of his employees that was building the company. Bill Gates went beyond just recognizing these contributions; he actually rewarded them handsomely with a stake in the company. He was quite generous with employee stock options, and in so doing, built deep loyalty among those early employees and helped develop a generation of ‘Microsoft millionaires’ who continue to give back to the Seattle-area in numerous ways.

Third-order engagement flips traditional business models on their head, by blurring the role of employees, partners and customers. Through it, Twitter, Facebook and other social network services are able to engage a much broader base of people in building the value of their services. Eventually, that value translates into monetary value – or the service goes under. In Delicious, we saw the widespread outrage users felt at having contributed so much time and energy into supporting the service, only to hear rumors that Yahoo was considering shutting it down (Yahoo has since reconsidered, and is now looking for a buyer).

This is the other side of the third-order engagement coin – the one most companies fail to see. When users invest heavily in a product or service, they feel a certain level of ownership in it. Tell them you’re going to shut it down and squander all that investment of their time and money, and they’re going to be mad.

But what of the other scenario – what of the times, like Facebook, when all those individual user investments build something extremely valuable in a monetary sense? Shouldn’t that investment of time and energy and social capital translate into at least some opportunity for a financial stake? Bill Gates built Microsoft on the contributions of his employees and rewarded them handsomely for it. Could and should Mark Zuckerberg do the same thing for the employees and users responsible for Facebook‘s success?

Facebook is a very innovative firm. But might the “Bank of Facebook” be something even more innovative; something that builds even more longer-term loyalty to the service? I’m not sure, but I think it’s time to start asking these kinds of questions more seriously.

Thank you, anonymous Facebook hacker, for asking what we think about this. I’m glad you did.


(Originally published on the Alchemy of Change on January 26, 2011)

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