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Facebook IPO - Proof of Growth or Reverse Growth?

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Now that the huge hype created over the Facebook IPO has given way to more practical and analytical thinking, it is time to take a closer look at the tech IPO scenario. To begin with, one needs to assess whether ventures like Facebook and Groupon who have already treaded the IPO path or ones like Dailydeals and Flipkart who are awaiting their turn should take the plunge at all! Are tech IPOs truly a good idea?

The Groupon IPO was worth $13 billion which was quite handsome in comparison to the general performance of Tech Companies back then when it went public. Shockingly, its stocks nosedived to $10 billion on its opening day! The fall was linked to reports stating that SEC was to carry out investigations in its accounting practices! Although Facebook hasn't had to encounter such accusations, some analysts are of the opinion that its accounting practices have also received flak, quite like Groupon. However, presently, there are graver reasons to analyze that may be responsible for the miserable performance of the FB IPO. Problems could have been with the business model and even with the privacy issue. It could also be adjudged if the IPO was truly undervalued and if we are truly about to tread upon a "techbubble" phase. It would be perhaps pertinent to mention here that whereas Facebook head honcho Mark Zuckerberg tied the knot a day after the IPO launch, Groupon CEO Andrew Mason had tied the knot one month ahead of his issue release.

Even as the media went berserk over latest news and updates surrounding the IPO, all of them ended up grossly missing the point. Apart from some concrete efforts taken by The Guardian to approach the issue with the required rigor and rationale, all else preferred to stick to superficial conclusions. Quite interestingly, The Guardian makes a point stating that this IPO could well be signaling reverse growth for the powerful social networking giant. It states that through this IPO, Facebook actually makes a desperate effort to cash in on its popularity in haste. However, the article misses the point that the market is probably not as dumb to fall for such calculated bait. Once the frenzy over the IPO faded, prices that had risen to $45 now fell to $32! And one look at the business model would state that the value is likely to remain at the same spot and could even register a decline further!

Facebook revenues thrive on advertising. And a business that depends on advertising alone is bound to have weaknesses of its own. The same was reemphasized when General Motors decided to pull a sizeable amount from its Facebook advertising budget right ahead of the IPO. Reasons cited included not being able to justify advertising spends on social networks due to lack of quantification of outcomes. Needless to mention, there could be similar outcomes with other advertisers as well!

Facebook has also been accused of violation of privacy norms by customers, governments and the general opinion makers at large! Besides, with privacy laws donning a tougher shield not only in America but also in other parts of the world, Facebook could find it a bit too difficult to bet on this specific model. And it does not seem to have a satisfactory answer to privacy woes, right now. Besides, mobile isn't part of its business plan just yet! And neither has it been able to exploit its user base for mobiles. Besides, dearth of expertise has forced it to move revenues. Naturally, advertisers are not being provided with any clear cut monetization path. As a result, consumer oriented enterprises would be shying away from the platform due to lack of result visibility, sooner than later.

In the given circumstance, Facebook could be limited to a social networking interface meant specifically for personal interactions that are not at all relevant to business purposes. As observed by Andrew Keen in the February of 2012, the frenzy surrounding Facebook is probably awaiting a fate similar to that of the dotcom mania of the 90s when the Netscape IPO was encountered with disastrous fate. And the hysteria that accompanied the Facebook IPO coupled with the subsequent debacle has somewhat proved his point.

Although both businesses are distinctly different in nature, Facebook is almost always compared to Google. However, according to experts, Google far outweighs Facebook. Facebook has never been in a position to replace Google. As has been aptly analyzed by the G+1creator Paul Adams, Google renders to value to technology instead of giving importance to social science. Therefore, it treads a path that is completely different from Facebook and much wider in terms of scope. Therefore, comparing these two beyond these parameters is simply wastage of time.

For those keen on tracking the performance of tech IPOs, it could be important to recollect the incident where an IPO was floated by co brother of Narayana Murthy (CEO of Infosys India), Gururaj Deshpande. Post an initial offering of $120, it fell to $1! Hopefully, Facebook would not meet similar fate although the possibility cannot be entirely ruled out, with the volatile markets testing the worth of every issue. It would be interesting to see how the Facebook issue behaves over a period of time.