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Ep. 61: Facebook's private fund-raising: What it means for techWant Facebook stock right now? You can't have it... unless you're already filthy rich and can get in on the "private market" that exists for Facebook shares. What does this market mean for Facebook, investors, and tech in general? Join my discussion with...
Hi everyone I'm Rick Adelman welcomes you reporters' roundtable where 2011. Or near their Francisco back from -- finally. I'm joined today with by Miguel health from the New York Times. Thanks for coming in we're gonna talk today about FaceBook FaceBook is the company that everybody wants a piece of the social network has. At last report over 600 million subscribers. But more importantly it's a big destination. Most users spend a lot of time on FaceBook when they go there making an advertising and commerce powerhouse a money machine. That could potentially put Google to shame because school is a -- station FaceBook is a place you go. Now normally when a tech company gets this size in the number of users in the form with. Level of importance -- can actually goes public. Which means that we'll -- unique while not -- those reports were not allowed to but everybody else. Gets to buy a tiny piece of a company called stock or share. And then they participate in this success of the company or the failure by selling or losing money on the chairs and telling other people. The IPO or the initial public offering. Is a really big deal it's how fast rising tech companies make their investors venture capitalists rich. And reward. Early employees and founders of companies. Who have worked for. In many cases very little. To build equity or ownership of a company and then when they go public in the company but the public buys that stock they make money caption. If this were 1999 today FaceBook would be a public company right now. At least I believe so I'd driven to the exits as -- called by their investors by investors who would want -- return of all the money they put into FaceBook to help it grow. Up but it is not its 2011. -- FaceBook isn't going public today instead it's raising funds through. What's called private placements. People are buying shares of FaceBook stock. But it's not -- that you and I can -- you have to be at certain current investors who were going to be talking about that today. About what it means to have a private placement for FaceBook. For investors for users and for other tech companies. And I wanna start Miguel again thank you very much for coming in -- has been covering tech and and public markets and stuff like this or if on a fifteen years -- more or less about a lot. You've been through -- one point -- your industry standard -- -- otherwise. At that red -- we were arch rivals -- And and this is a different time. Why is this such a big story last I checked at the times than in years you know familiar other blogs that you -- you have. Half dozen people were in the story wise it's such a big deal. Well it's a pretty dramatic change for how technology companies. -- that the lifespan of technology companies as you explained. The used to. You know receive money from venture investors. Work -- -- whatever they did and at some point they would go public. If everything went well and investors got rich the employees got rewarded some of them got very rich if -- weren't a Google at a company like that. Now the process has been -- then and it's a lot slower. In hard after the dot com bubble. The FCC impose -- of regulations which makes going public a little more complicated. Little more expensive. -- talking with Ben Horowitz who is a venture capitalists and was also -- Netscape employee he said. And on average it used to be like the million dollars per year to be a public company. It's now. After five million dollars or something like that and that in in overhead in overhead idea accountants and regulatory fees and whatnot and he said look at Netscape which went public in 95 and and he thinks I don't remember exactly. That would have been into the profits of the company -- in and in addition to that you get. Scrutiny from Wall Street you have to disclose your numbers to your rivals cheer investors. And so companies are taking longer to go public. And so. That creative problem for all the investors in -- of the employees. They have to wait longer. Something had to happen and what happen is that. There started to emerge the secondary market -- secondary transactions where so maybe. Comes in and you know investors command and they buy shares privately held shares. United -- that's negotiated between the two parties. But that's that allows the early investors and employees to sell some part of their stock. Without having to go out. Let's back up a little bit here and and and dive into what happens when you're inside a company like FaceBook or Ernie start -- company tech are not. If I want to go work at company X and I think it's really cool. And they are not public and maybe they'll even make much money. I go to work -- to give me a salary. And they say you'll also get this small fraction of the company and chairs and a eventually I I earned those shares over time document that. But then I I have rights. To the shares right owned -- shares in the company except these aren't shares that I can buy and sell usually this happened to me this is having to -- companies have worked for in the past where. I own a small small small piece of the company and on the promise -- -- the hope that some day the company will have an exit which means either a big company will buy it. Port will go public and those shares will be valued much higher than what I've. Have they been died when I own them as a private company. Now what's happening with FaceBook is that if you're an employee FaceBook and you have a thousand or 101000 or -- hundred shares of FaceBook stock. You can now sell it that's unprecedented or at least not hasn't been very common right how does that work. It is unprecedented -- -- you used to have to wait to sell those shares and until the IPO or Intel you're shares were converted into. The shares of a company that acquired it from. And for employees and investors that meant -- sort of an all or nothing proposition if your company. At a lot of promise and you know you mention magazines -- what the industry standard we got chairs there was the year when the magazine was very successful we've. Maybe an IPOs in the offing we had all these shares. -- we're giving us given to us as part of our compensation. There was no place to sell them. As it turned out the company didn't succeed and -- it went belly up. And all those -- eventually were worth nothing so this gives employees. -- mechanism. To cash in some of it. Before there's actually an IPO or an acquisition well let me just so you instead of an all or nothing game it becomes. In -- that the way I describe these fees that processes. It's a little bit of a slow motion IPO -- the company is not public that. There's a market for the shares. Privileged investors can buy them from you often -- the company involved. And with some restrictions and and you can cash -- -- now the idea -- confuse me. The concept of the public market in. On our plan and I guess that's where personal capitalist markets. Is the the idea is that the public. Accurately. With help. Sets the value of the company and that the price of a share is that percent of the company based on. Earnings on projections -- -- -- when a company goes public. Traditionally -- IPO that. First trade maybe not the -- itself but the first trade is. Supposed to be an accurate representation of the value of the company GM's case that happened to actually be actually work for one. When -- Orkut FaceBook today or -- red Herring and years ago whatever and somebody wants to buy those shares for me which I've been. -- their vested and or whatever. There's there's no giant market there's no millions of investors sending the price -- the price set. While -- that's that's clearly the big one of the big differences here -- when your selling or buying shares in the public market you have. You know potentially millions of investors there are anybody who wants to buy shares and there are shares to be -- everyone wants to -- to sell shares. There buyers who will buy those chairs so it's -- it's what's called liquid market there's enough buyers and sellers and not shares and so. -- market price you know -- in according to economic theory finds its equilibrium. Here you don't have that liquidity. You have investors. In private transactions where they're very few investors who qualified to actually buy these shares determining -- price and you know that could be. Good for the seller if the buyers are very hungry eight you know that there's one of the issues with this is there's very little information. -- the investors -- And so they they you know. They're buying this because this is as you described in the intro -- -- as the hottest company around. And everybody wants a piece of it but. You get a fraction of the disclosure you get from a public company that explains not how much they're not only how much revenue they have and how much profit that -- The hold the two list of financial disclosures that if you're sophisticated investor you say while this you know. It's ought to be worth -- per share button and here you don't have that you have. These private investors in this case that clients of Goldman Sachs can acquire shares of FaceBook. They have certain requirements -- you know you and me -- the average person wouldn't be sophisticated enough to. To buy into these -- maybe it's just an emotional reaction but I bristle at that well what it was just what is that the of the sophisticated or the credited it investor that's. There's there's two big restrictions if -- want if for people who want to get in on the FaceBook action right now unless you're. One of the early investors or a gazillion -- -- McNamee for example at the one who already owns a big part of -- right. If you're your standard -- note that the millionaire. Run of the -- you know he you -- share in a Learjet you don't actually own a pollster -- you know the standard. And you want a piece of FaceBook -- what do you have to be how rich how connected how tapped in and how many. Of their of these people can their -- So the way this was set up with FaceBook is that Goldman Sachs Heyman says. You don't give us up to one point five billion in shares and will sell that to a investors -- investors are very. -- well to do private clients have. Goldman Sachs I believe the minimum investments three million dollars -- you have to hold shares. The -- a yeah I mentioned the word sophisticated investors meaning these guys -- -- that. But it's actually technical term is an. Companies the issuers of stock or the intermediaries that the Wall Street banks that step. Don't take advantage of you and me who are not sophisticated investors we you know people tell us well these chairs or fifty -- if you'll buy it. Well you have enough disclosure. That. You can sort of make a decision and and decide whether -- buy or not. The sophisticated investors somebody -- has perhaps it. It costs fifty investors because there's it is a lot less regulation of this private market and it's sort of buyer beware. I mean these are people who know if the ins and outs of the market they know what information they have. They know what information they don't have when they make a decision to -- to -- And in a way to protect. I UN -- grandma from buying into these -- you know the SEC won't allow that anybody can can get into now the FTC also won't allow in a transaction like this even though this is still private company the Securities and Exchange Commission is involved. And they set limits not just on the types investors but on the number right but what it does that have again it's this is the same principle is that. -- to the rule is that once the company has 500 investors are more 500 shareholders -- more it needs to start disclosing. A public information as long as you and I start a business we're both shareholders it's -- -- our problem we sell shares to my cousin. It's kind of our problem once we have 500 people that own a piece of our company. The FCC considers that the big enough number that you need to start giving more information you can't. Anymore do sort of back -- deals. And -- issue -- FaceBook is that. Because there's so much hunger for their shares. They are creating -- Goldman Sachs this mechanism. Where all the people that Goldman Sachs sells shares to. -- that one point five billion in shares they will count as one investor. And because it's Coleman -- buying the shares and then these people owning a stake into that Goldman Sachs pool. And you know there's real question as to whether that's gonna fly in the SEC's looking and into this transaction. One we come back when you take a quick break. And we come back we'll talk about. Why FaceBook might not ever want to go public and the fact that these restrictions haven't we -- Well obviously a lot of people want to get in on the FaceBook action they want the company to go public so that they can get a piece of of their value right now I just at the back -- napkin calculations and based on the -- -- -- fifty billion dollar valuation pro rated from the latest Goldman acquisition. Offering. And -- about 600 million subscribers that means that you and I are each worth 83 dollars and I want that 83 dollars back. Why would FaceBook. FaceBook wants to go public may be FaceBook itself doesn't certainly everybody who invested in FaceBook wants the market the FaceBook market. To be public with so we can make their money back that's a venture capital business works -- might FaceBook not want to go public at all. Well -- I think FaceBook will go public that that you know you go public because. Once your. Trade and on Wall Street you get. Access -- tremendous pools of capital right now FaceBook because it is a unique company it's able to do these deals. Most companies can't do that that even FaceBook at some point. You know I mean they just raise two billion dollars their main competitors Google Google has 33 billion dollars in the bank. If FaceBook ever wants to be in that lead. No matter how much money how profitable it is you will need to go public and and it will because it is a promise that accompanied -- implicit promise and makes to the venture capitalists and the employees at some day. You'll be able to take all this. All these nice is that there's big prize that we're building and be able to sell that men and you know -- a car or house or an island. So eventually FaceBook will go public the reason mark Zuckerberg has resisted this. Is that. You know that there's really no. If you have enough money which FaceBook has for now. There's no real benefit of going public -- you have extra regulations extra scrutiny from Wall Street and perhaps from the government. You you know European competitors get to see how well -- -- -- -- you're doing. This was a huge issue for Google. They went through the same. Process mentally you know Larry and Sergey. Back in 0304. -- they did not want to go public they were forced to go public because of this 500. 500 investor rule but they were terrified that Microsoft. Who they consider their number one rival would know how much money Google was making and search how profitable the search business wise and come after them and you know. Microsoft realized that once they -- Google filed the papers to go public. And and they'd go after Google at that time that it was a little -- and Google had so much like you know. There were so far ahead and I think FaceBook feels the same -- tell your competitors how well you're doing when you don't have to. It seems to have worked out okay for Google. -- did just fine you -- one who could come after FaceBook. That. This disclosure would make material impact I mean News Corp. their their public company there valuation the entire News Corp. Is 42 billion dollars under what FaceBook is that it -- -- -- -- -- -- -- The -- I've made the analogy of the Google Microsoft rivalry here. You know Google -- the number one rival and I think they have pretty decent idea how much money -- -- innate. You know. What what about other issues we talked about financial oversight and regulation and when when you when you -- your company moves from being -- private privately held. Or even semi privately held as it is right now. Two being public can vote composition of the board of directors changes the responsibility of the board of directors changes they are now officially technically responsible to their shareholders which -- -- And you -- -- -- more oversight not just and finance the split and other issues the it wouldn't that happened to FaceBook. Well hey. It's possible that. Once it becomes public and you -- they would -- will be more scrutiny that it. The board members will be accountable to the shareholders as they are today and -- have just the shareholders are smaller pool. And there could be -- -- -- -- issues that FaceBook faces from a policy perspective like privacy. Where. If it were a public company there might be more scrutiny on those issues on how it handles those issues. Not necessarily because of board has to consider the concern about privacy -- they have to be concerned about how privacy would affect the business and is ultimately -- responsible. To the shareholders and how the business that it so so there's only a risk that. Who do you think will be the CEO of FaceBook the public company. And and felony -- that ridiculous thing on I think so. He's very young for CEO he's very young a couple years ago he did not seem like he was mature enough room. And and poised enough to be CEO he seems to have. Coming -- his own in the last year or so and I don't haven't seen any sign that he wants to relinquish control in fact he set up the company. With a couple. Restrictions one is that there's a dual class structure. Where even after they go public and and this is a model that they're following Google and a few other companies like. You know in the in the old world. Some media companies like the new York times company the Washington Post company's. Have dual class structures where you have. Everybody. Who owns public stopped as one class and the founders -- in the in the case of the media companies that families that -- the -- newspapers. -- with the voting control mountain. And so FaceBook establish that. So. Did the early shareholders will have voting control and he also established at according to the book that David Kirkpatrick wrote in a way that. -- -- -- Will have ultimate. Voting control over the board so he can't be -- -- he he is very much. Holding the -- at this company would. Would you want to invest in a company with that form of a royalty at the top of it well that's. I asked that the the editorial you yeah I know that that's -- very valid question and when when Google. Went public you know to take an example of that that similar set of the dual -- structure and Dave wrote a letter that was very -- -- You know they told Wall Street. You guys investment company but we're running this show we are gonna run and the way we think it is we're not concerned about short term. Fluctuations which a lot of people on Wall Street arm and you know. As long as you know that you know go ahead and invest and it's worked out very well for Google of course because the company has done phenomenally while when a company. Stops doing so well is -- and shareholders have. Issues to raise in and indicates. Of a company with a -- stock structure they have very little power to. You know upstage the board as you know last year's. Some investors tried to do that would with the Yahoo!. You know it's difficult to do in a public company with a single -- structure it's. It's impossible essentially to do. If there's -- out structure because the board control the company now you've written a little bit about this on on the effect that this. Private placement of FaceBook shares is having on the valley and -- started and what -- going public would do talk to us about that what does this mean. For. Personal for the high profile. Oh start -- right now Zynga. Group on. You mentioned and -- and also where everybody else who has a little company right now thinks. Okay I don't have to the public -- -- addicted to find the exit. The payback might venture capitalists and it to buy my five million dollar -- -- only mention I mean what effect does this have on on tech. -- -- So -- it seems to me that this completely changes the calculus that investors and entrepreneurs may you know that he used to be. You know wait for the coming out moment and then you have this big IPO party. Now there's this sort of more gradual path to. You know getting some liquidity early on how. You know that it venture investing is very traditionally take high risk and then high reward in this in a way takes out some of the -- because you can. Take out a little piece of what you invested. Who -- of these secondary placements. And and still you know wait for the IPO so. It's gonna change how investors things about the kinds of things they invest and how they invest and how much risk -- take. But then. The caveat to all this is that it's added this is happening with FaceBook it's happened would Zynga. It's happened -- Linkedin a few other very successful Silicon Valley companies. I don't think that today there's going to be a market of secondary market for shares in. You know the second and they're tears start -- of which you know the majority of the startups in the valley are not. In Facebook's V and seeing his -- -- an accent so I think this is gonna have a profound and impact. On those you know top you know 25%. Of really really hot companies. The rest of the valley I think it's gonna be more business as usual on their gonna wait for being bot or you know they're successful enough to go public if if the. It looks like the public market for tech companies the IPO market rather is. Soon to open up again 2011 with the IPO. -- demand media. -- that far right I demand media is the content. And are a content form that's -- a charitable -- to -- it but that's what it is. They watch what Google -- trending on cool and and they send out requests for people right quick stores which -- as CO2 death. And then they sell ads against that's of their highly dependent both a whole different reporters' roundtable right there. But at any rate or is it going with that. With the IPO market opening up again what happens then to this this. Secondary market the pride -- -- to market does it then maintain or if the IPO market comes along again. Does that. Make the secondary market that we're looking for now FaceBook kind of -- historical oddity. -- it seems to me that the secondary market is here to stay and you know one way to think about it it's an intermediate -- though it's you know instead of going from zero -- -- sixty. You -- easier to thirty and then eventually over to sixty and sixty being the idea. So. If and when -- -- public which respected well you know all the people who -- in and through the secondary market get there exit. Companies public and and you know I I think the two -- -- exist some companies will choose one routes and committees coaches and other. And again -- to the point that it's gonna affect the way companies are started and planned and funded in out of strategically. It's gonna affect them in ways we don't know yet. A group on is a great example -- a company just raised. Close to -- billion dollars which is phenomenal sum for -- yen to three year old company. Do when of these secondary markets and then into a New York Times reported that the companies also considering an IQ it's a why -- -- raising my all the designing you know right now and then they're gonna go public you know 236 months from now. And so -- There's a lot of financial engineering calculations going on that we don't -- -- -- -- -- Now some people have written that what's happening with this some people being on the transit daily has written that this. Kind of and not fully disclosed. Private placement is a financial catastrophe on the order of the credit default swap issue because of the lack of disclosure and the way it's gonna be -- -- in you know. -- -- You know investor. It is that the private market going doesn't have the risk of inflating things or you think -- this is it my and that's -- -- editorial opinion you think there's enough. Intelligence. Behind the people are putting money into these vehicles that we're going to avoid any form of you know -- inflation. Well it's quite possible that these these markets could help create a -- -- but. They are limited in size and so by definition. Not as many people could get -- in the bubble in -- dot com bubble of 1990000. You know. Every -- yeah every investor was playing Keno roulette with a but they're shares in an indie startups L or if they -- -- -- doing it themselves they were doing them through the mutual funds they were investing. These markets have. Very very limited you know it's either very rich sophisticated investors like. -- Digital Sky Technologies which owns you know invested hundreds of millions in to FaceBook. Or these Goldman Sachs private clients who have 93 million dollars to -- on FaceBook shares its not gonna be a bubble that affects millions of the. While the other potential. Impact of this is that. This. Trend takes the height and the bubble valuations and the well my means -- value but the wealth that's being generated. And cuts -- out of the public now granted the public has takes a risk when they invest in an Internet company but there's also the potential that they're gonna get really rich. Does this slice the public out of the hype cycle and the potential to actually make get rich and reserve the richest just for people are -- rich. Yet to some extent -- that's area in the old days you would have. You know. Companies. That are private their shares would be value to 3510 bucks a share many go public and it's -- the hundred dollars and if you manage to buy before the IP OU could make it Kelly. Now you -- -- are ready valued at fifty billion yes. If you where to go public tomorrow next year how much would -- be valued at. It's hard to see anybody who buys that BIP let's say let's say you bought into -- Did you double your money I mean it seems crazy that FaceBook would be where it. A hundred -- but -- -- about this the day after Google went public. After it trade it for a full day it was worth 27 billion so half of what FaceBook is worth today. So it completely changes that that this sort of that big pop that you are getting in the IPO on. Good companies not everybody does well the IPO but that's the really -- companies -- to do really well now some of that. Is is you can't pop that much if it's already worth fifty billion. And you know and I haven't asked you and I'm not going to ask you if you think FaceBook is worth it because -- you know who knows but what do you think is going to happen in the next. They said they're now listening they're probably gonna the public people projecting the current -- -- local public and but I don't 2012 what you think the next twelve months looks like FaceBook and and then for other companies that might be in -- -- 25% you talked about. Well I think FaceBook was gonna continue growing I think it reached something like 600 million. He slump in like one in twelve people on the planet -- on FaceBook it. It's pretty unique I mean it's a remarkable. And I think the company is gonna continue tripping out on issues. Privacy which have -- the company hadn't stopped the growth but it's certainly raised a lot of questions. And you know we'll see we'll see how -- play out. The other companies there's going to be a handful of really successful Silicon Valley companies they're making a lot of money. Some will go straight to the IPO. Some will we'll go through the secondary markets and eventually I think they'll have to go public that at their trajectory from birth to IP OS has been altered. It seems wherever. Leo health thank you very much for the time and talking to a your perspective on the FaceBook private offering. Again those -- go health from the New York Times he can follow him on Twitter what's your ID. And health and read his stories on the times they are insightful and fascinating I'll put some links -- to the show notes on. Reporters' roundtable dot cnet.com you can follow me on Twitter -- FE. And send an email to the roundtable roundtable at cnet.com we'll be back next week. Probably talking it's about something to do with Verizon but I'm not completely sure you have to find some good -- for that. Again thank you thank you they need -- thanks for producing. And -- -- -- all next week by everyone.