When the dust settles on Facebook's first weeks and months as a public company, what emerges will serve as a referendum both on how web companies approach IPOs and to what extent Wall Street methodologies can keep up with the fast-changing tech world.
There is little doubt that Facebook's impact as a public company will be profound. Former Facebook executive David Morin had it right when he said that Facebook “sets the tone for long-term, product-driven Internet companies.”
However, the recent track record suggests a disconnect between Silicon Valley and Wall Street. Of the 31 Internet IPOs held since the start of 2011 leading up to Facebook's debut, 22 are trading below their closing price on the day they went public, and 16 of those are trading below their offer price, according to numbers crunched by CNN.
If Facebook's sluggish showing in its first day of trading — bucking expectations of a pop to close at $US38.37, or 0.97 per cent above its IPO price — continues there will be more questions asked about the road ahead for tech companies on Wall Street.
The 31 Internet IPOs jumped an average of 34 per cent on their first day of trading, far outperforming Facebook's first day, but nearly all have since come back down to earth, trading an average of eight per cent above their offer prices. That figure drops to only two per cent if you subtract LinkedIn and Zillow.
What Facebook can hope is that by not popping on its first trading day it can find a sustainable and stable footing on the Nasdaq and avoid the volatility that has hit so many other new tech shares.
Among the weights dragging on the shares of newly-public tech companies are unreasonable expectations and lingering suspicions that tech companies — especially those with social networking in their DNA — could wither by not keeping pace with new entrants, evolving technology and a fickle audience that thinks little of brand loyalty.
Facebook sought to skirt many of those doubts by putting off its IPO as long as possible. Doing so gave it time to build its user base and business model, making it a much more mature IPO than other recent tech companies. Facebook went public with a deeper track record, but also amid questions about its growth potential.
If over the long-term Facebook proves itself to be a success for both users and investors, one of the legacies of Facebook's IPO could be a lengthening of time between founding a tech start-up and going public. Following that model would not only give companies a stronger foundation on which to survive the intense scrutiny of going public, but also allow Wall Street to better assess tech IPOs on proven, rather than potential, business models.
It took Google in 2004 to prove that an online company with a disruptive idea could turn a healthy profit and thrive as a publicly-traded company. Now Facebook has been saddled with the task of doing the same for social networking companies.
Facebook will be in a race to prove it can withstand that scrutiny. And it truly will be a race, as the magnifying glass Facebook will be under makes any effort at subtle, long-term business model transitions a daunting task.
But not all the responsibility falls on Facebook and its Silicon Valley colleagues. Facebook will either chart a new, sustainable course for tech companies also eying an IPO or, under intense scrutiny, force Wall Street to re-examine what went wrong with the largest-ever tech IPO.
The steep valuations and wild fluctuations of tech companies who are still working to build sustainable, profitable business models and revenue streams suggests the need for a rethink by Wall Street on how tech IPOs are assessed.
One of the key developments to watch will be how Facebook diversifies away from display ads, beginning with games. Facebook's primary partner is social media games-maker Zynga, which had its own IPO in December when it debuted at $US10 a share.
The company behind games such as “FarmVille”, “CityVille” and “Words With Friends” is crucial, representing 15 per cent of Facebook's revenues in Q1 2012.
But Facebook's debut didn't help Zynga, whose shares fell 13.42 per cent to close at a new low of $US7.16 on Friday.
The decline of display advertising — Facebook's bread and butter — and increasing use of mobile devices that leave little room for ads that are equally unobtrusive and effective are bringing mobile gaming revenues into sharper focus for Facebook.
But Facebook will have to move fast. Traffic on its core game offerings has declined and already Zynga is putting distance between itself and Facebook, having spent $US45.5 million on 15 acquisitions last year that diversify its offerings from Facebook. Zynga's games are now accessible through the company's website, further reducing its dependence on Facebook's platform.
For all we know, the core of Facebook's future business model may yet not even exist. Looking at the need to diversify away from display ads and to somehow monetise Facebook access on mobile devices suggests that the revenue stream that will ultimately determine whether or not Facebook is worth much more than $US104 billion, or much, much less, hasn't yet seen the light of day.