Why didn't Facebook just go public?

Facebook secured $US240m of cash from Microsoft last week. And it may collect twice as much again from other investors, including hedge funds or private equity firms. A fund-raising of this size is typically done through the capital markets, not a venture capital round. Which raises a question – why didn't the hot social network just go public?

The answer cuts to the heart of Facebook's stunning success at attracting new users. Facebook has led the charge in cultivating third-party software developers. These are the folks – ranging from sophomores at Stanford working out of their dorm rooms to venture capital-funded startups with foosball tables in their lobbies – that are creating the funky applications that make Facebook such a sticky website.

There are now some 6,600 of these applications – most of them viral communication devices of one form or another – and Facebook users have downloaded them nearly 100m times. But here's the conundrum: Facebook has little, if any, control over these third-party platforms. This is no simple matter. It creates the risk that as they become more important to the website, Facebook loses the ability to chart its own destiny.

Think of it. If an application becomes wildly popular, what's to stop its developers from, say, moving to MySpace or selling out to Yahoo? Indeed, Google is now actively recruiting Facebook developers to move to Orkut, its own social network. Google already has a host of applications that it uses to drive traffic – such as Gmail, Google Maps and YouTube. But, rather differently from Facebook, it owns or developed all of them itself.

Conversely, what if an application, such as Top Friends which already boasts 3 million users who can rate their friends on the website, succeeds in generating traffic but fails to make its developers a penny? What's to stop the application's founder from folding up her creation and taking a barista job at the local Starbucks?

The obvious way to mitigate the risk is for Facebook to take an equity stake in promising developers, or buy them outright. The need to do this, more than anything, explains the firm's requirement of a huge slug of equity capital from Microsoft and others. An IPO might have raised more. But without a clear roadmap for handling its burgeoning third-party developers, Facebook isn't ready for the klieg lights of public ownership.