Zuckerberg's uphill IPO battle

Facebook founder Mark Zuckerberg faces a challenge in balancing making money with keeping users happy, but he's determined to let investors know he's after more than just profits.

SmartCompany

Does Facebook founder Mark Zuckerberg really want to float his baby?

Reading his letter to investors in the Facebook prospectus, which was released this morning, you get the distinct impression that taking the business public is really the last thing that he would like to do, given the choice.

Here are the first couple of lines:

"Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected.

"We think it’s important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do.”

The letter is a fascinating document (the letter does read as though it was actually written by Zuckerberg, not some PR person) that could be taken as almost a warning to investors – this is the way we run this business and we don’t want to change.

Zuckerberg’s focus in the letter is on the social service he says Facebook is providing. He talks repeatedly of the "connections” the platform has created, the importance of sharing, the desire of Facebook to create a more open and transparent society and the ability to help users "transform many of our core institutions and industries” such as governments and businesses.

"There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future.”

He also spends a number of paragraphs outlining what Facebook calls "The Hacker Way” – a phrase likely to send a few chills up the spines of investors.

But Zuckerberg defends his position.

"The word ‘hacker’ has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world.

"The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo.”

Just one short section of the letter includes the words "money” and profit”.

"Simply put: we don’t build services to make money; we make money to build better services,” Zuckerberg writes.

"And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximising profits.”

You can almost hear investors around the world shaking their heads. You can have your nice motherhood statements Mark, but we need you to live up to this $100 billion valuation we’re about to place on your company.

But strip back the ideas of a "social mission” and a "hacker” culture and you expose a culture that is not unlike that of Apple, which prided itself on speed to market; a willingness to launch a product and then release updated, improved versions; and the power of innovation.

Here are a few of those key attributes illustrated with what Zuckerberg says are mottos used around the business:

- "Done is better than perfect...Hackers try to build the best services over the long term by quickly releasing and learning from smaller iterations rather than trying to get everything right all at once. To support this, we have built a testing framework that at any given time can try out thousands of versions of Facebook.”

- "Code wins arguments... Hackers believe that the best idea and implementation should always win — not the person who is best at lobbying for an idea or the person who manages the most people.”

- "Move fast and break things...Moving fast enables us to build more things and learn faster. However, as most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly.”

- "The riskiest thing is to take no risks...We encourage everyone to make bold decisions, even if that means being wrong some of the time.”

This culture might have helped build Facebook’s user base to 845 million and create what Zuckberg claims is 100 billion "connections”, but it has also helped build an impressive business which has increased profit from $229 million to $1 billion in the past three years – at a profit margin of 27 per cent.

But while the growth rates are phenomenal, Zuckerberg has to know that bringing in $5 billion worth of new investors will only increase the pressure on the business to monetise its user base.

There are plenty of ways to do this, including improving its advertising offerings, growing into new regions and moving into mobile ads (its mobile platform currently doesn’t contain any).

The "hacker” culture Zuckerberg has built, with its emphasis on innovation and speed, should serve Facebook well as it chases more revenue opportunities.

But getting that balance right between making money and pleasing users will not be an easy one to negotiate.

Zuckerberg says Facebook doesn’t "build services to make money; we make money to build better services.” But will investors agree that this is the way the company should be run?

This article first appeared on SmartCompany on February 2. Republished with permission.