Facebook IPO: Stop Leaving Money on the Table

Facebook isn't as successful as you think. And, investors will find this out soon enough. Let's take a look at how Facebook can fix its financials.

Facebook is running out of time to get its act together. The company is expected to file for its IPO by April 2012, which would mean a likely celebratory opening bell the following September (give or take). Once the company reveals its financials to the investing public, I suspect, it will have a lot of explaining to do. How will it answerthe tough questions will mean the difference between an IPO that looks like Google’s and one that looks like Groupon’s.

And, make no mistake about it: Facebook’s IPO could turn ugly.

The fundamental problem at Facebook – admittedly an impressive company that quickly grew to more than $4 billion in revenue (forecasted for 2011) – is that it isn’t making money in enough ways. It does have its Facebook Credits business (which is becoming known by some variation of “Zynga tax”), which Facebook COO Sheryl Sandberg said at the Business Insider IGNITION conference is “a nice, growing business for us.” Nonetheless, Facebook is an advertising platform first: that’s where it pulls in more than 80 percent of its revenue.

Now, for a company that’s making a big bet on advertising (alas, Sandberg says the company’s strategy is to make “big, bold bets”), it has really painted itself into a corner. The only ways to advertise on Facebook right now – and have to pay for it – are to run a sponsored story or use Facebook ads. If you want to have an impressive Facebook presence, on the other hand, you wind up paying someone else (like Buddy Media). Facebook is leaving a lot of money on the table, particularly when you ruminate on the fact that there are 9 million company Facebook pages and 2.3 million paying advertising clients.

Simply put, Facebook has failed where Twitter has succeeded.

Twitter’s developer community is perpetually furious, because Twitter develops competing products that marginalize them almost immediately. The warning shots fired at the Chirp conference in 2009 truly indicated what was to come. Twitter’s features and revenue streams are its own, whether through competition or acquisition (another area where Facebook falls short).

Meanwhile, Facebook allows the complementary companies – which should actually be seen as competitors – to exist, even to thrive, via the Facebook platform. Sure, there’s the Zynga tax, but that falls far short of the revenue streams Facebook could be developing. These are businesses Facebook should own, and use the reach of its own platform to grow aggressively.

If Facebook is going to survive as a public company, starting next year, it is going to have to find new ways to generate revenue (particularly given the weakness of its advertising product). This means not only developing more flexibility for marketers but also identifying the businesses in the Facebook ecosystem that it should be treating as competitors and either acquiring them or launching competing businesses (though the former would probably be smarter).

My opinion/guess is that Facebook’s financials, today, are not sufficient to justify the $100 billion valuation the company is said to be using for its IPO plans. This may not be a problem, as long as Facebook has a way to show potential investors that it can grow into a $100 billion valuation. So far, it just doesn’t seem that way.