Facebook IPO? Insights from the Social Network Movie

Going out with you is like dating a Stairmaster. You’re going to be successful and rich. But you’re going to go through life believing that girls don’t like you because you’re a nerd, and I want you to know from the bottom of my heart that that’s not true. It’ll be because you’re an asshole.

— Mark Zuckerberg’s (former) girlfriend, The Social Network

The Social Network is a wonderfully fast-paced and well-written film about the founding of Facebook by Harvard dropout Mark Zuckerberg. Zuckerberg founded the website while a sophomore at Harvard in 2004 and within less than seven years the social networking website has 550 million users and is worth at least $26 billion.

Upcoming Facebook IPO?

The development of Facebook – one of the fastest growing companies of all time — is one of the great business stories of all time, just as iconic of the American dream as the development of Microsoft (NasdaqGS: MSFT), eBay (NasdaqGS: EBAY), or Google (NasdaqGS: GOOG). The difference is that Facebook’s development is happening right now; you, I and everyone else are living it in real time. The company hasn’t even gone public yet, and Zuckerberg has cryptically said an IPO won’t happen until “it makes sense,” but I am sure that when it does it will be huge. The likely timeframe for a Facebook IPO is either 2012 or 2013.

Is the Social Network Fact or Fiction?

I don’t know how much of the movie is fact and how much is fiction (other than his Boston University girlfriend in the opening scene isn’t real but a composite based on several past failed relationships). It is based on the book “The Accidental Billionaires” by Ben Mezrich, who got most of his information from Zuckerberg’s bitter co-founder, Eduardo Saverin, who sued Zuckerberg. Nevertheless, screenwriter Aaron Sorkin (of “A Few Good Men” and “West Wing” fame), who adapted Mezrich’s book for the silver screen, says that the movie is “absolutely non-fiction” but also says that:

I don’t want my fidelity to be to the truth; I want it to be to storytelling. What is the big deal about accuracy purely for accuracy’s sake, and can we not have the true be the enemy of the good?

Zuckerberg says the movie is mostly fiction, whereas the Winklevoss brothers – Harvard classmates and Olympic rowers who sued Zuckerberg for allegedly stealing their idea and who settled in 2008 for $65 million – say the movie is accurate. 

Regardless of its accuracy, I found the movie to be chock full of lessons on entrepreneurship and what it takes to build a great business:

1. A Passion to Create

Sorkin’s Zuckerberg may be a narcissistic, anti-social nerd (the movie trailer uses a cover of the song “Creep” by Radiohead), but he also comes across as a genius computer programmer who wants to create “something cool.” He is not motivated by money. 

When recruited by the Winklevoss brothers to work on their social network website called Harvard Connection, Zuckerberg told them about an mp3 player he created in high school called Synapse that uses artificial intelligence to learn and characterize the musical tastes of the person using it. They asked him if anyone offered to buy it from him. Zuckerberg answered yes, that Microsoft had offered but that he turned it down, deciding to upload it to the web for free.

Later in the movie when Facebook had reached 4,000 users, Harvard classmate and Facebook co-founder Eduardo Saverin argued that it was time to monetize the website by selling advertising on it. Zuckerberg disagreed, saying:

Facebook is cool. If we start installing pop-ups for Mountain Dew it’s not gonna be cool. We don’t even know what Facebook is yet. We don’t know what it is, what it can be, what it will be. All we know is that it’s cool; that’s a priceless asset and we’re not giving it up.

Eduardo responds: “Unless you’re the Ballet Theater of Hartford, the purpose of a business is to make a profit.” Mark replies: “This isn’t a business.”

2. Successful Entrepreneurs Are Not Those Who Think Up Ideas, But Those Who Perfect Them and Execute Best

The movie clearly shows that Zuckerberg got the idea for Facebook after listening to the Winklevoss twins discuss their social networking site called Harvard Connection. But Zuckerberg argues persuasively in the movie that whereas specific work product should be patentable, a basic idea should not be. Competitors should be given the freedom to see who can best turn an idea into a marketable product:

Facebook is cool and popular and sexy while Harvard Connection is lame. I didn’t use any of their code. I didn’t use anything of theirs. A guy who builds a really nice chair doesn’t owe money to everyone who’s ever built a chair. They came to me with an idea; I had a better one.

My attention is back at the offices of Facebook where my employees and I are doing things that no one in this room, including and especially [the Winklevosses] are intellectually or creatively capable of doing.

Although Zuckerberg ended up paying off the Winklevosses to end their litigation, I don’t think he was legally obligated to. Idle dorm room chit-chat is not a binding contract and social networking was not a new idea. MySpace had launched in August 2003 and Friendster had been around since March 2002, long before the Winklevosses ever thought of Harvard Connection. And Yahoo! (NasdaqGS: YHOO) started its Yahoo360 and Mash social networking sites after Facebook. Despite these competitors both past and future, Facebook came out on top. The popularity and innovation of Facebook wasn’t the idea of social networking, but the execution and development of the idea. Facebook simply was the best mousetrap.

Was the real Zuckerberg “backstabbing, conniving, and insensitive” as a New Yorker article describes him? Sure. Two instant messages retrieved from his computer are not flattering. In one he tells a friend how he plans on handling the Winklevosses: “I’m going to f**k them.”  In another, he offers to provide a friend with personal information on any Harvard student registered on Facebook, calling them “dumb f**cks” for trusting him with their privacy. Furthermore, the title he chose for his Facebook business card was “I’m CEO . . . Bitch.”

Being a jerk isn’t illegal. In fact, it often is the mark of a great CEO.

3. Think Big

On a business trip to New York City, Saverin and Zuckerberg set up a restaurant meeting with Sean Parker, the 20-something founder of both Napster, the music sharing website that was sued by record companies and forced into bankruptcy, and Plaxo, an online rolodex business that venture capitalists took control of and then forced him out. In other words, Parker was a creative genius but not good at managing operating businesses once they were off the ground.

Up to this point in the movie, Zuckerberg had not smiled once, but he suddenly his face lit up in a huge smile once Parker started talking. Zuckerberg appreciated brilliance and knew it when he saw it. Parker and Zuckerberg were entrepreneurial soulmates, similar to technology visionary Jim Clark as portrayed in Michael Lewis’ book The New New Thing. Zuckerberg was mesmerized by Parker’s vision of Facebook’s future:

You don’t even know what Facebook is yet. How big it can get and how far it can go. Picture sharing, news feeds, a virtual champagne room, apps you haven’t even thought of. This is no time to take your chips down. A million dollars isn’t cool. You know what is cool? A billion dollars. And that’s where you’re headed unless you take bad advice in which case you might as well have come up with a chain of very successful dry cleaners.

When you go fishing you can catch a lot of fish or you can catch a big fish. You ever walk into a guy’s den and see a picture of fourteen trout? No, he’s holding an 800-pound marlin and that’s what you want.

Later, at a San Francisco night club, Parker tells Zuckerberg the story of the founder of Victoria’s Secret who sold the company to Limited Brands (NYSE: LTD) for $4 million only to regret it two years later when the company was valued at $500 million. According to Parker, the founder was so distraught at selling too early that he jumped to his death off the Golden Gate Bridge. The lesson for Zuckerberg: be patient and you’ll maximize the value of the business.   

Zuckerberg took Parker’s advice. When former Yahoo! CEO Terry Semel offered to buy Facebook for a cool $1 billion in 2006, Mark turned him down saying “It’s not about the price. This is my baby and I want to keep running it, I want to keep growing it.” Semel was shocked, stating later in an interview:

I’d never met anyone – forget his age, 22 then or 26 now – I’d never met anyone who would walk away from $1 billon. I couldn’t believe it.

Believe it. As I mentioned earlier, Facebook is now worth 26 times what Semel offered to pay.

4. Be Ruthless if Necessary to Save the Business

Co-founder Eduardo Saverin may have been CFO of Facebook, but he wasn’t a real entrepreneur and didn’t have Zuckerberg’s passion or vision. In fact, his only real contribution to the company was putting up the $19,000 to buy the computer servers needed to get the website running.  When Mark left Harvard to focus on Facebook in California after his sophomore year, Saverin refused to follow, staying in New York for a summer internship with the investment bank Lehman Brothers. 

Not only did Saverin do nothing to advance Facebook while in New York, he actually exploited the company for his own personal gain, posting unauthorized ads on Facebook for a job boards site called Joboozle that he owned exclusively. According to the movie, Saverin also froze the corporate account Facebook was using for funding in retaliation for Sean Parker’s increasing role. This was too much for Zuckerberg, who appointed Sean Parker president and turned to Parker’s VC contacts for funding. Once he obtained $500,000 in funding from venture capitalist Peter Thiel, he decided to oust Saverin from the company by diluting his stake from 30% to 0.3%. Don’t feel bad for Saverin; he sued and now has Facebook stock worth more than $1 billion.

Zuckerberg showed the same ruthlessness with Sean Parker, ousting him from the company at the behest of his VC partners after Sean was arrested for cocaine possession.

The point of these two ousters is that Zuckerberg did what was necessary to move Facebook forward and didn’t let sentimentality for a former Harvard classmate or admiration for an Internet pioneer ruin his vision.

How Big Will Be the Facebook IPO?

The Facebook IPO hasn’t happened yet, but I’m betting it will be as big as or bigger than Google’s, which came public in August 2004. Even though Facebook is a free site, it makes A LOT of money on advertising. It turns out that advertisers love Facebook because it allows them to target advertisements to members based on which Facebook pages they are “fans” of and which subjects they choose to post on their wall. According to Reuters, Facebook made $800 million in 2009 and is expected to rake in $1.4 billion this year. It is poised to make even more money in years to come as it invades Google’s turf by expanding into search.

In the first year after going public, Google’s stock price more than tripled from $85 to $280. Within a little more than three years it hit a high price of $747, a more than 770% gain!

I’m sure that Elliott Gue and Yiannis Mostrous, co-advisors of the short-term trading service Stocks on the Run, will be all over the Facebook IPO when it comes out. Just like Mark Zuckerberg, they have a passion in life: making huge profits for subscribers.


P.S. By the way, Zuckerberg has his own Facebook page, but unlike all other members he doesn’t allow you to make a friendship request (not that I’d want to).