Facebook: Zuckerberg's Success

Facebook: Zuckerberg's flight to stardom at 28

Published on Sat, May 19, 2012 at 13:21 |  Source : CNBC-TV18

Updated at Sat, May 19, 2012 at 13:58  

Facebook, the world's largest social network goes down in history for pulling off the world's largest IPO ever with 421 million shares on offer. Now while its valuation has caused shock enough, it would be shortsighted to measure the Facebook phenomenon nearly through the prism of the market reaction. Mark Zuckerberg seems to have truly understood the idea that no man is an island.

Facebook is a cross generational story that feeds on our inbuilt needs to connect, communicate and share. While there are questions on the sustainability of revenue streams, data of privacy management style etc. you can't help, but drop your hat to the vision, ingenuity and dogged persistence of a 28 year old who have created a company more valuable than the iconic Disney, Ford and even Boeing.

At 28 Mark Zuckerberg is amongst the world's richest people and he has already made the Time magazines list of most influential four times over. Zuckerberg's meteoric rise, the success has been well-documented and his story has even made billions at the box office. He has earned the respect of corporate leaders like the iconic Steve Jobs who said "I admire Mark Zuckerberg for not selling out, for wanting to make a company. I admire that a lot." But, while he has been heaped with a generous amount of praise, his critics have been scathing.

Divya Narendra, Founder & CEO of SumZero who had filed a court case against Facebook in 2008 says, "He has really shocked us. One day we wake up and read the school newspaper, there is a description of this website that sounds eerily like Harvard Connection, except it is called Facebook. About 8,000 Harvard students has signed on Facebook within the first 10 days of its launching. That was the entire college undergraduate and then a significant chunk of a graduate community. Our whole plan was to get Harvard on board and then to expand to other schools."

"But, because none of us were programmed, it took us three or four months to get connected and go up and running. By then, literally every school in the Ivy League had been on this. Mark had got funding to the tune of USD 0.5 million from Peter Theil, he had expanded it to many other colleges. When you are talking about a website where network effects are so important. First, it is really crucial. A big basis for why we really pursued them in court was that it was a key component of our strategy, the strategy of being the first at Harvard and then to expand through the Ivy Leagues," explained Narendra. 

And expand it did, far beyond America's Ivy League network. Today, with over 900 million users Zuckerberg is laughing all the way to the bank and is reaping the rewards for his patience and persistence. After all, not many 22 year olds would have had the courage or the audacity to decline a billion dollar offer! But, that's exactly what Zuckerberg did to Yahoo in 2006.

Ashish Kashyap, CEO, Ibibo Group is of the view, "The company had many opportunities to sell out and the nice thing about the company and it's founder was that they stuck to their guns and they held on. As a result, today we see it becoming such a valuable company. Last, but not the least, everything is about the customers. Facebook was not the first in the social networking party, there were many companies. One thing that they did right was that they lived very close to the customers to create a service which was far superior. It was a superior execution."

Super execution is what the Facebook team will have to deliver to justify the jaw dropping valuations. Already questions are being raised about the sustainability of advertising revenues, Facebook's lifeline. It didn't help the General Motors, one of the largest advertisers in the US. It pulled out its paid for advertising on Facebook just days before the IPO. GM claims that paid ads had little impact on consumers.

Hitesh Oberoi, Co-founder and CEO, Info Edge India said, "The stock is a little expensive, not because of any other reason but because Facebook is yet to figure out the monetization piece totally. They haven't got it bang on like Google as yet. There is a lot of work which still needs to be done on their side. While the users are very happy with Facebook, advertisers are still not very clear on how to use the media. The valuations look a little expensive but I am sure they will figure it out with time."

Facebook will also need to figure out how to sustain the whopping 88% revenue growth it had in 2011 in the face of competition.

Just like individuals, companies can setup pages to communicate with fans for free and Facebook can make money here as well. Take the 41 million plus fans who like Coca Cola. Coke can pay Facebook to make sure that fans see its messages and updates. Even more valuable to a brand is reaching friends of fans. In Coke’s case, that's hundreds of millions of people. Facebook leverages the information its users shares to deliver ads with social context, extending brands reach in a personalized way to hundreds of millions of new eyeballs.

In case of many games like Zynga's Farmville, users can play for free but, there is big money here too. Players can buy virtual goods with Facebook credits which cost real money. So from that respect, 30%.

On a limited edition Farmville haunted house that runs USD 7, Facebook's take - USD 2.10. With tonnes of virtual stuff sold everyday, it adds up fast. In 2011, virtual goods and ads from Zynga alone generated USD 445 million in revenue for Facebook.

But what does the Facebook IPO mean for Indian internet companies which have seen private equity interest but have so far stayed away from the markets.

Darius Pandole, Partner, New Silk Route Advisors points out, "As some of the leading Indian internet companies scale up and become profitable, we will see them coming into the IPO markets. The Indian markets typically prefer to value companies based on cash flow or based on asset value as opposed to the future potential of a business model. Hence, some of these will need to demonstrate that increase in revenue on profitability before they can come and do a successful IPO."

While India will have to wait for its Facebook moment, for Zuckerberg and team - the sun is shining. His net worth skyrockets to USD 20 billion, his team walks away with tiny sums as to the 33 underwriters for the IPO led by Morgan Stanley, JPMorgan and Goldman Sachs. Now, what Zuckerberg does with the cash will be the next big debate.

Zuckerberg could eventually make a run at that other social network - Twitter.

"They have got so much money already with just the cash that they are throwing off from operations; they don't actually need the money that they are going to raise in this IPO," believes Rocky Agrawal, Independent Analyst.

In Mark Zuckerberg's words: "There is a huge need and huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future."