Today, headlines are revealing the departure of Facebook CFO Gideon Yu, a previous top executive at both Yahoo and YouTube. This isn't the first time Facebook has seen top leadership moves. The entire company has been shifting for the past two years, including the exit of a few early Facebook co-founders. What does this all mean? Well, perhaps an upcoming IPO.
As suggested by the WSJ, Facebook may be looking to replace Yu with a CFO from an existing public company, one who may have experience with investment banks and tech IPOs. Facebook has been finding it difficult to raise additional cash at high valuations, most likely due to the current economic environment but perhaps also because of the company's extremely high valuation.
Overvalued? Microsoft really set the bar in 2007 when the software giant invested $250 million in the firm for any equity stake of only 1.6%, thus giving the company a $15 billion valuation. Most IPOs eventually drop from their issuance price after a period of stock price appreciation. For Facebook, the potential pull back in price may be fast and furious if the company seeks unrealistic valuations.
To make sense of this "IPO pull back effect" theory, take a look at J.Crew (JCG). Since it's initial offering in 2006 at $20 per share, the company has enjoyed a brief climb in price and subsequent drop well before the market crash in Q3 and Q4 2008. (During the time of the pull back in summer 2007, the DJIA was continuing to grow.)
Classic entrpreneurship lessons also teach us that firms flushed with VC cash sometimes avoid practicing good fiscal management. Amar Bhide of the HBR article Bootstrap Finance: The Art of Start-ups says firms that keep their growth prospects in-check are less likely to fail: "Start-ups that failed because they could not fund their growth are legion. Successful bootstrappers take special care to expand only at the rate they can afford and control."
This is especially true for Facebook. Can Facebook become the $15 billion dollar behemoth some investors claim it is? Previous attempts at introducing business models -- like Facebook Beacon -- have stirred controversy among the site's constituents. Therefore, has the company ironed out all the details of it's growth strategy? Startups with little cash usually focus hard on getting it right the first time considering the high costs of failure. For Facebook, the company has had a lot of breathing room to experiment and try out various business models.
But, despite this flexibility, Amar Bhide makes an excellent point: "Success, especially in new and growing industries, follows many detours and unanticipated setbacks; strategies may have to be altered radically as events unfold. Failure to meet initial goals is a poor guide to future prospects."
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