The Facebook IPO sure has fuelled a lot of 1990’s style animal spirits among the investing community. The huge size ($100 Billion? Really?) and enormous interest in the social networking company has contributed to the belief that Facebook’s IPO will bring about rebounding growth in Silicon Valley. The money raised will presumably be reinvested in other start-ups and technology companies. People who benefit from owning shares in a company that has had a major exit event will now have funds to spend on other endeavors, some of which might involve investing in or founding other companies. The usual Silicon Valley career track is for people to gain entrepreneurial experience with one venture firm first before starting or joining another (although some – Zuckerberg, Gates, Jobs – go directly to founding, often without stopping to collect a diploma along the way). One multiplier effect is that growth in Silicon Valley can stimulate the sluggish American economy by increasing productivity; enhancing confidence; putting cash into people’s pockets and innovating new products and services that people all over the world will want to buy. Having a few sectors of the economy show great health is helpful to the rest.
In the midst of all this enthusiasm, it’s also important to remember that IPO markets are famously cyclical. Until recently, pundits were mourning the death of a vigorous IPO market (often blaming Sarbanes-Oxley). Observers suggested that a weak IPO market discouraged people from starting up regular entrepreneurial firms and VC’s from funding them since the route to a profitable exit was not clear. During the slow IPO market of the late 2000’s many VC’s folded their funds and left the industry, further constraining the ability of small businesses to get the funds necessary to grow.
It’s obviously difficult to come to an exact estimate of the impact of a given IPO, but the visibility of Facebook makes it a bellwether worth following. If the company manages the transition to public ownership with grace and continues to grow and develop, this will be highly encouraging to other firms. If it stumbles, expect a lot of “I told you so” from the chattering classes. Me, I’m a little skeptical of the business model underlying the sky-high valuation. But more on that to come.