Companies go public for three reasons: 1) to raise capital for various corporate purposes like acquisitions and paying down debt; 2) to secure the wealth of founders, giving their kids something to fight over, and; 3) because they have over 500 investors, secondary trading of shares is picking up and if they don’t go public under a process they control the SEC will force them to go public in a less-profitable event.  Facebook in its prospectus says reason one — the most cited reason by far for companies going public — does not apply to them. They don’t really need the money and plan to park it in T-bills, which if you think about it can only drag Facebook earnings down given current low interest rates.

Give us your money and we’ll do nothing with it.  Not only that, we’ll also use your money to hurt the value of your shares.

To be fair, sometimes companies go public just because they can. Remember the dot-com bubble?  In that period of irrational exuberance companies went public and their shares soared for awhile without regard to profitability or even having a real business model. So sometimes you take the money because it is obviously stupid money and if you don’t take it now you may never get another chance (yes, I’m talking about you, Webvan).

But that’s certainly not the case with Facebook, which is profitable and growing, has no debt, and has $3.5 billion already earning next to nothing in the bank.

Reason two for having an IPO — to secure the wealth of founders and early investors — is the reason Facebook gave for going public and that makes sense. After eight years of hard work everyone involved would like a liquidity event so they can buy a new house and car. There’s nothing wrong with this motivation except, given the lack of actual need for capital, it shows a misalignment of interests between Facebook management and new Facebook investors.  We are actually investing in their Ferraris.

Now maybe Facebook is the IPO of the century and none of this matters, but as a narrative for big institutional investors it’s a little shaky, especially when you see that after the IPO Facebook CEO Mark Zuckerberg, who is younger than the IBM PC, will still control 57 percent of Facebook’s voting shares, in effect placing total voting and managerial control of a major public company in a single executive.  This is unprecedented for a company at this scale; even Bill Gates only owns 20-odd percent of Microsoft and had to answer to investors when he was CEO.

So this isn’t just the Facebook IPO, it is the Zuckerberg IPO.

Something similar to this happened back in 1988 when Dell Computer went public. Michael Dell was the Mark Zuckerberg of his era. At 24, Dell was even younger than Zuckerberg is today. Dell was smart and he was full of himself — but not so full that he thought he could carry the company offering on his shoulders alone.  With the encouragement of his investors and board, Dell hired some seasoned managers to help him take the company public, then later fired them all and went back to running the company as he saw fit.

Mark Zuckerberg wants to do the same thing that Michael Dell did, just minus the pro forma hiring and firing of suits.

It’s going to be a slog for Zuckerberg. For the next 2-3 months he’ll have to be everywhere, kissing ass while not appearing to be kissing ass, answering tons of boneheaded questions from people he doesn’t respect — people who will be primarily questioning his vision and fitness to lead.

Zuckerberg is going to hate this process and might explode as a result. He’s going to be under a journalistic microscope, too, and some bad information about him may come forth (I don’t have any, by the way, but powerful people often have powerful enemies). Throw in some bad business news for Facebook or some good news for Google and a $100 billion IPO starts to look pretty iffy.  There are lots of ways this process could fall apart.

What’s a geek to do?

Well just as there are three reasons for companies to go public there are also three ways to do it. The normal way is to follow the traditional path Facebook and Zuckerberg have embarked on now — hire investment bankers, do a road show, pay $500 million in fees, go public. That’s how Dell did it in 1988, though that company raised only $30 million, not $5 billion, so the fees were significantly lower.

The second way to go public is to do nothing at all yet have more than 500 investors and a brisk secondary trading market in private company shares.  In that case the SEC will do the IPO for you for free (well, they’ll fine you too, but not much) which sounds good in a way but must be bad because nobody ever does it.  Name a company that went public in this manner?  I can’t.

The third way to go public is by buying or merging with a company that is already public. This is viewed on Wall Street as the chickenshit method because it generates nowhere near as much in fees to investment bankers who, after all, are the cowboys driving this herd. To be fair, most of the time when companies back into going public it is because of weakness.  Certainly the public company they are buying is weak, often valueless.  The decision to use this method is often based on being unable to find an underwriter to go public by the usual route and not having the capital to wait for better times. Again, it’s hard to find a really big company that has done it this way, though little companies do this all the time.

But that’s exactly why I feel Facebook will abandon its present IPO course and instead buy a public company.

No road show for one thing.  Zuckerberg’s agony ends. The idea that acquiring a weak public company would drag down Facebook shares is ridiculous because Facebook is so big and available public shells are so small that the dilution effect would be vastly less than that $500 million in banker fees.

Here’s an idea: Facebook might actually find a public company it wants to buy.  Yeah, that’s the ticket.

And while buying a public company would limit the amount of money Facebook would be able to raise initially, the point isn’t to even raise money, remember?  The negative effect of all those T-bills would be avoided.

That’s why I think Facebook will change course and back into being a public company. It’s cheaper, easier, and accomplishes the same result.  Five years from now nobody will even remember how they did it any more than they can explain Google’s Dutch Auction IPO in 2004.

America is a very litigious society. We love to get all riled up and sue each other, whether our claims are valid or not.  In this reader’s case he is accused of making improper comments in an online forum. Seventy-five other people are also accused in the suit, but they are John Does — unknown individuals. Now we begin to see where that $75,000 claim came from. “All of you defamed me but only one used his real name so he can pay for everyone.”

In this case investors were discussing a public company the shares of which they did or didn’t own, liked or didn’t like, and the company seems to feel the criticism was both unwarranted and hurtful. So they sued, much to the surprise of my reader, who thought he had a right to his opinions.

Of course we have a right to our opinions. It’s expressing those opinions that sometimes gets us in trouble.  I say a lot of strong stuff right here but I also try to do it carefully. It helps if you are telling the truth, of course, but I find it useful even then to clearly identify strong statements as my opinions: “It is my opinion that he is a crook.”

After all, I could be wrong.

Many lawsuits are warranted but some look to me like bullying or even legal extortion. Sometimes it is cheaper to pay an undeserved settlement than to pay even more to win and get nothing. Big companies play this game. But everything is relative: my HVAC contractor sued me for not paying him for the work he didn’t do, following what I believed (note, this is my opinion) to be a similar legal strategy, figuring that I would pay to make the nuisance go away. Only I didn’t pay.  That’s not my style.

But a lot of people do pay and I would guess (again, my opinion) this can have a chilling effect on public discourse even to the point of affecting the public’s right to know.

So let’s fix the system.  Here’s my idea. If I were Facebook or Google+ or LinkedIn  — web sites that like to serve as centers of discourse — I’d offer my members a legal plan. No annual subscriptions or pre-payments necessary, but there would be a $500 deductible. Remember this is for legal services, not for paying settlements, so if you lose you pay the damages, though not the associated legal bills.

Let’s imagine Google gives this a try, because they’ll try just about anything that can be reduced to an algorithm as this can be.

Hire a top law firm; charge a $500 deductible for $1 million in legal services; show a profit by scaring the crap out of people with cleverly written form letters actually sent by androids; rinse, repeat one million times.

And it would work. People would think twice before writing words they might later regret.  But if those words were truly heartfelt and the cause important enough they might be worth $500. And those being talked about might still pursue lawsuits, but it won’t work well for them because Google will always have more money than they do. Game over.

This could be the idea that puts Google+ over the top.

So if you happen to work for Google and agree this is a fabulous idea, I’ll be happy to license it for a very modest sum.  But if you just take the idea and run with it, remember one thing.

I’ll sue you.

Roger with his axe

Roger McNamee is a smart guy and a very successful investor as a co-founder of Elevation Partners. He made a breakfast presentation last month at the Paley Center for Media in Los Angeles that is well worth watching. I could probably get half a dozen columns out of this one speech, but the part I want to concentrate on here is McNamee’s claim that when it comes to social media, Facebook (in which he was an early investor) has already won. I’m not here to say Roger is wrong, just that I am not exactly sure what Facebook is winning.

The core of McNamee’s speech didn’t have to do so much with Facebook as with Microsoft, Apple, Google, and HTML5. His point was that Microsoft is going down and that is freeing-up money from a decaying enterprise software business that can go to support new businesses based on HTML5. Google won’t be the beneficiary of Microsoft’s fall, according to Roger, because they’ve lost, too: the mobile transition effectively eliminates Google’s tollbooth on the Internet because smart phone users hardly search at all. So Apple wins by providing all the devices and Facebook wins, I guess, by providing the most popular destination.

Again, I’m not saying he’s wrong, but what I took away from this speech was first an image of Microsoft as the Roman Colosseum being mined for marble after the barbarian invasion, and second a sense that while Facebook is certainly a huge social, cultural, and business phenomenon, I just don’t see it being around for very long.

Facebook is a huge success. You can’t argue with 750 million users and growing. And I don’t see Google+ making a big dent in that. What I see instead is more properly the fading of the entire social media category, the victim of an ever-shortening event horizon.

Each era of computing seems to run for about a decade of total dominance by a given platform. Mainframes (1960-1970), minicomputers (1970-1980), character-based PCs (1980-1990), graphical PCs (1990-2000), notebooks (2000-2010), smart phones and tablets (2010-2020?). We could look at this in different ways like how these devices are connected but I don’t think it would make a huge difference.

Now look at the dominant players in each succession – IBM (1960-1985), DEC (1965-1980), Microsoft (1987-2003), Google (2000-2010), Facebook (2007-?). That’s 25 years, 15 years, 15 years, 10 years, and how long will Facebook reign supreme? Not 15 years and I don’t think even 10. I give Facebook seven years or until 2014 to peak.

Does this feel wrong to you?  Listen to your gut and I think you’ll agree with me even if we don’t exactly know why.

Roger may not care since he will have already made his Facebook fortune and then some. But I think this foreshortening is important because it makes Facebook the winner, yes, but the winner of what? Super-IPO of the decade? Yes. Dow-30 company of 2025? No.

My interest is in what follows Facebook, which I think must be its disintermediation by all of us reclaiming our personal data, possibly through our embracing the very HTML5 that Roger loves so much. The trend is clear from “the computer is the computer” through “the network is the computer” to what’s next, which I believe is “the data is the computer.”

You’ll notice I didn’t mention Apple. Black swan.

What’s taking place right now is very similar to the Revolution of 1848 and there was no Internet for that one.

Beginning in France, 1848 saw a social revolution sweep across much of Europe, toppling most governments of the time. Monarchies and ministers alike fell with some like Metternich of Austria having been in power as long as Mubarak has been in Egypt. Yet there was no Twitter in Vienna in 1848. No telephone (that was 30 years away), no telegraph (invented in 1844 but not yet deployed in Central Europe), railroads were just beginning to be built, and even Reuters’ carrier pigeons were a dozen years in the future. All communication other than oratory or theater was written in 1848 and went the slow way, by ship, horse, or foot. And yet, in a single year, nearly the entire continent saw revolutionary change.

The simple explanation for 1848 was that people had been unhappy for a long time and were ready for a change. They were angry and the power brokers of the time like Metternich were old, fat, and too used to power. Doesn’t that sound like much of the Middle East today? These nations have old leaders, rigid bureaucracies, and very young populations that don’t really know what they have to gain or lose, but just want something different.

So Tunisia fell and then maybe Egypt. The King of Jordan fired his cabinet, trying to look like part of the solution, not the problem. It will be interesting to see if that works. And did you read Colonel Gaddafi’s lament for the passing of the Tunisian dictator on his flank? I knew Gaddafi in the 70s and his sentiments weren’t for Tunisia but for himself.

The literal old man of the Middle East is Saudi Arabia, where the royal succession is from brother-to-brother — a system that literally can’t continue with the youngest son of the country’s founder, Abdul Aziz ibn Saud, now 67 years old. It will be interesting to see if the cousins are able to work that one out. I have my doubts.

Technology will play a role in all this, of course, but revolutions are conducted by people, not electrons, and even Twitter is just a tool.

Separated

at birth?

Facebook now claims more than 500 million members. Facebook is too big. Already we’re seeing Facebook defections by, well, me. And others, there are other people than me who are put-off by the simple fact that this social network is becoming as ubiquitous as bad breath in dogs.

LinkedIn, at only 80 million members, is already having success with its branding as the working professional’s Facebook. Well the real Facebook can’t allow that, can they?

So expect this year a Facebook fork with the social network offering premium services to get back all those high earners over at LinkedIn. We may see several Facebook channels in fact. How else can Zuckerberg appeal to those of us who, like Groucho Marx, “refuse to join any club that would have me as a member?”

“There’s no forking Facebook,” Zuckerberg will say.  But he’ll be wrong.

What happened to Second Life?  The 3-D virtual world from Linden Lab is still very much around but I don’t spend much time there, do you? Second Life has peaked.  And there is something to be learned from this transition.

Facebook is hot right now and Second Life is not, and some of that comes down to the difference between fantasy and reality.  Second Life is a fantasy environment  — an EverQuest without the quest — and that’s the problem.  It has the heavy processing requirements of a game without the rich textural depth of a Tolkein or even of real life.

Facebook, being tied to the real lives of the people involved in it, never runs out of anything, whether it is server power (minimal requirements there. at least in comparison to Second Life) or stuff to talk about.  Second Life is barren in comparison.  By attempting to imitate life, it pales beside the real thing.

Take dancing, for example.  In Second Life dancing performs the social function that in real life is performed by eating.  You can’t eat in Second Life, yet most of the time when people hang out together in real life eating is what they do.  So in Second Life, if they aren’t fighting or making-out, the avatars dance. But it just isn’t very satisfying.

Facebook doesn’t have a dancing/eating problem because it doesn’t purport to be anything like a 3-D virtual world — just a wacked-out representation of our individual lives for the benefit of our friends.

Another problem with Second Life is real estate.  As many companies have done, you can buy 3-D virtual social prominence, whether you deserve it or not.  What Second Life is actually selling isn’t real estate or even server capacity — what they are selling is us, or at least access to us by people who want something.  I don’t like that. Facebook is not immune to this, either, as we see in stories this week about how to buy Facebook friends. But for the most part the way to get lots of friends in Facebook is by being interesting.  Now there’s a concept.

The best purpose I’ve seen for Second Life is for showing videos to your friends.  Everyone meets at a particular spot, watches an mp4 video (thanks to the iPhone nearly every YouTube video is now available in the H.264 mp4 format), commenting back and forth like Mystery Science Theater 3000. But now DeskTube offers a very similar capability with real faces, not avatars, and in Facebook, too.

There’s less and less drawing me to Second Life, though as long as its around I’ll never leave completely.

Where else would I do my 13 hours of aerobics and 90 miles of running per week?

Just in case you ever sue me, you should know that I have every e-mail I have ever sent or received since 1992. That’s crazy from a legal standpoint, I know, but I can’t help myself. I’m obsessive-compulsive that way. But having a clear view of 16+ years of mail amounting to more than four gigabytes of mainly ascii text gives me a sobering sense of how poorly e-mail does the job lately compared to its glory days of, say, 1999.

More than ninety percent of my mail today by volume is spam. Back in 1999 spam was about 15 percent of my mail. Of course I am in large part to blame for this because I sign up for services and tell them, yes, I would like to receive news and offers by e-mail. I do this because I think it is my job to keep a finger on the pulse of the Internet and if you don’t get spam there isn’t much of a pulse. But it sure gets in the way of staying in touch with friends. And as you can imagine, I have a lot of friends.

As e-mail fails, then, we jump to instant messaging and social networks to take up the slack. Instant-messaging, which remains delightfully spam-free, is also like allowing casual acquaintances easy access to your IV drip: they can drop the worst stuff on you with no notice and no way of avoiding it. At least with e-mail you can decide when to check it or not, but IM is relentlessly in your face.

Well then there are the social networks, right? I tried to avoid these for years. I mean YEARS. People would want me to sign onto one or another so we could “keep our address books synchronized.” Why would I want that? But eventually some of my best friends began to take personally my resistance to being part of their automated lives, so I eventually signed-on to Plaxo, LinkedIn, and FaceBook. I might have a MySpace page, too, I’m not sure, but I certainly don’t visit there.

I barely visit Plaxo, but I am pretty consistently on Facebook and at least once a week get to LinkedIn. But that’s it. As far as I am concerned, if you want me to join Bebo or WhereAreYouNow or some other social networking startup, well forget it. Plaxo, LinkedIn, and Facebook do a perfectly adequate job of defining my culture, thanks. I can’t imagine needing another, especially ones that are so gimmicky. Why the hell, for example, would I want to rate my friends or have them rate me? That’s simply stupid.

There’s my money quote for FriendChat, PeopleRadar, RateMyEverything and a hundred other similar sites: “Rate my friends? That’s stupid” – Bob Cringely.

Keeping up with Plaxo, LinkedIn, and Facebook is bad enough, but I now sense that really ugly things are happening to those platforms making them less and less useful to me. It’s the rise of the social networking application.

You know what I am talking about, those applications that are built by third-party developers to take advantage of the social network ecosystem the companies are so proud to create but we all come to hate over time.

My friend Ira is a Facebook whore. He signs-up for every cause, group, or application sent to him by, well, anybody. Then what’s even worse is he expects me to sign-up too so he can send me whatever crap is the specialty of that subgroup.

I love you, Ira, but I just can’t do as you ask.

This is nothing more than social networking spam, folks, and it is sucking the value out of social networks just like mail spam sucked the value out of e-mail. And to those venture capitalists who see all these applications and rejoice because of the added network volume, which they think translates into higher valuations, understand that this very volume will eventually KILL every one of these companies, making your investment in them worthless.

If you think Facebook is immune to this effect because of its success, you are wrong. It’s very success makes Facebook even more likely to fail as a result. It won’t happen right away but it will happen when we’ll all jump overnight to some other platform whose only advantage over Facebook is that it lacks such sludge.

So if you are in touch with me for any reason please understand that while I will become your friend or contact on these services I will NEVER join a group, NEVER join a cause, NEVER accept an invitation (even if I actually end-up attending the event), NEVER become a fan, and NEVER, NEVER, NEVER install third-party applications.

And you shouldn’t, either.