The Facebook factor

Risk-taking is vital to technology firms’ success, writes Paul Hunt, managing director of Phoebus Software

The capacity technology has shown to fulfil the get-rich-quick dreams of programmer-enterpreneurs has astonished investors for almost two decades. The story of Mark Zuckerberg’s rise from dorm-room geek to the world’s youngest billionaire has perhaps been the most remarkable of these success stories. With a meteoric rise followed by a series of high profile lawsuits, the story of Zuckerberg’s rise has been so compelling that something as mundane as the founding of an internet company became the basis of a Hollywood hit.

Since Facebook’s intention to make an IPO was announced, most UK analysts have pooh-poohed the $100bn valuation. They argue that the company’s cach&eacute and cool-factor will draw in funds from investors more committed to the pie-in-the-sky ideas expressed in the letter Zuckerberg wrote to accompany the IPO than the fundamentals of the business. As with many IPOs, they predict the company will succeed in selling its shares at the stated value, but after that the stock will slide dramatically. After all, despite the $3bn revenues reported last year, there is still a question as to whether Facebook will ever find a way of fully monetising its product without causing a user backlash. What’s more, with 800 million users, more than one in eight people on the planet are already using Facebook. Short of making Facebook as ubiquitous as electricity itself, can investors really expect the company to grow much further, especially if its use in China continues to be restricted?

The answer, emphatically, is yes. I am continually surprised by the scepticism many investors still feel about the value of tech stocks. Technology assets are no less tangible than those of financial institutions. Both types of company make money by selling things you can’t touch or see and both can make very healthy profits doing so. It appears that the bursting of the dot com bubble almost twelve years ago, investors find it hard to believe there’s any room left for rapidly emerging tech companies – or at least that those companies can sustain their success.

There can be little doubt that Facebook has been one of the greatest business successes of all time. If predictions are right that the company’s forthcoming IPO does value the business at $100bn, in the halls of a Harvard dorm has been created a company worth more than the GDP of 131 of the 190 countries in the world. If the whole company were floated, Facebook would be, according to the FT500, one of the world’s 40 largest companies by market cap.

Facebook is a unique offering with a uniquely huge base of users. It has already changed the way many companies approach advertising, how people share information about themselves and connected the world as never before. As a provider of financial services software, we at Phoebus know no technology company can succeed without taking risks and innovating. More than in any other sector, failure to do so means simply that one cannot compete in a marketplace populated by companies constantly looking to make their products faster, better and cheaper. So just because Facebook isn’t a conventional business doesn’t mean it can’t justify its status as one of the world’s largest and most important companies.

I’m not saying necessarily that $100bn is a snip. But those investors who dismiss the IPO on the basis of where the company is today are forgetting that the success or failure of Facebook in the next 10 years will not be determined by the product today, but by its ability to maintain the innovative genius that has been the basis of its meteoric rise.