No matter how big and liquid a company, it is a startup until its business model is defined. The world’s biggest startup is now a public company, and it is the first startup to go public in the recent era. LinkedIn, Groupon, Zynga and Pandora, according to my definition, weren’t startups at the time of their respective IPOs, or maybe this is strictly a matter of proportion. All came to market with platforms that were – arguably – defined, and the analysis was mainly one of growth potential. Facebook, on the other hand, is a work in progress, at least proportionately speaking.
If we were to think of enterprise value as comprising two component parts – asset value and option value, where the asset is the underlying base, the actuality, and option value is the possibility, the unknown – then startup valuation is heavily weighted to the latter. If there’s been talk of bubbles in certain parts of the startup economy, this really refers to what that option value should properly be. Because we’re in the realm of the unknown, the realm of possibility, valuing such options is difficult and sometimes counterintuitive. There are formulas, but these are more useful in liquid trade and widely diversified portfolios, and even then the science can be imprecise.
Among the many significances of the world’s biggest startup now featured as one of the world’s large-cap public companies will be the visibility this sheds on optionality, its valuation, and how this might relate to other startups, public or private. As already suggested, where the line gets drawn between startup and more mature business – between the option and the asset – is a fickle undertaking, especially within the fast and abrupt movements of technology and its related sectors. The proportions may ultimately be the determining factor, and the consideration of what defines a startup and its optionality. Facebook and its IPO, a market leader and a milestone event respectively, will in this context play no small role in shaping directions.
With all of that in mind, and now that the triggering mechanism of public filing and trade is behind us, important steps along the path of improved market efficiency – the true subject of this discussion – will follow. For starters, the stock will eventually settle in a natural range without the influence of underwriters, at which time the market will more officially have spoken. Information will continue to be scrubbed for clues into the optionality of social media, advertising, and all other business models directly or indirectly related to Facebook’s current or future prospects. From this, views will crystallize and the math will become increasingly sophisticated, leading to a more general and substantial consensus on the valuations of Facebook’s peer group.
And by peer group, I am thinking about a sizable universe. I am thinking not only about both public and private comparables, but also about groups that touch on Facebook’s domain in a variety of ways. Social networks are obvious, as is advertising and its supporting cast of technologies and products. But there are also entertainment and information and transactional services that rely on the Facebook ecosystem, or on related ecosystems, because many roads nowadays lead to social. The public companies listed at the top of this article are not outside this very wide net, nor are many of the highest-profile private companies in the segment. And this is before we even get to the up-and-comers and the startups – that is to say, in the pure sense of the word – in various stages of fundraising and development and IPO plans.
In other words, this will be big, and whether or not the result is a pickup or decline in valuations, financings and entrepreneurial activities, the outcome will be net-positive because market efficiency will have gained. In a sector built largely on startups and optionality, financed largely on guesswork, we have a visible leader now to give the guesswork substance. The irony of the statement is not lost on the author.