Just last week we learned that shares of Facebook traded with an approximate valuation of $56 billion–or somewhere north of 200 times estimated 2010 earnings. These shares traded on a relatively new site called SecondMarket, where investors can buy anything from mortgage backed securities to shares in a variety of start-up tech companies.
SecondMarket pitches itself as a site where longer-term investors can buy and sell interests in companies without having to worry about “trading sentiment” whereby people with no real vested interest in a company can push around share prices to dangerously low and euphorically high levels. While it is possible for wanna-be Facebook owners to scoop up shares on SecondMarket there are significant limitations. In my opinion, the two most serious of these limitations are the lack of information that traded companies need to offer to the public, and the lack of liquidity for investors both large or small to pursue transactions.
The lack of supply of Facebook shares is no doubt a major catalyst in the willingness of people to pay relatively extreme earnings multiples. To some, simply “getting in” feels good enough to justify an investment when little of any substance is known about the underlying financials. At the same time, for an early investor looking to cash out some of their already sizable earnings there is no guarantee of the liquidity to sell. Putting too many shares up for sale could quickly squash some of the eager buying interest.
There are plenty of venture capital firms who own stakes in Facebook from the early days (AND MICROSOFT — NASDAQ:MSFT — OWNS A PIECE), with what are already substantial gains in place. These early investors will no doubt want to cash in their earnings in order to reallocate that capital to some of the other burgeoning young tech companies out there. After all, VCs don’t look to own mature companies, rather they provide capital to young ones early in their growth phase when capital is needed to scale a business model.
Although Facebook is not quite a “mature” company in that it still has ample room to grow, it has reached relatively mature valuations already while achieving plenty of its innovative initiatives and scaling objectives. How much more could these VCs want in being Facebook shareholders? Facebook owes it to their early investors to eventually provide a legitimate exit and the one reliable path is through the IPO.
Why will 2011 inevitably be the year? When offering shares in such a large enterprise, the most opportune time to do so is when the seller can most easily drum up buying interest. In December, leading indicators all point to a stronger economy moving forward, and this bodes well for the stock market too. This is mere speculation on my part, but I believe that with the company’s already sizable valuation and the economy on the path to recovery, the collective sentiment (both company-specific and macroeconomic) will provide the most favorable market conditions through which to pursue an IPO.