Jason Bishara runs a social network for financial advisors called linkedFA.
Jason's a former financial advisor himself, and he has some investing advice for accredited investors out there thinking about following everyone else's lead and plowing money into Facebook on the private markets.
Don't do it!
Jason's beef isn't with Facebook, which he's actually fairly bullish about, but with the fact that right now, Facebook investors have very little insight into the company itself. He smells a scam.
Specifically, he worries that Facebook is delaying its IPO because it knows its $56 billion valuation is overvalued right now.
A company will generally go public (through an Initial Public Offering or IPO) for one of two reasons: 1) to raise capital; and/or 2) to provide an exit strategy for early-stage investors. In either case the purpose of going public is to attract the highest valuation possible. This is typically done by breaking up the shares into smaller units and selling them to less sophisticated retail investors who have longer investment horizons. An IPO is a great way to bring in more capital and increase the value of the company as more people buy stock, however if the company is seen as overvalued, an IPO will result in a diminished valuation of the company as the stock drops. The question is how to determine the value of Facebook, and I believe the answer resides in the actions Facebook has undertaken, as well as the questions they still face. It would be in Facebook’s best interests to do an IPO if they were undervalued and are able to sustain a rapid growth rate because the IPO would most likely attract a much higher valuation. Why have they held off? Have they somehow found a way to translate their global reach into income and they have no need for more investment capital – and yet still have no need to provide an exit for their early-stage investors? Or are they overvalued and afraid that an IPO would devalue the company and provide a poor exit for early-stage investors?
How do you know when a company gets overvalued? A tell tale sign of overvaluation is when extremely savvy investors try to break up their large amount of shares and sell them to unsophisticated individual investors in smaller blocks (sound familiar?). The IPO process is similar to the distribution process of any business trying to sell product in that it brings products to the retail buyer (or as in this case the retail investor). By breaking down the investments into smaller chunks it enables the seller to sell his investment at grossly inflated prices. As I stated earlier, I was approached several times in the past 3 weeks to buy Facebook private stock and the sales pitch was that I would be buying it pre-IPO and I should get in now. If the company had plans of going public any time soon I promise you that no sophisticated investor would sell today, unless they believed the company was already overvalued.
For the record, we're pretty sure Facebook is holding off on an IPO not for any financial reason, but because Mark Zuckerberg is reluctant to relenquish any control over what he considers an unfinished project.
Also, we're beginning to hear that some of the people driving up Facebook's valuation on the private markets actually do have "information rights" – access to the company's books.
Still Jason makes some solid points – and we share his view that investors should be very cautious about buying stock on private markets.
