“Coulda, Woulda, Shoulda” – Lessons Learned from Facebook’s IPO

What “coulda” ignited a desperately needed thriving IPO market, Facebook’s IPO is going down in the history books as a cluster of mishaps complete with a series of investigations and lawsuits looming in the distance.

In case there was even a shred of doubt left, the Facebook IPO validates just how dysfunctional the public markets have become. Not to mention greed infested and corrupt. Was it really necessary for Morgan Stanley to inform its institutional clients during Facebook’s road show that it was cutting its estimates while simultaneously raising the price and size of the offering?

Does anyone sympathize with the weeping hedge fund manager who lost $100M by trying to flip FB on the open?  This same hedge fund “woulda” quintupled its money had its manager read Lou Kerner’s Facebook report on SecondShares in March 2010 that placed a $100B price target on Facebook when it was valued at a mere $19B.

There were plenty of investors who profited handsomely off Facebook. They just weren’t able to do it trading in the treacherous public markets. The fact is the appreciation was realized by investing in the PRIVATE markets. I guess I really need to show the following chart yet again.

Our Stock Markets Are Transforming

Instead of flipping what was touted to be a hot IPO, private market investors made money the old fashion way – by buying and holding. Oh the torture, of having to actually keep a stock for more than 30 seconds. Here’s the truth: trading stocks does not create jobs, fuel innovation or foster economic expansion. To the detriment of America’s economy, its public markets have become one giant breeding ground of traders.

Weeks after the JP Morgan derivative fiasco, the last thing Wall Street needed was another black eye.  But POW! It saddens me to say so, but it was well deserved. Here’s a suggestion: stop creating cataclysmic derivative products, misleading public investors and risking other people’s money. Remember once upon a time, when as a principal underwriter, you took chances bringing young emerging growth companies public – some of which went on to create enormous wealth and even change the world? Perhaps rather than place new issues in the hands of your biggest institutional clients, you can allocate them across an issuer’s greatest supporters – its clients, its customers, its users and its partners.

I am not one to say, “I told you so” but back in December, I pleaded with Facebook to buck the Wall Street establishment and self-underwrite. (Read “How Facebook’s IPO Could Transform the Capital Markets”). It “shoulda” listened – especially after Goldman Sachs completely bungled its private placement in 2011. Facebook “shoulda” utilized a Dutch Auction model and employed a method called Direct Registration where it would have been able to sell its shares directly to its loyal user-base in a much more equitable manner. Facebook’s IPO “shoulda” gone down in history as the catalyst that transformed the capital markets into a level playing field and led us into a new era of the “social stock market” comprised of long-term investors deeply committed to an issuer’s brand.

Twitter, I hope you are paying attention.

In all sincerity, I removed “Coulda, Woulda and Shoulda” from my vocabulary years ago. Rather than harp on what might have been, I prefer to use the mistakes of the past to create a better tomorrow.

As such, Facebook’s IPO should not be viewed as a monumental regret but rather as a “wake-up call” for the nation. This is undoubtedly a “market structure” problem, not a regulatory one. We simply cannot allow high frequency traders and those who are “too big to fail” to run amok with our capital markets. While there are some who will inevitably use Facebook’s IPO debacle to undermine key components of the JOB Act, they will be doing this country a grave disservice. We need to inspire entrepreneurship, not deter it. If they are so inclined to tighten regulation then appropriate it towards those who are destroying the capital markets with useless derivative products and excessive greed. Whatever you do, please do not strangle the emerging businesses who are merely trying to restore economic prosperity through innovation and job creation.

222 days, 5 hours, 54 minutes, 32 seconds until the democratization of the U.S. capital markets.

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