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Summary:

Get ready for a blockbuster — and almost nuts — year of technology in 2012. Why? Because Facebook is doing the mother of all initial public offerings. And like Netscape and Google before, the Facebook IPO is going to change not only the company but also Silicon Valley.

flywheel

Get ready for a blockbuster — and almost nuts — year of technology in 2012. Why? Because Facebook is doing the mother of all initial public offerings.

And much like Netscape and Google before it, the $5 billion offering is being viewed as the much-awaited catalyst for the technology industry and is expected to set off a flurry of activity. I have been here long enough to cover the IPOs of both Netscape and Google, and on both occasions, the tailgate effect was enough to pull even the clunkers (read: marginal startups) to the proverbial finish line.

We are already seeing four recently public companies — Pandora, LinkedIn, Zynga and Groupon — ramping up their efforts to buy little startups. Google is competing for talent, and so are other Internet giants. And now Facebook!

I have been wondering whether we would see a slow exodus of Facebook employees, which in turn would force the social networking giant to go out and start acq-hiring people by buying a lot of tiny startups. And if more of these little companies get acquired, more dollars will rush into the startups and thus create a fly-wheel effect. The presence of Facebook millionaires is only going to accelerate angel investment activity.

Nevertheless, I wanted to see how some of the top venture capital investors (whom I deeply respect for their clear and concise views of the industry) were thinking about the landscape.

Fred Wilson, a general partner of New York–based Union Square Ventures and an investor in red-hot companies like Zynga, Etsy, Twitter, Foursquare, Tumblr and Kickstarter, emailed me back with this answer:

Yes, I said exactly that on Friday evening at a talk I gave at social media weekend at Columbia University. I think this is great for entrepreneurship, startups, angel investing, etc., etc. because we are going to get a bunch more capital created and entrepreneurs created and we’ll also get more exits.

What this means is that super angels and hacker universities like Dave McClure, Y Combinator and TechStars are going to see a lot more of their companies get acquired. Jeff Clavier, the founder and partner of SoftTech VC, an early-stage investment firm based in Palo Alto, Calif., who recently closed his $55 million fund, had a multitude of thoughts:

Because of the ginormous valuation, it is clear that the number of Facebook employees reaching tens of millions of dollars in (paper) net worth is unusual. Candidly a number of early Facebookers have already taken off and “retired” at the age of 30/35. One of the questions moving forward is how much of a carrot can Facebook give new employees with such a high base valuation.

Remember that Facebook has a very high bar to talent acquisitions, and should not compromise on that. Once Facebook has a public currency, it will make it easier for them to make larger paper acquisitions. Until recently they were not doing that to avoid issues with the 500 shareholder rule (Ed Baker’s Friendly was a rare, recent deal where equity was used).

Brad Silverberg, a veteran of Microsoft and other tech companies and a general partner at Ignition Partners, a Seattle-based venture fund, thinks the IPO could have a corroding influence on the company culture.

One of the biggest challenges Facebook will face is the gulf between the have’s and have-not’s within Facebook.  It can create tremendous internal stress and can result in people leaving to follow their own entrepreneurial dreams. This can be both for early people who made it and love the thrill of the startup, and for later people who are contributing, gain confidence, and now want to go off and make their own fortunes.

I think Silverberg’s point is pretty spot-on. I have seen this haves-versus-have-nots dynamic create havoc at many companies before. I have spoken to multiple people, and there is a general sense in the Valley that there is a large contingent of Facebookers who are ready to bolt. Google in comparison didn’t see an exodus of employees until recently, mostly because of its deep engineering-centric culture. Before it was grafted with the Microsoft genes, Google was a company where the smartest people went to be with the smartest people. It wasn’t till 2007 that the company started to lose its top-rated talent.

Facebook — Mark Zuckerberg’s Hacker Way missive not withstanding — is a lot more mercenary and materialistic. And part of that means employees are likely to cash their chips and run, only to place them on some new startups. And whichever way you look at it, I am pretty sure 2012 is going to be one heck of a ride. Buckle up!

  1. Iftikhar Mahesar Wednesday, February 1, 2012

    I am not sure what is Facebook going to do with such a hefty amount of money. Is it going to provide multiple services like Google Inc,

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    1. A lot of it will be to pay for its infrastructure as I do believe they are going to need a lot of money to keep building out the services on top of that platform. I would not be surprised for them to spend a few hundred million of a couple of new data centers, perhaps around the world.

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    2. I think the money will be invested in mobile, acquiring more companies and improve their platform, which is essential for the apps …

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  2. Facebook should start an employee ‘startup fund’ where they match employees contribition up to 30 percent for straight equity ownership in the employees new business venture/idea. They can name it facebook franchise! This will enable them to stay connected with the millionaires they have created and participate in ideas and companies that are fresh, new and healthy. Facebook can even set up a pool of resources, enabling their franchise owners to efficiently own and operate tech companies.. Its a lot more work then meets the eye! Just thinking outloud…. bizTag

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    1. That is a good idea. I hope they actually take your advise.

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      1. Craig Clifford Friday, February 3, 2012

        I think the SEC might question the legality?

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  3. Do we really need to explain this? In simple terms: it’s a boat load of money that will inundate the startup economy in Silicon Valley. Hang on to your hats. There!

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  4. Your point about people cashing their chips and running is spot on. I think there’s quite a bit of immaturity at Facebook as far as the employees. You’ve got people who started there just out of high school or in their early 20′s who are now quite wealthy, but have always been since they’ve worked there. They don’t have the maturity to think long term, and perhaps now they won’t need to.

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    1. I see you know a few people at that company….

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  5. Steroids for the valley startup economy

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    1. Well put.

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  6. Joshua Goldbard Thursday, February 2, 2012

    Everything about this screams 2001. The only problem I see is that there are no Cassandra’s. Economics is a zero sum game, and if a lot is going to Facebook, it has to come from somewhere. Just how long can this bubble last? One year? Two years? What is the material difference between today and 2001?

    In 2001, the shattering revelation that destroyed much of the Internet Revolution was multi-plexing; in Social media, such a disruption is not impossible. Just ask Google, or Myspace, or Friendster, or Xanga; it is impossible to see what’s coming around the corner.

    My only point is that this is a bubble which will almost certainly collapse at some point. The question is, who will ride the wave and who will get caught holding the bag? It’s another massive game of high stakes poker, but it’s probably the best time to be an Entrepreneur in recent memory.

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    1. Joshua. I agree this one is a bubble, but for different reasons. However, economics is not a zero sum game; if it were, economic growth would be impossible.

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    2. Josh

      Agreed — everything that goes up eventually comes down. However in the interim, this is going to be one helluva right.

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    3. “Economics is a zero sum game” is completely wrong. Wealth creation is just that: creation of new wealth. Also known as “growing the pie,” rather than fighting over a fixed pool of resources.

      Look around the world. The average American is 700% wealthier, in real terms, than 100 years ago. 300 million Chinese have moved from $1/day poverty into a middle class. All this without a corresponding drop in anyone else’s wealth. Today the world has more food than at any time in history. Also more food per person. More cellphones per person. More information.

      Rant complete, I agree that it is a bubble which will pop.

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  7. I Do not agree with the premise of cashing in your million dollar chips for a new business start up. First of all a million dollars is not a lot of money in today’s economy. I would think about cashing in after I made a Billion dollars and I would definitely cash in after I accumulate a Trillion dollars. If I was a employee at Face Book I would just be happy that my investment was growing. I would be meditating and praying for new ideas on how to increase the addiction for Face Book Users. The way you make a Chocalate Chip Cookie better is by adding more varieties of chocalate to the same great batter.

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  8. Been living in the valley long enough to have seen this before – bottom line is it will great to be a German or Italian car dealer or Realtor in Menlo Park or Palo Alto for the next two years, then what? In the old days we talked about innovation, now we’re just talking about overpaid ‘talent’ moving their money around (which will ultimately wind up offshore through buying expensive material products manufactured elsewhere). Do I have faith that this generation will risk their money in alternative energy, medical research, or some new paradigm-shifting technology that changes the way we help our own economy or the less fortunate? I’m skeptical, but propose the challenge.

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    1. Pete

      I like your skepticism. I think you see this movie enough times you know what is coming….

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  9. I think the startups that are focusing on making content creation, sharing, and consumption easier and more effective will be the big winners in the end. Content seems to be the constant across all valuable platforms.

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  10. What about those of us not on facebook? MZs S1 letter reads as if we all will be connected…….

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