20: Entrepreneurial Finance and Venture Capitalinvestment stake in an investee company via an IPO. For example, until March 2002, Australian VCs
were required to hold their VC investments in escrow for two years after an IPO, rather than selling these
down via the IPO. These restrictions helped to prevent VC investors from overvaluing their listing price
to inflate their returns via IPO exits – a problem that occurred with the Facebook IPO, discussed below.
David Haeberle, Chief
Executive Officer, Command
Equity Group
‘If you make 10
investments as a fund,
you’re probably going to
see five write-offs.’
See the entire interview on
the CourseMate website.COURSEMATE
SMART VIDEOSource: Cengage Learning5 Why do venture capitalists almost always use staged financing and convertible securities to
finance entrepreneurial companies?6 Entrepreneurs often refer to venture capitalists as ‘vulture capitalists’, because of the amount of
equity they demand before investing. Do you think the standard venture capital pricing formula is
a justifiable compensation for risk, or is it exploitative?CONCEPT REVIEW QUESTIONS 20-3
THE FACEBOOK IPO DEBACLE
Following the success of Amazon’s and Google’s
IPOs, the public listing of Facebook was eagerly
anticipated. Many were expecting spectacular
investment returns, but the IPO process was
riddled with drama. The saga, in fact, is still proving
to be an endless source of intrigue.
The shares were listed on 18 May 2012,
following weeks of investors’ jostling to buy shares.
At the IPO, Facebook (which traded as ‘FB’ on
Nasdaq) sold 421.2 million shares at a price of
US$38 each, raising over US$16 billion. However,
even by the end of the first day of trading,
investors were left very much underwhelmed.
Technical glitches on the exchange delayed trading
for almost half an hour, and there were further
issues throughout the day, leaving investors unsure
of whether their trades had been successful. By the
end of the day, the share price had only risen by 32
cents, and things took a drastic turn for the worse
after that. Rumours of insider trading began to leak
out. By August, the share price had fallen to below
US$19 per share – a loss of over 50% compared to
its listing price.
In addition, it was revealed that unfair
listing practices had occurred. Just before thelisting, Facebook revised its profit forecasts,
which should have resulted in a reduction in its
expected valuation. However, this information
was not revealed to all investors. It appears that
the information was only selectively revealed
to institutional investors, leaving retail investors
out of the loop and overpaying at the time of
the IPO. All of these problems left Facebook,
Nasdaq, the banks involved in the issue
and the listing underwriter, Morgan Stanley,
facing litigation. In mid-December 2012, the
Massachusetts financial regulator fined Morgan
Stanley US$5 million for violating securities laws,
and the fallout and drama from the IPO are
expected to continue.
Although Facebook’s share price did start to
recover, progress was slow, and in early January
2013 the shares were trading at between US$27
and US$28 per share – around a 28% loss from the
IPO price. Three years later, in early January 2016,
shares were trading at around US$97.
Sources: The information on the Facebook IPO story is drawn from ‘Going
Public: Key Developments in Facebook’s IPO’, ABC News, 18 December
2012; the Facebook share price data was drawn from http://www.nasdaq
.com/symbol/fb. Accessed 8 January 2016.finance in practice