What’s a start-up worth, or reflections on Facebook’s IPO fiasco

Here’s my 5th contribution to EPFL‘s “start-up of the month

When its IPO was announced last February, everyone agreed that Facebook was worth somewhere in the ballpark of $100 billion. Today, Facebook has lost 40% of its value – how is this possible?


Facebook a perdu plus de 40% de sa valeur

Facebook, unfortunately, isn’t an EPFL start-up, but the controversy surrounding its overvalued stock market debut (Initial Public Offering, or IPO) nonetheless provides a good opportunity to discuss the value of a start-up, in particular, spin-offs from EPFL laboratories.

A company’s value cannot truly be measured scientifically, even though there are techniques that try to do this via revenues and profits – Logitech and Swissquote, who have historical connections with EPFL, are measured like this. The law of supply and demand rules here: the value of a company is the product of the number of shares and the price per share. Companies listed on the stock exchange are thus hostages of the market and its moods.

When companies are not listed on the stock exchange, as is the case in the majority of start-ups, they can still be valued. Interested readers can learn more in the article “Equity Split in Start-ups.” When EPFL start-ups like Eelcee, Abionic, Aleva and Kandou (see previous articles) recently announced they were looking for financing, they were valued by their investors, even though there was no market in which to buy shares. Switzerland, however, provides some information via the registre du commerce (commerce registry) in which each start-up registers the change in its number of shares. From there, if you know the amount of money that has been raised, you can deduce the price per share and thus the value of the company. But I personally wouldn’t make the calculation, out of respect for the discretion desired by the entrepreneurs and the investors.

Again, value is just a subjective thing that depends on the good will of the investors. Facebook, like Google ten years ago, didn’t completely abide by Wall Street’s rules, by which a company agrees to be under-valued at its IPO so that the ensuing trading result in an upward curve. So far, it’s just simple speculation, and we’ll have to wait several years before we know whether or not Facebook’s IPO was a failure or not.

Our start-ups have a similar problem. I’ve known many entrepreneurs who prefer that their companies have the best possible value when they were looking for funding. They forget that the only real value is that which is created over the long term by their products or services, and that the value of a company is a very volatile thing, as Facebook just illustrated so well. Entrepreneurs tend to retain the lion’s share of their companies, even though by doing this they also seem to be ignoring Logitech founder Daniel Borel’s advice: “We prefer a little pie that we control completely to a big pie that we only control 10%, and this can be a limiting factor.”

I’m convinced (even though I’m often wrong) that Zuckerberg’s impact will be similar to Brin and Page’s. Here in Switzerland, I hope that local companies are created whose value is on a par with those of Daniel Borel, Mark Bürki and Paolo Buzzi.

References

Facebook Finally Files For $5B

Facebook data today

Logitech

Swissquote

Equity split in start-ups

Eelcee and composites


Two million Swiss francs for an allergy-detecting device

Swiss register of corporations

2 thoughts on “What’s a start-up worth, or reflections on Facebook’s IPO fiasco

  1. Tristan Renaud

    Well I see several issues in your article:

    1. FB IPO
    It is indeed a kind of shame for the ethic of IPO but I believe that the “ethic of an IPO” is more an oxymoron than something else! Mark Z has been very clear: the IPO was a necessity to reward his investors, himself and employees. Nobody said it was required to let the company continuing its growth, it was more a necessity (US legislation requires that companies above 500 shareholders must go public) than something else IPO are usually useful for! That said, it is still a shame, fair enough, given some information retention just during the IPO. And as you wrote, only time will say whether it was too expensive or not.

    2. About the Swiss start-up fund raising
    I believe that indeed, there is some confusion very often in Switzerland between “why do we need investors?” and “what are our real motivations as entrepreneurs?”. Basically, cash requirements is what the project demands. So it is what it is and one needs it when the project demands it. Omho, the projects’ cash requirements should drive the fund raising, not the motivations of the entrepreneurs, and not the value of the shares at a given moment. And as I wrote already, entrepreneurs should start projects aligned with their motivations and define their growth strategy accordingly (E.g. bootstrapped projects, which does not require investors when they want to stay independent, or fast growing ones with investors when their ambition is what matters the most, more than their desire of independence). But I understand that your global vision may be: some lack or realism from many entrepreneurs, and even some greed (I mean it is normal to maximize the value of your shares but they are confused by cash requirements, and desire to stay independent). Please let me know if my comprehension is not the right one and thanks again for sharing your thoughts about Swiss start-ups ecosystem!

    Reply
  2. herve

    I think we are in full agreement. My intuition is that entrepreneurship is still seen as speculation and easy money and not so much about value creation…

    Reply

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