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Decline of Facebook

Everyone is quitting Facebook

On a day when Wall Street darling Apple hit new highs, making it the most valuable company ever (not adjusted for inflation), ex-darling Facebook continues to reach record lows. After its controversial IPO, Mark Zuckerberg has been unable to convince investors of a brighter future. It’s not just Wall Street that remains flocking to the exits, the company has been leaking high-level execs since it went public. The site is also shedding users. Despite robust international growth, Facebook lost 6 million U.S. users in May.

Now, with the three-month investor lock-up period over — the period in which pre-IPO shareholders are barred from selling a certain chunk of their shares — the company is losing one of its largest and most notable shareholders. PayPal co-founder and early Facebook investor (he famously paid $500,000 in 2004 for a 10.2 percent stake) Peter Thiel on Monday sold another 20 million shares, nearly his entire stake. Along with the proceeds of the initial IPO, Thiel has netted himself a tidy $1 billion for his troubles.

That investors are cashing out after one of the most hyped IPOs in history is only natural but the velocity of the selling belies a lack of confidence in Zuckerberg to fulfill Facebook’s lofty promises. Thiel isn’t just any old investor. He sits on the board and has privileged insight into the future of the company. As he must understand by now, this is only beginning for Facebook’s Wall Street woes. It faces three more “lock-up” expirations by year end with the biggest in November, when a further 1.32 billion shares could flood the market eclipsing many times over last week’s paltry 271 million share window.

“We don’t build services to make money,” Zuckerberg wrote half a year ago in Facebook’s IPO prospectus, hinting at the company’s inherent identity crisis. The site was never designed to make money, it was crafted to suck users in and keep them within the confines of Facebook’s world. Zuckerberg, perhaps unwittingly, admitted the central paradox to this agreement: “People want to use services from companies that believe in something beyond simply maximizing profits.” But by going public at the valuation that they did, around $100 billion, Zuckerberg and company signed a pact with the devil. That number doesn’t represent real value. It’s a promise that would conceivably be delivered down the line, essentially a public declaration that profits will indeed be maximized.

Those profits have yet to materialize as Zuckerberg now tries to toe that fine line between making people happy — or rather, keeping them hooked — while sucking them dry along the way. In trying to please all, the users (the site has the lowest customer satisfaction rating among its peers), its partners (who complain about robot infestations), and Wall Street (the stock is down nearly 50 percent since it went public), Zuckerberg has only succeeded in disappointing everyone

Facebook’s drastic fall from grace isn’t just a Zuckerberg screw-up, it’s indicative of a broader trend. Many of the startups expected to fuel new web economy are floundering. Zynga’s stock continues to tank and even Groupon’s staunchest supporters are starting to give up hope. In short, the race for users hasn’t proved as fruitful as most would have hoped.

A new wave of startups are taking notice. With the website plus users formula for success and instant riches breaking down, entrepreneurs are going the Apple route. Thanks to the rise of sites like Kickstarter that have “democratized entrepreneurship” for hardware makers, techie founders are shifting towards actually making stuff, reports the Wall Street Journal. For tech’s next generation, the Facebook model is becoming unfashionable, says Brian O’Malley, a venture capitalist at Battery Ventures. “With what’s happened to daily-deals companies and social companies, people are realizing that a barrier to entry [with hardware] is a good thing.”

 

 

 

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