The Facebook IPO

Hey Acquired listeners. A note about this show: we recorded this episode the night before the 2016 Election Day in the US. At the time, the biggest change we saw coming was adding a new type of content to Acquired in analyzing IPO’s, which we introduce in this episode. Two days later, we woke up to a very different world than the one we were expecting. Reflecting on what’s happened, and the past few months of our show, we wanted to say two things: First, we want to apologize for our cavalier attitude toward this election cycle, and our glossing over the clearly very real problems and deep divide in America that it represented. In the Skype episode, David pretty glibly compared the AT&T - Time Warner merger to "Make America Great Again", arguing that any reactionary force is “on the wrong side of history” and cannot be relevant in a changing world. That was wrong, the sentiment behind it was wrong, and it was insensitive to the very real pain a lot of people are feeling out there on both sides. Second, looking back on this particular episode about the Facebook IPO, we think it actually might present a relevant parable for our country right now and--we hope--some important lessons for the technology industry going forward. For all the wonderful aspects of the tech industry that we celebrate on this show, there is no doubt that it also bears a great deal of responsibility for the current divide in America, and especially in its contribution to wealth inequality. Likewise, for all the wonderful aspects to the Facebook IPO story, as told in this episode, there is a very dark side as well: Facebook shareholders, investment banks and institutional investors raked in billions of dollars at the expense of individual retail investors who lost their shirts. At the same time, Facebook’s perseverance through their “broken IPO", and their determination in overcoming with incredible speed the massive, existential challenge to their business model posed by mobile, is something we think *can be* an inspiration to us all on how to move forward even when that seems hard. We hope you’ll listen to this episode with that in mind and think about how you, we, and the technology industry as a whole can do better in serving everyone in this country and in the world. Thanks for being on this journey with us. We’re sorry for our shortcomings, and we’re going to keep working hard to do better. -Ben & David Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics covered include: Introducing a new content vertical for Acquired: analyzing IPO’s! Facebook turning down early acquisition offers, including including the famous $1B overture from Yahoo in 2006 http://www.inc.com/allison-fass/peter-thiel-mark-zuckerberg-luck-day-facebook-turned-down-billion-dollars.htmlThe Wikipedia entry on the Facebook IPO https://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook#cite_note-2 referencing it as a “cultural touchstone”Trading of pre-IPO Facebook stock on SecondMarket and SharesPostThe infamous 2011 Facebook - Goldman Sachs deal http://dealbook.nytimes.com/2011/01/02/goldman-invests-in-facebook-at-50-billion-valuation/ attempting to circumvent then-active SEC regulations on number of permissible shareholders in a private company, and Goldman’s eventual loss of “lead left” status to Morgan Stanley for the ultimate Facebook IPOFacebook’s S-1 filing https://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm on February 1, 2012The company’s "small problem" at the time (read: gaping chest wound) with mobileAcquiring Instagram for $1B while on file to go public in April 2012Facebook’s $16B IPO finally taking place on Friday May 18, 2012, priced at $38 per share giving FB an initial market cap of $104BNASDAQ’s “technical glitch” (read: egregious f*&# up https://www.youtube.com/watch?v=lRe7VvWHfb4) preventing the stock from trading when it supposed to and resulting in $500M of investor losses https://techcrunch.com/2013/03/25/ip-oh-my-gosh-all-that-money-just-disappeared/Facebook’s stock tanking following a flat first day of trading, losing 25% of its value during the first month and over 50% 4 months later, leading some to label it “The Biggest IPO Flop Ever http://www.theatlantic.com/business/archive/2013/05/facebook-one-year-later-what-really-happened-in-the-biggest-ipo-flop-ever/275987/"Later revelations that Facebook had unprecedentedly lowered revenue guidance during its IPO roadshow due to continuing challenges with mobile http://venturebeat.com/2012/05/23/facebook-revised-revenue-estimates/, resulting in an information asymmetry between its underwriting investment banks and their institutional investor clients versus the investing public at large How, from the ashes of its “broken IPO”, Facebook amazingly rose to fix its mobile problem at lighting speed, going from mobile comprising zero percent of ad revenue to 23% in one quarter, and over 50% one year laterZuckerberg's belief that the difficult IPO process and "terrible first year” as a public company "made our company a lot stronger https://techcrunch.com/2013/09/11/zuckerberg-says-he-was-too-afraid-of-taking-facebook-public/”… and silicon valley’s bizarre, antithetical and counter-productive take away to “stay private longer http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/” Followups: The scoop on Microsoft’s use of foreign cash to buy Skype http://nickseguin.tumblr.com/post/5608679473/on-msft%20, thanks to longtime listener and friend Nick Seguin Hot Takes: Twitter shutting down (or selling? https://techcrunch.com/2016/11/07/revive-vine/) Vine The Carve Out: Ben: Amazon employee #1 Shel Kaphan on the great Internet History Podcast http://www.internethistorypodcast.com/2015/02/amazon-technical-co-founder-and-employee-1-shel-kaphan/David: Connectography: Mapping the Future of Global Civilization https://www.amazon.com/Connectography-Mapping-Future-Global-Civilization-ebook/dp/B015VABIRC by Parag Khanna

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Hey Acquired listeners, a note about this show before we get started. Ben and I recorded this episode the night before the 2016 election day in the United States. At the time, the biggest change we saw coming was adding a new type of content to Acquired in analyzing IPOs, which we introduce in this episode. Two days later, we woke up to a very different world than the one we were expecting. Reflecting on what's happened in the past few months of our show, we wanted to say two things. First, we apologize for our cavalier attitude towards this election cycle over the past couple of episodes, and our glossing over of the clearly very real problems and deep divide in America that it represented.

• 0:40David Rosenthal?

  In the Skype episode, I pretty glibly compared the AT&T Time Warner merger to "Make America Great Again," arguing that "any reactionary force is, quote, 'on the wrong side of history,' and cannot be relevant in a changing world." I was wrong. That sentiment is wrong, and it's insensitive to the very real pain that a lot of people are obviously feeling out there on both sides.

• 1:03Ben Gilbert?

  Second, looking back on the episode, we think it actually presents a relevant parable for our country right now, and we hope some important lessons for the technology industry going forward. For all its wonderful aspects that we celebrate on the show, there is no doubt in my mind that the tech industry shoulders a lot of the responsibility for the current divide in America, and especially in its contribution to wealth inequality. Likewise, for all of the wonderful aspects to the Facebook IPO story that you're about to hear, there is a very clear dark side as well. Facebook shareholders, investment banks, and institutional investors raked in billions of dollars at the expense of public retail investors who lost their shirts.

• 1:42David Rosenthal?

  At the same time, Facebook's perseverance and their determination in overcoming what were massive existential challenges to their business model, as you'll hear about in this episode, at incredible speed, we think can be an inspiration to us all right now on how to move forward when it doesn't look like that's super possible. We hope you'll listen to this episode with that in mind, and think about how you, and we, and the technology industry as a whole can do better in serving everyone in this country and in the world. Thanks for being on this journey with us. We're sorry for our shortcomings. We're going to keep working really hard to do better. And with that, on to the show.

• 2:39Ben Gilbert?

  Welcome back to episode 25 of Acquired, the podcast about technology acquisitions. Today's episode, we're trying something new. We're piloting a new idea, analyzing IPOs in addition to our normal acquisition format. When we started the show, our goal was to understand what made an acquisition go spectacularly well. And over the past 24 episodes, we've started zooming out and asking ourselves exactly why that is. Both David and I are really trying to understand how to create big, enduring companies, and we know that's why a good chunk of our audience listens to the show. Oftentimes, you can have these huge, successful acquisitions, but that's not the only goal. The goal, for us and for many entrepreneurs, is to create lasting value. As we thought about what direction we wanted to take the show, it became more and more clear to us that we should be looking

• 3:24Ben Gilbert?

  at companies that don't get acquired, but go all the way to going public. And really, these are even a better example of building hugely valuable companies. So today, we're starting with a monumental IPO in recent history: Facebook.

• 3:37David Rosenthal?

  Dun, dun, dun.

• 3:39Ben Gilbert?

  Oh, yes.

• 3:40David Rosenthal?

  I'm really excited for this, and I hope you guys are too. Not that we're going to stop doing acquisitions, but we thought this was, as Ben said, just a great direction to take the show. So let us know what you think in the Slack channel, by email, on Twitter. We love feedback here at Acquired.

• 3:57Ben Gilbert?

  Very true. And in typical, I mean, both of us are very involved with early-stage companies in different facets, and in kind of typical customer validation, customer development format, be harsh. We'd love all your criticism, and we want to make Acquired the best show possible for you guys.

• 4:15David Rosenthal?

  Helps us make the show better.

• 4:17Ben Gilbert?

  True that. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you prove that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:37David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:58Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 5:20David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:38Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right. You want to go into IPO history and facts?

• 6:10David Rosenthal?

  With that, this is an epic one to start with. So...

• 6:16David Rosenthal?

  I'm going to assume that most of our audience is familiar with the Facebook founding story. If you're not, we highly recommend you go watch The Social Network.

• 6:25Ben Gilbert?

  Or if you'd like a less fabricated version, the David Kirkpatrick book, or there's a variety of good resources and we would do a much worse job telling that story here than you could get elsewhere.

• 6:34David Rosenthal?

  Yes. Much ink has been spilled on that front. But suffice to say that Facebook was founded in 2004 by Mark Zuckerberg, Eduardo Severin, Andrew McCollum, the forgotten Facebook founder, Dustin Moskovitz, and Chris Hughes. A whole bunch of stuff happened, including turning down several acquisition offers along the way, most notably a $1 billion acquisition offer by Yahoo in 2006, just when the company was two years old, sort of foreshadowing Instagram in years to come. And I think Mark has talked about turning down that acquisition being one of the pivotal moments in the history of the company.

• 7:15Ben Gilbert?

  And that's the kind of like crisis moment in the bathroom. I think he like, there was a point there where he, I'll have to check my facts on this and we can do it in follow-up, but I think this is the one where it was over dinner and he ended up in the bathroom, like looking at himself in the mirror and having this emotional crisis of, oh my God, am I actually turning down a billion dollar offer?

• 7:34David Rosenthal?

  Yeah, crazy. But he did. And Facebook went on to much more than a billion dollars in value. So much so that if you Google the Facebook IPO and you find yourself on the Wikipedia page, there's a whole Wikipedia page dedicated to the Facebook IPO, and right in the beginning, it refers to it as a, quote, "cultural touchstone."

• 7:57Ben Gilbert?

  Yeah. And that's no joke. I mean, it's one of the largest acquisitions of all time, I'm sorry, one of the largest IPOs of all time.

• 8:03David Rosenthal?

  Indeed, the third largest behind Visa and General Motors, but probably happier than those two, since those were, at least General Motors was post-financial crisis when the US government was re-IPO-ing it after the bailout.

• 8:20Ben Gilbert?

  But talk about enduring companies to study.

• 8:24David Rosenthal?

  So, let's dive into it.

• 8:28David Rosenthal?

  In the late days of Facebook as a private company, which had spent eight years from 2004 until 2012 as a private company. It was a frenzy, not just inside the company, but outside the company. Everybody and their mother, literally their mother, wanted to be an investor in Facebook. And at the time, there were actually two ways, two sites that had popped up that would let you do that. There were these, these vehicles called Second Market and Shares Post. And these were startups themselves that facilitated trading private company stock.

• 9:11David Rosenthal?

  And you had to be an accredited investor to do this. This was before the Jobs Act and before a lot of the new equity crowdfunding laws and regulations.

• 9:19Ben Gilbert?

  Did you have to be an accredited investor to sell or just to buy?

• 9:22David Rosenthal?

  Just to buy, but employees could sell on these sites. And the vast majority of all volume being traded on these sites was Facebook shares in 2010, 2011. And this was starting to be a really big problem because now all of a sudden, Facebook and other companies that were, who shares were trading on these sites, they'd sort of lost control of these shares and they had all these shareholders out there who they didn't know who they were. And at the time, pre-Jobs Act, the laws were that you had to have less than 500 shareholders as a private company. Once you had more than 500 shareholders, you had to go public.

• 10:03David Rosenthal?

  And so this was happening in Facebook more than any other company at the time. And in an effort to sort of try and also get under this 500 shareholder rule in 2011, and it'd be January 2011. Facebook separately did a rather infamous deal with Goldman Sachs.

• 10:28Ben Gilbert?

  That's right.

• 10:28David Rosenthal?

  That didn't go so well. The first part of the deal went fine, and that was that Goldman invested $450 million itself in Facebook. That happened. But the second part of the deal, and that was at a $50 billion valuation. The second part of the deal was that Goldman was going to create a special purpose vehicle that was going to be one single entity. And then it was going to market to its private wealth management clients, the ability to invest in this special purpose vehicle that was going to be a billion and a half in total. And then that would invest, that would, vehicle would invest in Facebook. And so they sent this email out to select private wealth management clients of Goldman

• 11:12David Rosenthal?

  saying, you know, opportunity of a lifetime. It was like a, like a Nigerian cash scam email that Goldman was sending out to their clients. They couldn't even, they didn't even, couldn't even say the company by name. It was a unnamed, high-growth, private company that they were offering the opportunity, once in a lifetime, an opportunity to invest in.

• 11:32Ben Gilbert?

  Wow, but you throw the Goldman brand behind that, and it seems like, sure.

• 11:36David Rosenthal?

  Seemed like a good idea at the time, and to Facebook too. Well, the SEC didn't think it was such a good idea. So Dealbook, New York Times Dealbook actually leaked, scooped that this was happening. And after that, the, the SEC started investigating, and Goldman ended up, they still ended up doing the deal, but they did it with all foreign clients. So they decided that it was too risky to have US investors invest in the deal. And this was a huge, huge moment. Big egg on Goldman's face and on Facebook's face for what came across as really trying to skirt US securities laws.

• 12:18David Rosenthal?

  And up until that point, Goldman had been sort of top bill in the running to be the bank that would take Facebook public.

• 12:27Ben Gilbert?

  Right.

• 12:28David Rosenthal?

  And this basically killed their chances of being lead-left, quote unquote, on the IPO.

• 12:34Ben Gilbert?

  What is, for those of us like kind of not from the industry, what is lead left?

• 12:38David Rosenthal?

  So when investment bankers take a, speaking as a reformed investment banker myself, when investment bankers take a company public, there's usually a consortium of banks that underwrite the IPO, but there's one bank that's the leader and that's referred to as being lead left, quote unquote, which is on the cover of the prospectus of the IPO, the bank that's at the top and on the left is lead left and they get the biggest allocation of the IPO. And it's always a huge battle amongst the big bulge bracket banks for hot IPOs and there was never going to be any IPO hotter than Facebook to be the lead left. Not only because they'd make a lot of money from it, but the prestige associated with

• 13:19David Rosenthal?

  that, well, in theory, we'll see what really happened, live on for a long time. So because of these two things that were happening, there was immense pressure on Facebook to finally go public in the 2012 timeframe. So late 2011, they start preparing. They actually select Morgan Stanley, Goldman's longtime rival, to be lead left. They're deep preparing for the IPO and business is going great. For the year of 2011, they ended the year with 845 million monthly active users, 483 million daily active users.

• 14:02David Rosenthal?

  So doing the math on that, that's over 50% DAU to MAU ratio, which means over half of Facebook's users used it every single day, which is just incredible. And still to this day, there's so few products that are like that and not just usage, but engagement. So they were seeing at the end of 2011, over 2.7 billion likes and comments per day.

• 14:31David Rosenthal?

  Which is crazy. And by the time they actually went public in 2012, they amended their S1 filing to include Q1 numbers. And in Q1 2012, they saw 3.2 billion likes and comments every single day.

• 14:49Ben Gilbert?

  Which those likes and comments numbers, they like to put that in there. It's like almost an unfathomable ridiculous vanity metric, right? Because there's nothing to compare it to. And we really like, it's hard to wrap your head around what that even means.

• 15:02David Rosenthal?

  Well, but it's engagement, right? I mean, it's like, people aren't just opening the app, they're actually doing stuff in the app.

• 15:09Ben Gilbert?

  Great point.

• 15:10David Rosenthal?

  And in these days, we'll get to this in a second, it wasn't so much the app as it was the website on desktop. And not only, you know, things are going really well for Facebook at this point. Not only do they have these huge, unprecedented user base, unprecedented engagement, but they are making real money, too.

• 15:29Ben Gilbert?

  Yeah, they were profitable by their IPO, correct?

• 15:31David Rosenthal?

  Very profitable. So in 2011, they did $3.7 billion in revenue and over $1.7 billion in operating income, which is really incredible. You think of a private startup at that point in time, people had never seen a private company at kind of this scale of both revenue and profitability.

• 15:53Ben Gilbert?

  Right. And that's, let's see, that's a 45.9% operating margin.

• 16:00David Rosenthal?

  Yeah, it's quite good. As we were talking about a bit before the show, hiring Sheryl Sandberg to build advertising at Facebook was one of, if not the best decision that Mark Zuckerberg ever made.

• 16:13Ben Gilbert?

  Yeah, this is worth a quick little story. But before March of 2008, Facebook didn't have Sheryl Sandberg at the helm as COO. And they had no ad product.

• 16:27David Rosenthal?

  Yeah, they were just running banner ads.

• 16:29Ben Gilbert?

  Yeah. And they had some, they cut some deal with Microsoft. Mark was totally allergic to, you know, cannibalizing the purity of the site with advertising. And in March of 2008, Sheryl Sandberg came in and her goal and her charter was make the company profitable. So when, before she joined, quote unquote, the company was primarily interested in building a really cool site. Profits, they assumed would follow. And so in late spring, Facebook's leadership team finally agreed that they were going to rely on advertising with the ads, quote unquote, discreetly presented. And then it was kind of her charter over the next three years to actually build a, an in-house competency coming from Google of a real ad platform.

• 17:13David Rosenthal?

  Of a real advertising platform. And in three years to go from, you know, essentially nothing, like they were making plenty of revenue, but it was low quality revenue from banner ads, to go from essentially nothing to almost four billion in revenue and almost two billion in profit.

• 17:26Ben Gilbert?

  Wild.

• 17:27David Rosenthal?

  Totally wild. Interestingly, this is a fun side fact. This was the days of the Facebook platform and games on Facebook and particularly Farmville. And they noted in their S1 filing that Zynga, Zynga alone represented 15% of Facebook revenue at the time of the IPO.

• 17:49Ben Gilbert?

  Oh, that's a huge risk.

• 17:50David Rosenthal?

  Yeah. That was in the risk factors. So as, as we're alluding to, things are going great. February 1st, the big day, the day that everybody in tech has been waiting for. They file, Facebook files, it's S1, which happens, now it happens before you go public. You file your registration statement, the prospectus for, for going public. In those days, it happened even longer before, before the actual IPO happens. Now it's a fairly short time period after some of the changes made in the Jobs Act. So February 1st, they file, Morgan Stanley is lead left banker. And then showing how far Goldman had fallen just a year earlier, you know, they were in

• 18:33David Rosenthal?

  the pole position to be lead left. They actually get demoted to third. So JP Morgan is second and Goldman is third. So this was a big, big demotion for Goldman. But as we shall see, Morgan's being lead left on the Facebook IPO wasn't necessarily the golden egg that the banks thought it was. So things are great, but there's one, one problem with Facebook right now.

• 19:02Ben Gilbert?

  What's that?

• 19:03David Rosenthal?

  And that problem is mobile.

• 19:06Ben Gilbert?

  Yeah, so fascinatingly enough, in their S1, when they're listing the summary risk factors to the business, this one's incredible. One of the risk factors is "Growth in use of Facebook through our mobile products, where we do not currently display ads as a substitute for use on personal computers, may negatively affect our revenue and financial results." So the risk factor they're identifying here is not that, you know, "We don't know how we're going to monetize the phone. We haven't rolled out phone ads yet." It's that the risk is that people start using mobile products more than desktop products, and we don't have a revenue model there.

• 19:48David Rosenthal?

  Yeah, they literally had no revenue model. So, two huge, two aspects to this very huge problem for Facebook right now, the mobile problem. One is a usage and engagement problem, and they had, we just talked about these incredible usage and engagement metrics that they had, but that's all on desktop. On mobile, they have mobile apps for Facebook, but these are the dark ages of HTML5, and the misery of the HTML5 mobile Facebook app, which was so slow, basically impossible to use. And as a result, only about half, half

• 20:30David Rosenthal?

  to slightly less than half of Facebook's users were active on mobile.

• 20:36Ben Gilbert?

  Yeah, and fascinating to think about all the implications to mobile being an afterthought. Like, when you opened the app, the newsfeed, as we know it today, was not one unified newsfeed, where you would see the same thing on the mobile app that you would on desktop. It was like, you would see a completely different set of information, like a different algorithm determining what you would see, served down to you a different way, cached in a different way, obviously not nearly as responsive. This was, you know, philosophically, they wanted to be able to move faster by dynamically controlling the HTML that was served down without having to reset it to the app store.

• 21:11David Rosenthal?

  And not making a bet on, you know, this was, as we've talked about on the show, the age of the mobile platform wars, and is iOS going to win, or Android? And they thought they could be really flexible by having this HTML5 app that was one app that would get put in a wrapper and shipped to both app stores. But yeah, it was not working.

• 21:29Ben Gilbert?

  No.

• 21:30David Rosenthal?

  And it was funny, even doing the research for this episode... I read a bunch of articles about this and I remember doing this. Most, a lot of people, rather than installing or using the app on their phone for Facebook, they would go to m.facebook.com and use the mobile web because it was better than the crappy app that they had.

• 21:51Ben Gilbert?

  Yeah, shocking.

• 21:53David Rosenthal?

  Which, and I mean, this was in tech years, you know, four years, four plus years ago, four and a half years ago, a long time. But it's not like the mobile ecosystem was undeveloped at this point in time. Like there were apps, like Uber existed.

• 22:08Ben Gilbert?

  Right.

• 22:08David Rosenthal?

  There was no excuse for not having.

• 22:10Ben Gilbert?

  I think Twitter had already bought Tweety, so the iOS client for Twitter was exceptional at that time.

• 22:15David Rosenthal?

  Yeah.

• 22:17Ben Gilbert?

  Tweety became the native app. And the, like, to put this in perspective, where they had no ability to monetize on mobile at this point.

• 22:26David Rosenthal?

  And that was the, so one half of the huge gaping chest wound that Facebook had at this point was the app sucked. And then the other half was they had no monetization model. They made no money from mobile.

• 22:38Ben Gilbert?

  And to put that in perspective today, I think David will tell us the story of kind of everything along the way. Facebook's earnings came out a couple of weeks ago and mobile advertising revenue represented 84% of ad revenue for the quarter.

• 22:53David Rosenthal?

  Yeah, so that was the third quarter of 2016 as we're recording this today. And it's basically the entire business today. So the story of how we got there is massively tied up in the Facebook IPO. And actually, even just a couple of months later, after the IPO in September 2012, Zuckerberg was onstage at TechCrunch Disrupt that year and he said, "The biggest mistake we've made as a company is betting on HTML5 over native in mobile." That's how, how much, over a few short months, he realized what a big problem he had.

• 23:32Ben Gilbert?

  Wow. And it's probably worth, before diving back into the story, to like, set some context on the numbers here. So IPO.

• 23:41Ben Gilbert?

  Biggest in technology history, you know, third largest of all time, priced at 100, the market cap for Facebook was 104 billion.

• 23:49David Rosenthal?

  Yep, which we'll get into in a sec.

• 23:51Ben Gilbert?

  Okay, cool. Yeah, why don't you just dive in then?

• 23:53David Rosenthal?

  Okay, so we're still on the road to IPO and it's now April. Facebook is on its, has been working on its roadshow and getting, presenting to investors, large institutions who will buy into the IPO. And on April 9th, 2012, they come out with a rather shocking announcement at the time that we've already covered on this show in one of our early episodes and that is in fact, our benchmark of what a great acquisition is. They announced that they're acquiring Instagram. And we talked about this a little bit on the episode, but just to step back again here and

• 24:35David Rosenthal?

  put this in the context of how crazy this was, that Facebook was, had filed their S1, they're in the process of going public and they acquire a company that has 13 employees for a billion dollars. That, this was just crazy. And, but, but underscores how much, how Mark and Cheryl and the team were coming to realize how big of a problem mobile was for them. And the entire rationale for the Instagram acquisition was around bolstering their story and their user base in, in mobile.

• 25:12Ben Gilbert?

  Yeah. And I remember trying to rationalize this at the time and talking to friends, and I think we even talked about this on the Instagram episode, that, you know, there, there were a few things that Facebook held near and dear, and one of which was being the, the source of platform and identity. And that was quickly becoming really important to them to get a foothold in that everybody sort of needed a Facebook as, as infrastructure on the internet. But the killer app for, for Facebook was photos.

• 25:37David Rosenthal?

  Was photo sharing.

• 25:37Ben Gilbert?

  It's what got by far the most engagement. It was nostalgic.

• 25:41David Rosenthal?

  All those comments and likes.

• 25:42Ben Gilbert?

  Yeah.

• 25:42David Rosenthal?

  Billions every day.

• 25:43Ben Gilbert?

  Yeah. And so for them to, to lose that foothold where like that, that's really their core of strength is this is where people share and engage on photos. That's a total existential threat, especially when everyone's attention is shifting to mobile and they don't have a credible offering there.

• 25:57David Rosenthal?

  Yep. And, and they actually, you know, in, in this time, leading up to the actual IPO, Facebook was, and most companies do amend their S1, their, their, their. Registration statement quite frequently as new information comes up and they're and they're working through feedback from investors and whatnot. And of course, they amend it for this acquisition that they announced. And they actually say, it's interesting, they say in the in the S1 that they intend to continue operating Instagram as a standalone entity and product, which we talked about on our show. But interesting that they actually put that in the S1 for Facebook's IPO. But then they also say, this is this is after they talk about Instagram, but in the same paragraph, "We believe that mobile usage of Facebook

• 26:42David Rosenthal?

  is critical to maintaining user growth and engagement over the long term, and we are actively seeking to grow mobile usage, although such usage does not currently directly generate any meaningful revenue." This is how important they're they're realizing it's becoming. Also, interesting side note that I found while I was doing research here, there was a breakup fee on the Instagram acquisition of $200 million. So if for whatever reason the acquisition didn't go through, Facebook would have paid Instagram $200 million.

• 27:12Ben Gilbert?

  Wow.

• 27:13David Rosenthal?

  Which is interesting.

• 27:15Ben Gilbert?

  That's enormous, because Instagram, like, a lot of the time, you're gonna have a breakup fee like that because of the incredible costs that you incur by, you know, opportunity cost and negotiation and like the time.

• 27:31David Rosenthal?

  And usually, it's, you know, you see those things often when it's like a public company acquiring another public company.

• 27:36Ben Gilbert?

  Right.

• 27:37David Rosenthal?

  It's impacting the stock price. But this was a 13-person startup.

• 27:39Ben Gilbert?

  Right. And it's not like when we were talking to Zillow CFO Kathleen Phillips, how like the negative signal that it could send to the market, to Trulia's shareholders and to Trulia's, you know, incredible number of stakeholders from the advertisers to all the people that depended on them. Like, Instagram didn't have a lot of stakeholders. Instagram didn't have a high opportunity cost of other things they could be doing to the tune of $200 million. It's not like they even had more than a few people, like, working on the acquisition. It was Kevin and Mark talking.

• 28:11David Rosenthal?

  And some very excited VCs on their board.

• 28:13Ben Gilbert?

  Yeah, yeah, no kidding. Wild that it's that high.

• 28:17David Rosenthal?

  So things keep moving along in the process. On May 9th, Facebook files the sixth amendment to its S1. We're going to come back to that in a minute. Things keep going along and mid-May, they decide that they're going to set May 18th as the day. Friday, May 18th is the day that Facebook goes public. So the start of that week, though, something that there's an inauspicious start. And that's at the beginning of the week, GM, that we've already talked about on this episode, General Motors, announces that they're going to stop all advertising on Facebook because it's not actually working that well for them.

• 28:54Ben Gilbert?

  Yeah.

• 28:55David Rosenthal?

  And they've been spending $10 million a year with Facebook.

• 28:57Ben Gilbert?

  And they wanted flashier ad units. I mean, their major complaint was, look, on all these blogs, they're letting us take over the whole back page. We can slide stuff in from the sides. We can get this big header that pushes all the content down. And all we get are these crummy little, you know, static ads on Facebook on the side. And I don't know if they had started newsfeed ads at that point. But either way, the ad formats on Facebook have historically been so much more limiting than the kind of arguably user-hostile things that you get across the advertising ecosystem on the web.

• 29:29David Rosenthal?

  Yep. And but, you know, no matter, $10 million, $10 million, that's a big account. But Facebook made, you know, $3.7 billion the past year. So you know, drop in the bucket, things proceed. The night before the IPO, Thursday night, Facebook holds an all-night hackathon leading up to the IPO. And then in the morning, everybody's been up all night. And the whole company rings the bell for the NASDAQ remotely, remotely from California. And Zuckerberg pushes the button and big fanfare. And then, and then the company's supposed to start trading. And so they priced the IPO the night before.

• 30:08David Rosenthal?

  They priced at $38 per share, which gives Facebook a market capitalization of $104 billion at IPO.

• 30:18David Rosenthal?

  Again, unprecedented in technology history.

• 30:22Ben Gilbert?

  And how many, they sell enough shares to consist of how much value?

• 30:25David Rosenthal?

  They, they sell 421 million shares at $38 a share, raising $16 billion in the IPO. And about half of that, the company keeps and about half of that is selling shareholders that are monetizing their shares. So Zuckerberg presses the button in the morning, everything's supposed to begin trading. And, and actually when, when companies go public on the NASDAQ, they actually delay trading a little bit so that at the open, the, the stock doesn't start trading right away. They have a little time to make it orderly because usually there's a lot of interest in IPOs and a lot of, a lot of trades are happening.

• 31:04David Rosenthal?

  So they didn't, the, Facebook was supposed to start trading at 11:05 a.m. Eastern time on, on Friday, May 18th, 11:05 comes, people are placing trades, no trades are happening. The NASDAQ is broken. Facebook has literally broken the NASDAQ. I mean, it's functioning for all other stocks, but, but what NASDAQ would later describe as a technical error occurs and this just unleashes mayhem on the Facebook stock. Traders are placing orders and they don't know if they're going to get filled at all. Plenty of orders placed during this time period aren't filled.

• 31:45Ben Gilbert?

  Or if they're going to get filled at the wrong price.

• 31:47David Rosenthal?

  Or if they're going to get filled at the wrong price. So a lot of orders actually get filled at the wrong price, at a higher price than what people were placing them at. This is a disaster of epic proportions on NASDAQ's part and actually ends up contributing. This really hurts NASDAQ. I mean, up until this point, NASDAQ had always been the place for technology companies and all the tech companies were on the NASDAQ and the old school companies were on the New York Stock Exchange. After this, I mean, NASDAQ still has plenty of tech IPOs, but the New York Stock Exchange really makes a push. Yep. So when Twitter ends up going public, they do it on the New York Stock Exchange. Fitbit, Grubhub, Zendesk, lots of tech companies are now using the MYSE and a lot of it is because of this.

• 32:33David Rosenthal?

  So it's pretty bad and eventually NASDAQ actually settles two lawsuits. The SEC files a suit against them. They pay $10 million to the SEC and then a shareholder class action lawsuit against them because of this for people who lost money in the Facebook IPO. And NASDAQ ends up paying 26 and a half million dollars to shareholders as a result. So, once it all gets sorted out, though, later in the day, Facebook does begin trading and it's pretty clear that things are not going well. The stock ends the day at 38.23, so up 23 cents from offering price. But that's a really bad sign because that means they didn't get a pop from lots of

• 33:17David Rosenthal?

  excess demand and people wanting to buy the stock. And what that usually means, and this is what happened in this case, that the underwriting banks ended up supporting the stock because they've staked their reputation on this IPO. They don't want to let the price fall below the offering price. And so they end up, Morgan Stanley, JP Morgan, Goldman Sachs end up buying a lot of shares to support the price on this first day of trading.

• 33:42Ben Gilbert?

  Well, that doesn't sound sustainable.

• 33:43David Rosenthal?

  No, and it doesn't because the next trading day, which is the following Monday, it's a bloodbath. So, market opens on Monday and within 15 minutes of trading starts, Facebook is down almost 14%, which doesn't sound like a lot, but like stocks don't fall, stocks don't move 14% in one day.

• 34:08Ben Gilbert?

  Also, I mean, if you think about like, that means that like $15 billion of market cap was destroyed.

• 34:14David Rosenthal?

  Just erased immediately. I mean, that'd be like, if the whole market moved that much, that'd be like the Dow losing like 2,000 points in one day. And this is the second day, Facebook's second day as a public company.

• 34:26Ben Gilbert?

  That's like destroying like 14 Instagrams.

• 34:29David Rosenthal?

  Yeah, immediately. So not good. And it's so not good that it actually trips what's called a circuit breaker that stock exchanges have built into them that if a stock starts really getting pummeled like this, they'll stop trading in it. So that

• 34:44Ben Gilbert?

  Just for that stock?

• 34:45David Rosenthal?

  Just for that stock, yeah. So that short sellers can't aggressively bash the price down. So this is, this is really bad. And ends up closing that day at about $34 a share, which is down 11%. The next day on Wednesday, I guess Wednesday, two days later, the, the stock opens, closes down another nine, oh, sorry, Tuesday, closes down another 9% at $31 a share. Wednesday, the stock opens and news hits that Facebook is getting slammed with a shareholder lawsuit because news has leaked that that, that sixth revision that

• 35:26David Rosenthal?

  I mentioned to the S1 prospectus a couple of weeks before the IPO. Well, it turns out that there was actually a little more to that story than just revising the S1. And what happens is that that was the first day of the official roadshow for Facebook on May 9. And Mark and Cheryl and the executive team were doing the roadshow. And at the end of the day, David Ebersman, who was the CFO of Facebook at the time, takes Morgan Stanley aside and says to them, hey, we're actually going to lower our guidance for what we expect revenue and earnings to be for the second quarter.

• 36:07Ben Gilbert?

  Wow.

• 36:07David Rosenthal?

  And you don't do this when you're on your IPO roadshow.

• 36:10Ben Gilbert?

  Private information.

• 36:10David Rosenthal?

  Yeah, well, it's private information, but A, you don't, so they were giving guidance as part of the roadshow to institutional investors, sort of like, you could think of it like practicing your earnings calls, but investors are going to want to know what management's outlook is for the future.

• 36:26Ben Gilbert?

  Practicing your earnings call, but to one shareholder and not all the other people who are likely buying.

• 36:30David Rosenthal?

  Well, right. And they just given the first part of the, you know, a roadshow with the old estimates. And so now they have to figure out what to do. But the other thing is you don't, you don't lower your guidance during the roadshow. You lower it before you go out on the roadshow.

• 36:45Ben Gilbert?

  Right.

• 36:46David Rosenthal?

  Once you've started.

• 36:48Ben Gilbert?

  What would you do in this situation if you got news that you should low, like that it's going to come in lower if you were in the middle of your roadshow? How do, how do you fix that?

• 36:55David Rosenthal?

  Well, you probably don't do what Facebook and Morgan Stanley did, which is they decide that they're going to call the equity research analysts that are going to cover Facebook, and they're going to disclose this news. And the reason for this, by the way, is that mobile was really hurting them. So they were terrified that they were going to come in below expectations because they were behind on mobile. And people were switching over to mobile faster than they could get products out the door and get monetization done. So they call up the research analysts, but they call the research analysts of the underwriting banks, and they tell them that this, they're going to revise earnings down. And so the

• 37:37David Rosenthal?

  underwriting banks, Morgan Stanley and JP Morgan and Goldman, they all call their clients, their institutional investors, which are mutual funds and hedge funds, and they tell them, hey, Facebook, you know this IPO that's going to be the IPO of the century next week? They actually just revised their forecast down. So you've now got this situation where the public has no idea that any of this is happening.

• 37:56Ben Gilbert?

  But all the big institutions know.

• 37:57David Rosenthal?

  But all the big institutions know, all the clients of the banks that are doing the underwriting for the deal. And so we find out much later, but there was a huge amount of short-selling pressure on the Facebook stock at the IPO because all these banks are like, well, now there's an information asymmetry. Like, I know something you don't know.

• 38:16Ben Gilbert?

  They should capitalize that on that, on behalf of their clients.

• 38:20David Rosenthal?

  I mean, that's what they do.

• 38:22Ben Gilbert?

  So is what they did a securities violation? Like, is that legal?

• 38:26David Rosenthal?

  Well, it's a very much a gray area. And they actually, Facebook never gets in any trouble for this. But Morgan Stanley takes a big reputational hit and ends up settling a lawsuit, actually with the Massachusetts state regulators. I'm not sure why it was Massachusetts and not the federal SEC. But the only lawsuit that ends up getting settled, and it's not that much money, Morgan Stanley pays $5 million in the settlement to Massachusetts for this, but they tacitly admit wrongdoing here. And this is a big, a big oopsie for them.

• 39:09Ben Gilbert?

  Yeah, it's crazy thinking about in these like highly controlled environments like this, that a side conversation like the two of them had can Create ripples of that magnitude.

• 39:20David Rosenthal?

  Well, when you're talking about a $16 billion IPO, that is literally the biggest in technology history, and you've just created this information asymmetry, and it's going to be the most watched by all parties, including the SEC of all time.

• 39:35Ben Gilbert?

  Well, when you phrase it that way, David.

• 39:36David Rosenthal?

  Yeah, not a good, not an auspicious beginning. So, all told, when all this is done, the first two weeks of Facebook as a public company are terrible. The stock goes down during nine of the first 13 trading days, and by the end of May, so two weeks after the IPO, Facebook had lost a quarter of its value. And remember, it IPO'd at $100 billion market cap, so $25 billion in value just wiped out.

• 40:06Ben Gilbert?

  Wiped out. Wow.

• 40:07David Rosenthal?

  The Wall Street Journal calls the IPO, quote, "a fiasco." And so then what do you do? So now you're the company, you're Mark, you're Cheryl. You know, you go from being the most hyped IPO in history to literally a fiasco with all these shareholder lawsuits flying around.

• 40:25Ben Gilbert?

  Yeah.

• 40:25David Rosenthal?

  You've got this gaping chest wound of not figuring out mobile.

• 40:29Ben Gilbert?

  Yeah, so to me, there's two things going on here. One is the PR thing that you have to manage and the entire, like, financial ecosystem that you're now a part of. And you really have to, you know, weave carefully here on, you know, your next few quarters are going to be watched so carefully. You've taken a huge reputational hit. People are afraid of buying your stock. Other people are opportunistic in getting in and feeling like it's maybe a little risky. But then the other thing that's kind of going on here is, you know, Facebook just needs to inwardly look at their product, and this is really what they do, is say, "Look, all of this, these symptoms that are happening in the financial

• 41:12Ben Gilbert?

  market are because of the problem that, one, we don't have a credible, like, a great mobile experience, and, two, everyone's shifting to mobile anyway, even with our crummy experience, and we don't have an ability to monetize there." And, you know... The interesting thing is it doesn't take them too much longer to to actually launch, which I'm sure you'll tell us about in a moment, to launch their their mobile ads product. But like, it is so interesting that, you know, as a management team, they they kind of took a step back, focused on the fundamentals, focused on improving the product, focused on serving their customers, and like, actually rebounded from this with with a, you know, very strong, you know, step into mobile.

• 41:53David Rosenthal?

  Yeah, I mean, this is, for me, and, you know, when we get into grading in a minute here, like, this is the defining moment for, at least the the public company, you know, part of Facebook's journey. Like, this is what, why they are a great company and why Mark and Cheryl are great leaders. I mean, it would have been so easy to hit the panic button with everything going on here. I mean, the amount of pressure was just immense. But they do exactly what you said. They they they spend the rest of the summer completely focused on mobile. And this is, you know, when you hear about, you know, Facebook has a very unique corporate culture,

• 42:34David Rosenthal?

  but they have essentially like a propaganda department that makes posters and puts them up around campus in Menlo Park. And posters all of a sudden went up all over campus, like, you know, "Mobile is our future." And and they get the whole company in the period of just one summer, basically, completely focused on mobile. They spend all summer working on native apps. August 23rd, they release their native iOS app. The native Android app comes a little later. And then shortly thereafter, it's not like they release that and the market's like, oh, great, problems are solved.

• 43:11Ben Gilbert?

  Right.

• 43:12David Rosenthal?

  On September 4th, Facebook hits its all-time low at $17.73 a share, which puts their market cap at about $49 billion. So they've just lost $50 billion of market cap. This is really the depths here.

• 43:29Ben Gilbert?

  Wow.

• 43:31David Rosenthal?

  But they release, they release a product, it's a great product, people love the iOS app. And more importantly, it has the ability to insert ads into the feed. And Now, the age of the native ad and advertising in the Facebook feed on mobile is born and kind of like a phoenix rising from the ashes. It's just incredible. So they don't turn on advertising in Q3, but Q4 of 2012, they do turn on advertising on mobile and they go from literally $0 to 23% of the entire ad revenue for the whole company comes in via mobile in Q4.

• 44:12Ben Gilbert?

  Wow. Which is amazing because when you think about where they've transformed to today, they basically have cracked advertising on mobile. I mean, the newsfeed ad unit is like the best ad unit. And I think that for when we shifted to mobile, everybody tried to move their banners down to tiny little banners and that didn't work very well.

• 44:38David Rosenthal?

  Yeah, remember like Millennial Media and iAd and AdMob and all that stuff?

• 44:43Ben Gilbert?

  I had launched my career. Did I ever tell you about this? Yeah, in Seize the Day, we benefited from Apple.

• 44:50David Rosenthal?

  Which is an app that you built while you're in college, right?

• 44:53Ben Gilbert?

  Yep. It was kind of one of the early to-do lists in the store. We launched and we were one of the first partners to have iAd in there and we had like ridiculous CPMs and Apple featured us. So like, there was like, I think Nissan Leaf was like one of three advertisers that actually bought it. Anyway, so banner ads like didn't work very well. Apple has sent Sunset at iAd. A lot of publishers are moving to just putting their square desktop ads in the middle of articles. People are getting closer with these sort of like native ads embedded into publisher formats, but really like-

• 45:27David Rosenthal?

  But what really works on mobile is Facebook ads.

• 45:30Ben Gilbert?

  Is a native Facebook ad. And like, when you're scrolling through that newsfeed, you scroll sort of at every, or you stop at every story to pause and look at what it is. And for that brief moment- The advertiser has the opportunity to take over your entire captive attention in a way that they never could on desktop.

• 45:45David Rosenthal?

  Yep.

• 45:46Ben Gilbert?

  And like, Facebook cracked it. And it's, they're, they're, the fact that 84% of their revenue today, and as a hugely successful company, comes from mobile advertising is a huge testament to them turning it around.

• 45:58David Rosenthal?

  They cracked it. I mean, in a period of about six months, while going public with the, and while acquiring Instagram, they basically invented the mobile ad industry. And, and I think a really nice way of, of putting a bow on and tying up the Facebook IPO story is that the next year, TechCrunch Disrupt 2013, so in 2012 Zuckerberg had said Facebook, said Zuckerberg said in an interview on stage that HTML5 was the biggest mistake that he'd made in the history of the company.

• 46:35Ben Gilbert?

  Yeah.

• 46:36David Rosenthal?

  2013, TechCrunch Disrupt, Michael Arrington asks Zuckerberg on stage, you know, so how about that IPO? And Zuck says, you know, this is a quote, he says, "I'm the person you would want to ask last on how to do a smooth IPO, but," and this is, you know, this is a year later, he says, "but it's actually a valuable process. Having gone through a terrible first year, as it made our company a lot stronger, you have to know everything about your company. It took us to the next level and we run our company much better now."

• 47:12Ben Gilbert?

  Pretty interesting.

• 47:13David Rosenthal?

  Pretty interesting, yeah.

• 47:15Ben Gilbert?

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• 47:29David Rosenthal?

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• 47:43Ben Gilbert?

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• 47:53David Rosenthal?

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• 48:10Ben Gilbert?

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• 48:27David Rosenthal?

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• 48:43Ben Gilbert?

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• 48:52David Rosenthal?

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• 49:04Ben Gilbert?

  Should we go into what would have happened otherwise?

• 49:06David Rosenthal?

  What would have happened otherwise?

• 49:08Ben Gilbert?

  Well, I think this is a kind of a natural point of segue because in one of the things that I was thinking about in what would have happened otherwise is there's sort of three things that that you get when you IPO. Three sort of like advantageous components to it. The first is an influx of cash. Obviously, Facebook's Facebook's going to raise six, seven billion dollars in in cash that that goes directly to marketable securities or cash on hand for the company. The rest obviously goes to investors who are existing investors who are cashing out. The second is the fact that if they're going to do M and A transactions in the future, having public company stock way more valuable than difficult to value private company stock.

• 49:49David Rosenthal?

  Not necessarily more valuable, but the industry term is it's a liquid currency in that you can assign a value. You can say like, one share of Facebook stock is worth, you know, X on the public market. I can tell you with certainty, it is worth $17.73 on September 4th as opposed to, I don't know, what's a share in PSL worth, Ben?

• 50:12Ben Gilbert?

  That's a little speculative at this point, David.

• 50:14David Rosenthal?

  Yeah, exactly.

• 50:15Ben Gilbert?

  And that ties into our third, too, is liquidity for shareholders. So when you IPO, you've got all these employees that have been working for private company stock options for years, a lot of them having purchased them. And they can't really get liquid. They can sort of use the second market.

• 50:32David Rosenthal?

  They're using shares posted in second market.

• 50:34Ben Gilbert?

  Yeah, so it's interesting that some of the trials and tribulations of the IPO can be attributed to the fact that there was a sort of a value assigned to the company by the transactions that were going on in second market, but there were so few of them that it was a pretty illiquid marketplace. So you've got this very rough estimate of what the company is worth, sort of setting and guiding what they're going to IPO for. And if they hadn't IPO'd, you could have even more of this going on. And the longer they wait, the more difficult it gets because people are super anxious to get liquid on this part of their compensation that they held for years, a lot of it, life-changing amounts of money.

• 51:19David Rosenthal?

  Yeah. I mean, I think I'd say here that a lot of the clear bungling of the IPO was probably a result of just waiting too long. And there was so much pent-up pressure there, pressure to perform, pressure to... The last round that Goldman had done, that they botched with letting private wealth management clients invest via this special purpose vehicle, that was at a $50 billion valuation. So Facebook wanted to deliver a 2X return on that, wanted to hit the mythical $100 billion market cap. I think there was just a lot of...

• 51:59David Rosenthal?

  And then they were forced to by second market and shares posted and the lack of having the Jobs Act.

• 52:06Ben Gilbert?

  Which is funny because you were saying that while they were on the roadshow is when the Jobs Act got signed.

• 52:10David Rosenthal?

  Yeah, so the Jobs Act actually gets passed into law while they're working on the IPO. So ironically, they could have avoided a lot of this pressure if they just waited a little bit, but they didn't know that at the time.

• 52:20Ben Gilbert?

  Yeah, and it really did seem like what would have happened otherwise, like if they had stayed private, to their knowledge, it wasn't going to get passed and they shouldn't count on it and they were forced to IPO. If they had continued to wait longer, like actually we're seeing a lot of companies do today.

• 52:36David Rosenthal?

  Yeah.

• 52:37Ben Gilbert?

  You know, you run into these sort of issues where early investors need to get their money out and they're gonna, I don't know, do big secondaries and you're gonna have the same sort of issues that we're having today with the super unicorns, which we should talk about in tech themes. But another big one that I think is worth talking about is the fact that they went under a tremendous amount of scrutiny by going public. Like, this really forced management to understand every facet of the business and understand where their huge key risk factors were. I really think that the most interesting part of that S1 is where they identify risk to the business. Because truly, like, they probably were working

• 53:22Ben Gilbert?

  on some of the mobile advertising stuff beforehand, but like, it is a huge slap in the face and like a huge wake-up call to realize our business has an existential crisis on its hands. And so many other companies got destroyed in the wake of mobile. And it was interesting that Facebook was able to kind of like, keep their head above water until they really kind of came out and thrived.

• 53:41David Rosenthal?

  Yeah. And I think it's such a testament to Mark and Cheryl leading this company to do that. Because, you know, it's kind of like a running joke in the industry that like, you know, "risk factors," quote unquote, in S1s are like a joke. Like, you know, you have to put them in there. So let's make up some like phony risks to our business that actually make us sound stronger. But as part of, you know, I think because of all this disaster that the IPO process became, they had to really answer to like, what these risks meant. And they saw literally half of the value of the company evaporate before their eyes. And, you know, what stronger wake-up call could there be to understanding that

• 54:26David Rosenthal?

  they had a big problem they had to fix?

• 54:27Ben Gilbert?

  Right. And I guess, you know, they could have priced lower and gotten the pop that they were looking for. Maybe they just got out ahead of their skis a little bit and could have like weathered this first year by, you know, pricing at 70%, getting a little pop up to like 75%. And then, you know, over the next 18 months, then really kind of turning the gas on.

• 54:48David Rosenthal?

  And it's interesting, they definitely could have done that, but like... To what would have happened otherwise, would they then have noticed like would the magnifying lens have been shown as brightly on how big a problem mobile was?

• 55:00Ben Gilbert?

  Right.

• 55:00David Rosenthal?

  And would they have again fixed like fixed the product, fixed them had model, fixed the monetization model, invented a new ad unit within six months?

• 55:09Ben Gilbert?

  Yeah, pretty crazy.

• 55:12David Rosenthal?

  Pretty crazy. All right. Tech themes?

• 55:14Ben Gilbert?

  Yeah, let's do it. The biggest thing that I think we both really want to talk about here, we were chatting a little bit before the episode. This totally changed the way that tech companies IPO.

• 55:27David Rosenthal?

  It was a cultural touchdown, according to Wikipedia.

• 55:30Ben Gilbert?

  Which is of course, according to something else, because Wikipedia makes no claims to be correct, but rather referenceable.

• 55:34David Rosenthal?

  It actually, it was a reference to, I forget what article labeled it a cultural touchdown.

• 55:38Ben Gilbert?

  Yeah, yeah. But I mean, we, we, companies that were IPOing before were averaging three, four, or five years before they IPOed. Facebook went eight and had this total calamity on their hands. And, you know, we went through a pretty rough patch last year where there were just not a lot of tech IPOs and bleeding into early this year. And I think you can probably speak to this better than I can, but we're definitely in a period where people are waiting longer now. And that seems like you can kind of trace that back to Facebook.

• 56:10David Rosenthal?

  It's so interesting. I think one of the lessons that Silicon Valley and the tech world seems to have absorbed from the Facebook IPO is don't go public. It's terrible. Like, and the IPO was indeed terrible, as we've said. But what's so interesting is like, Zuck would be the first one to refute that, right? Like in his quote at, you know, a year later at Tech Hunch Disrupt, like, it was great for the company. It forced them to really, you know, step up and play with the big boys, play in big boy land and big girl land.

• 56:44David Rosenthal?

  And but but the lesson that's been taken is totally the opposite. So Ben, you're referencing this. I pulled some numbers on some tech companies, well-known tech companies that went public before Facebook and how long between founding and when they went public. So Zynga went public before Facebook, a couple of months before, four and a half years from founding to IPO.

• 57:06Ben Gilbert?

  Which is crazy to think about. Zynga was built on the back of exploiting opportunities within Facebook, right? Like, Facebook may have been, whatever, 12% or something like, or 16%.

• 57:17David Rosenthal?

  15%.

• 57:18Ben Gilbert?

  15% reliant on Zynga, but Zynga was like 100% reliant on Facebook.

• 57:22David Rosenthal?

  100% reliant on Facebook, yeah, exactly.

• 57:23Ben Gilbert?

  And then when they moved, like, ran into big troubles when they tried to move off of Facebook and kind of control their entire ecosystem with their own website.

• 57:28David Rosenthal?

  Realized they had no control. Another company, similarly, Groupon, three years from founding to IPO.

• 57:36Ben Gilbert?

  I think I was at the TechCrunch Disrupt when Andrew Mason was on stage and said, "Never take your company public."

• 57:40David Rosenthal?

  Yeah, right. Like, this was the, this was what people were, entrepreneurs were internalizing from this. You know, Zillow, which we covered, six years. Pandora, seven and a half years. People thought that was a really long time to go from founding to public. You know, the VCs were dying to get out of that company. LinkedIn, that we covered, six and a half years. So that was kind of like the normal before Facebook. After Facebook, like, like you said, Ben, you know, there's, the really great companies haven't even gone public, but the ones that have, like Etsy, 10 years, Shopify, 11 years, Fitbit, eight and a half years, Atlassian, 13 and a half years, Twilio, nine years this year.

• 58:24David Rosenthal?

  People are staying private a really long time and, and not just, not just staying private, but raising just absurd amounts of money. So, you know, Google, right? Like, it's, it's so funny to see the evolution of the generations of tech companies and how they treat, you know, behave in the private markets.

• 58:42Ben Gilbert?

  Generations in the last 20 years.

• 58:44David Rosenthal?

  Well, generations in tech companies are about four years. It's like going to college.

• 58:50David Rosenthal?

  Google raised $25 million before they went public. Facebook raised, you know, kind of $2 to $3 billion when you include that Goldman round before going public. Without the Goldman round, you know, somewhere around a billion or so. Uber has now raised 11 and a half billion dollars over the eight years or so that.

• 59:13Ben Gilbert?

  It's insane that you can raise $11 billion without having to like be under the scrutiny of a public company. And I guess, I mean, that's, that's totally the cited advantage, right? It's like, we don't have to disclose all these things. It's better for competitive reasons, but like, really it's for a lot of these companies.

• 59:30David Rosenthal?

  But the reality is it's just worse for everybody.

• 59:32Ben Gilbert?

  Yeah.

• 59:33David Rosenthal?

  Yeah. It's worse for the companies because you're not accountable to these massive challenges that you're facing. Like, what if, like, let's imagine, let's do another, what would have happened otherwise for Uber? Like, let's say instead of raising the last couple billion dollars, Uber had gone public and was staring down this Didi situation in China as a public company and would have, you know, been forced to really fix it.

• 59:57Ben Gilbert?

  Yeah, I mean, it turns out that hundreds of years of standard accounting principles and, and having to disclose in this very standard format is actually like quite good for keeping, keeping discipline for the business.

• 1:00:10David Rosenthal?

  Yeah. And, and it's not, you know, it's not good for investors, right? Because investors now, the reason, you know, and what you've seen since the Facebook IPO is obviously like the age of the unicorn has existed. And that's, that's twofold, you know? It's one, companies staying private longer, not wanting to go public. But then related is that investors, all the people that were investing in these IPOs, like their, their business model is predicated on getting cash into companies at this stage. So you've seen T. Rowe Price, you've seen Fidelity, you've seen Tiger Global, the hedge fund, you've seen Dragon Year and, you know, XYZ, other.

• 1:00:48Ben Gilbert?

  Directly invest.

• 1:00:49David Rosenthal?

  Public company, public markets investors start doing late-stage private venture rounds.

• 1:00:54Ben Gilbert?

  Yep.

• 1:00:56David Rosenthal?

  That's what they've always done. It's just now those deals are happening in private instead of in public. It's bad for the company. It's bad for the investors because they don't get the disclosure and it's terrible for the public because like you can't buy these stocks.

• 1:01:08Ben Gilbert?

  It's really like kind of anti patriotic. Like follow me on this, but the, the American prosperity is built on the fact that for hundreds of years, American corporations have innovated. Like we, you know, the computer, the internet, like all these things that like we conceived of and, and, you know, brilliant innovators in the U. S. Be often because of our great public, public education system and a lot of the, the kind of shared values of our culture. Like having public markets allows for the everyday person to, you know, now it's more like through mutual funds and index funds, or if you want to take a flyer on a company,

• 1:01:48Ben Gilbert?

  but like benefit from the aggregate innovation that comes out of the American corporation.

• 1:01:55David Rosenthal?

  Yep.

• 1:01:55Ben Gilbert?

  And like it really freezes those people out. And it's really, I mean, if, if you want to like really carry it forward, like sort of contributes to wealth polarization.

• 1:02:04David Rosenthal?

  Yeah, I think it absolutely does. Like I think there, you know, there are two elements of, uh, as we are seeing in this election cycle play out so viscerally, like income inequality and wealth inequality in America is more polarized than it's ever been.

• 1:02:20Ben Gilbert?

  And here's the crazy thing. We're sitting here on Monday night. Uh, our listeners will, will know the outcome of this election where we do not.

• 1:02:26David Rosenthal?

  Yeah, we're literally the night before the election here, um, which is also crazy.

• 1:02:33Ben Gilbert?

  All that rioting outside that you hear all the sirens and stuff is because of the Seahawks Monday night football game here in Pioneer Square, not because of the election.

• 1:02:40David Rosenthal?

  Night before the election. Seattle has its priorities either straight or completely wrong, depending on how you view things.

• 1:02:48David Rosenthal?

  But yeah, like part of that is that these entrepreneurs are creating these tech companies and like they're getting massively wealthy, you know, Mark Zuckerberg and, you know, Travis and Airbnb guys and whatever, but, but it's equally on the investor's side too. Like the people that are investing in these companies are so much more institutions now and for so much of the wealth creation period of these companies than they ever were, so much more.

• 1:03:10Ben Gilbert?

  Yeah, when you restrict the access to invest to people that already have the information and means to do so and large enough, you know, amounts of money to deploy, it's, it's like, it's a rich get richer scenario. And that's pretty crazy. And actually, to kind of continue this, like thinking about tech trends or really like investment trends, with big institutionals coming down market and investing directly rather than deploying that capital into private equity and late-stage venture, it kind of puts the squeeze on those industries.

• 1:03:46David Rosenthal?

  Oh yeah, absolutely.

• 1:03:48Ben Gilbert?

  There with, there's a few things sort of contributing to this trend. There's this notion that we've been talking about that companies want to go public later, but, you know, they are investment vehicles where large amounts of money can be deployed. So large amounts of money will be deployed. So there's that thing going on.

• 1:04:02David Rosenthal?

  And the private markets.

• 1:04:03Ben Gilbert?

  Exactly, exactly. It simultaneously, you have this other market force that's fueling that, which is over the sensitive element of the internet, that one thing has always been true, and that is more information will be more available to more people than previously existed. And so now it's so much easier to get information than it previously was that you, institutional investors, VCs and private equity firms would make the case to their limited partners and their investors, saying, look, I have information access and connections to these startups or these late-stage companies that I will deploy this capital into, and I have unique access to that.

• 1:04:47Ben Gilbert?

  Whereas like that's becoming less and less true.

• 1:04:51David Rosenthal?

  Yeah, absolutely.

• 1:04:52Ben Gilbert?

  There isn't, there's much more visibility into what companies are performing well and people can kind of go find them directly. And obviously, that's not entirely true. Like the, there's still a very human element to all of this, but it is, in general, it's easier to find out who is running a company and if that company is doing well and reach out to them if you have an attractive offer to invest than it ever has been before.

• 1:05:15David Rosenthal?

  I mean, I think about this every day and, you know, being a venture capitalist and at the early stage, we're somewhat insulated from this somewhat, but like only somewhat. And, you know, there's, there's sort of three things that a venture capitalist does, and I didn't make this up, but, you know, lots of people talk about this, but it's totally true.

• 1:05:33Ben Gilbert?

  Roosevelt's principles of venture capital.

• 1:05:34David Rosenthal?

  You know, you find company, one, find companies, great companies. Two, you know, pick them, decide, you know, if you're going to invest or not, if you, if you think the company has high potential or not. But then three, win the deal. If it's a competitive deal. And, you know, it used to be that like those three disciplines were like all really important. And now, like, at least the belief is that it's all about winning the deal. You know, it's like, oh, yeah, yeah, like you can find companies easily. And like, yeah, yeah, you can tell like what's going to be successful and what's not. I mean, like, there's some judgment there, but, you know, it's kind of a commodity, but like, winning, like, that's, it's all about winning now.

• 1:06:09Ben Gilbert?

  If, well, if that's the case, and it's really all about, you know, just getting the best deal, then it should be more entrepreneur friendly and like prices should go up and it should be much more commoditized to the point where-

• 1:06:22David Rosenthal?

  Which is exactly what's happened.

• 1:06:24Ben Gilbert?

  Exactly. That, that investors effectively just get the minimum acceptable return that any of them are willing to deal with.

• 1:06:31David Rosenthal?

  Yep. At the late-stage venture, this is 100% what has happened over the last few years in the market. And it's changing slightly on the margins, but, but this has been a powerful force across all of venture and especially late-stage venture in the past few years.

• 1:06:48Ben Gilbert?

  Hmm.

• 1:06:49David Rosenthal?

  All because of the Facebook IPO.

• 1:06:52David Rosenthal?

  Thanks, Mark and Cheryl.

• 1:06:53Ben Gilbert?

  I don't know for saying that exactly.

• 1:06:56Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:07:09David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:07:25Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:07:40David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:08:04Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:08:23David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:08:53Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 1:09:18David Rosenthal?

  All right. So we bring it home?

• 1:09:21Ben Gilbert?

  Yeah. Yeah, yeah.

• 1:09:23David Rosenthal?

  Do you want to talk about how we thought about what our criteria would be for grading IPOs?

• 1:09:29Ben Gilbert?

  Yeah, absolutely. So, you know, the way that we normally grade an acquisition is through the lens of was it a good way to deploy that capital for the acquirer? So we kind of close our eyes and don't really care about was it a good thing for the acquiree? Because like they're getting a bunch of money. It was a great thing. Their investors are cashing out and almost every time that we analyze it, it was good.

• 1:09:54David Rosenthal?

  Yep. And we think a little bit about like the financial, you know, returns to the acquirer. But, you know, we're not spreadsheet jackies here.

• 1:10:02Ben Gilbert?

  Right, right.

• 1:10:03David Rosenthal?

  We think strategically, was this, was this a good move for the acquirer?

• 1:10:07Ben Gilbert?

  Yeah. And we think about, did that acquisition both provide that, that financial return, but sort of in a longer lead time scenario? Was it something that made that a better, more lasting, more enduring, more, more valuable for longer, more valuable for longer company?

• 1:10:28Ben Gilbert?

  And so the way that we decided that we're going to grade IPOs is through that same endurance lens. We want to assign this a grade based on the rubric of, did it make this company a more lasting and enduring institution, have it a bigger competitive moat, make it a stronger, more viable, long lasting company?

• 1:10:51David Rosenthal?

  Yeah. The, the way we were talking about it before the show and, and I want to think about it is like, was the IPO a springboard for the company or, or a diving board?

• 1:11:03David Rosenthal?

  A lot of people thought the Facebook IPO was going to be a diving board.

• 1:11:06Ben Gilbert?

  Yeah, yeah. And so what that allows us to do is sort of zoom out from that, that terrible plunge, you know, in the first week, plus the ensuing months.

• 1:11:15David Rosenthal?

  Really the whole year.

• 1:11:16Ben Gilbert?

  Yeah.

• 1:11:17David Rosenthal?

  For the first year. I mean, the stock was below the IPO, below the IPO price.

• 1:11:22Ben Gilbert?

  Right. And it, it allows us to look at the company as it exists today and, and look at that moment of IPO and say, was that the right move for the company or not? So.

• 1:11:32David Rosenthal?

  With that rubric in mind, what's your grade on this?

• 1:11:38Ben Gilbert?

  I am going to call this an A minus.

• 1:11:46Ben Gilbert?

  A lot of that is based on how bullish I am on Facebook today, how great their strategy has been since the IPO, correcting for a lot of those blunders. The minus is because I am not convinced that all of the tumultuous times that they went through contributed to the success that they are today. I think that they could have gotten here. They definitely needed to IPO. I think that was a, no doubt about it, they needed to do that situation. But I think that they could have gotten to this point of, you know, hypergrowth and

• 1:12:28Ben Gilbert?

  like kind of saturating the addressable human race with internet crux that they're at today. I think they could have done that without such a bungled year.

• 1:12:38David Rosenthal?

  No doubt it was a bungled year. I'm not so sure. I am going to give this as probably unsurprisingly, given my enthusiasm during the history and facts, I'm going to give this an A+ because I think they wouldn't have. And I think had they not gone through that year and had this massive, you know, 20,000 megawatt spotlight shown on them, they wouldn't have moved so fast to plug the mobile hole. It wasn't just a hole, like it was a chest wound and built, like we said, not just the

• 1:13:20David Rosenthal?

  product, but the whole business and advertising model and invented native advertising practically within six months. I think they, I agree with you, I think they could have done it eventually, but had they not moved so fast because of this, would they have lost? And the other thing that's in my mind here, clearly...

• 1:13:42David Rosenthal?

  May was the pivotal moment for the Facebook IPO when things really started to go south and these problems, these cracks started getting exposed. But I got to imagine that the whole process was really in Mark and Cheryl's minds, um, uh, starting to expose some of this stuff. And what if they had not bought Instagram in April? Uh, and, um, and if they had not bought Instagram and not moved so quickly to plug these holes, would there be a future where, or an alternate present today where Instagram had remained

• 1:14:24David Rosenthal?

  an independent company, had become the Facebook of mobile, had figured out native advertising and completely eaten Facebook's lunch? I mean, cause if you look at, so if you look at, uh, Facebook's revenue over the last couple of years, essentially the desktop Facebook is completely flat to down over the last four years. Uh, what was their whole business? This meteoric rise that made them the most hyped IPO ever, the largest technology IPO ever, that business is essentially dead. Um, and like you said, 84% of their advertising now is mobile. What if that were, you know, half, a third, a quarter, a fifth or a 10th of what it is today and Instagram were the gorilla in mobile advertising?

• 1:15:08Ben Gilbert?

  Yeah. I mean, there's a whole lot of things they would need to go right there, right?

• 1:15:11David Rosenthal?

  A whole lot of things for sure.

• 1:15:13Ben Gilbert?

  It's, it's, they would need, you know, to, to have a Sheryl Sandberg, right? Who, who's going to build this like operational advertising, sales business, right? You would need, um, well, it's actually really interesting looking at, uh, so Twitter didn't have this crux.

• 1:15:32David Rosenthal?

  Yep.

• 1:15:33Ben Gilbert?

  Right? Like Twitter.

• 1:15:34David Rosenthal?

  And Twitter was always, you know, if not mobile native, like it was built for mobile.

• 1:15:38Ben Gilbert?

  Text messaging, right? Like, yeah. And, and you look at their transition to the, the smartphone world and, um, I mean, Twitter is still like, still doesn't have a great ad unit.

• 1:15:52David Rosenthal?

  Yeah.

• 1:15:53Ben Gilbert?

  And there's a lot of problems going on there and we're kind of seeing it all fall apart in front of our eyes, but like, uh, a large part of it is like, it's, it's just never like, Facebook ads are way more compelling, particularly on mobile. And like, if Facebook, you, you raised this interesting point, like if, if Facebook didn't feel this existential crisis, could they wind up in a Twitter-like situation, at least with their, uh, uh, maybe not with engagement, but with monetization?

• 1:16:20David Rosenthal?

  Yep. Or, or even, you know, maybe not Instagram, um, but I'll throw it out there. You know, it was, uh, February 2012, when Facebook filed its S1. One year later, February 2013, Snapchat's founded. So, you know, um,

• 1:16:36Ben Gilbert?

  Lot of possible.

• 1:16:36David Rosenthal?

  One of the greatest things that I love the most about our industry is it is so hyper-competitive. Um, and I think this is just such a great, um, case study of why you can't rest on your heels, even when you are the largest tech IPO in history.

• 1:16:51Ben Gilbert?

  Yeah.

• 1:16:52David Rosenthal?

  Because, man, the next generation is coming right after you.

• 1:16:56Ben Gilbert?

  Yep.

• 1:16:57David Rosenthal?

  All right. Um, speaking of Twitter, follow-ups. Twitter, lots going on on Twitter these days. Um, but they're shutting down Vine, potentially selling Vine.

• 1:17:08Ben Gilbert?

  Yeah, no surprise there. I mean, it's shocking to me that, um, they haven't, and I think these are, will, will come, but they had like 9% layoffs. Like it, it seems like there's a lot more of that to come. They're, they're, they gotta streamline their products. Like, it's kind of shocking to me that they didn't, they didn't do Periscope 2 in one fell swoop. I think they probably, the reason that's probably living on is because, uh, um, Facebook Live is proving so, the future of Facebook, that, um, Twitter is, is really afraid to exit that race when Facebook is making such a big bet on it.

• 1:17:41David Rosenthal?

  Yeah. Wait, uh, total aside, by the way, related to Facebook, um, doesn't get, it gets a lot of press, but not in this context. Like, Facebook is kind of trying to do this again, everything we're just talking about.

• 1:17:51Ben Gilbert?

  Oh.

• 1:17:51David Rosenthal?

  Reinventing itself around video.

• 1:17:53Ben Gilbert?

  I think, yeah, I think there's an existential thing where they totally envy VR, right? Like, they totally feared, like, missing the, the next boat, since they almost missed the mobile boat. So like, buy Oculus and be way ahead of the curve on that.

• 1:18:04David Rosenthal?

  Try to buy Snapchat.

• 1:18:05Ben Gilbert?

  Yep.

• 1:18:06David Rosenthal?

  And, and, you know, Snapchat is mobile and I just made that analogy, like, oh, could Snapchat have killed Facebook in mobile? But like Snapchat's also video.

• 1:18:13Ben Gilbert?

  Right. Yeah.

• 1:18:15Ben Gilbert?

  Yeah, so for me, you know, tough to do. You never want to kill products that people love, but like, I want, I'm rooting for Twitter to survive at all here. And so I think they need a lot more belt tightening to get there. Because it's not, to me, they're in this very difficult situation where all the investors are super excited that they might sell. So that sort of pushes the price up. And then that price tag ends up being too expensive. So they're in this like weird catch 22 where they were unsuccessful in finding a buyer. And now they have to like, go figure it out.

• 1:18:50David Rosenthal?

  And they've already gone public. Maybe we need to add a third category to the show, which is like, what happens if you've already gone public, you have no buyer, like, what then? Plan, Plan C?

• 1:19:02Ben Gilbert?

  Yeah, it's a, it's an invaluable product to the world. And it like, I really want it to endure. And it's actually a pretty good business. Like, they sell a lot of ads and there are ad, there are reasons why people use Twitter ads and can't necessarily satisfy that on any other platform. It's a good business. It's not a Facebook sized business and they really need to reduce their costs to get it to a place where it can actually live on sustainably.

• 1:19:26David Rosenthal?

  Yep. I agree. Quick follow up on Skype, our last episode, we speculated on the show that Microsoft might have used foreign cash to buy Skype, which was a non-US company. And it turns out that is indeed the case, was indeed the case. We were pointed in this direction by Nick Seguin, dear friend of Ben and the show, helped us a lot in the early days with, with feedback on the pilot.

• 1:19:56Ben Gilbert?

  Thanks, Nick.

• 1:19:57David Rosenthal?

  Thanks, Nick. And he pointed us to an old blog post that he wrote after the acquisition, about talking with a friend about this. And yes, turns out, Microsoft did use cash that was holding overseas to buy Skype. And so got a massive, was able to essentially repatriate that cash, tax free, then got a massive tax benefit for it. So definitely plays into how you should think about the Skype acquisition.

• 1:20:22Ben Gilbert?

  Yeah. And it's, if I recall, not Not only did they avoid, you know, paying the, you know, approximately 33% to repatriate that capital, but then there's that second advantage too.

• 1:20:35David Rosenthal?

  Yes, there is that second advantage and that's what is apparently referred to as quote, "the deadly D", that they can repatriate apparently up to another eight and a half billion of cash, tax-free, which at a 30% tax rate is worth two and a half billion to them.

• 1:20:55David Rosenthal?

  So in theory, perhaps Microsoft is getting about $5 billion in tax credits out of a value out of the Skype deal.

• 1:21:05Ben Gilbert?

  Pretty wild and that's eye-opening for me. Like if a US-based company uses overseas capital to make a purchase overseas, they can repatriate that same amount of capital back, kind of in like exchange for deploying that capital in an acquisition. It's really interesting to start thinking about other companies that have huge amounts of cash overseas, Apple, Microsoft, and actually most big tech companies.

• 1:21:31David Rosenthal?

  Google, yeah, all of them.

• 1:21:32Ben Gilbert?

  And like what they could possibly do, yeah.

• 1:21:36David Rosenthal?

  Interesting, yeah. Any corporate tax lawyers out there who know any more about this?

• 1:21:42Ben Gilbert?

  We'd love to hear from you.

• 1:21:42David Rosenthal?

  We'd love to hear from you. Let us know. All right. Carve out?

• 1:21:47Ben Gilbert?

  Carve out. So I was chatting with some of the listeners in Slack. If you'd like to join the Slack, go to acquired.fm and you can sign up there. And we were talking about the Internet History Podcast.

• 1:22:01David Rosenthal?

  Oh, so good.

• 1:22:02Ben Gilbert?

  This is an awesome, awesome, awesome podcast where I believe it's Brian McCullough, Brian McCsissi on Twitter.

• 1:22:11Ben Gilbert?

  It's like 100 episodes or more. It's super long.

• 1:22:14David Rosenthal?

  This is so good. If you like Acquired, you will love the Internet History Podcast.

• 1:22:19Ben Gilbert?

  Particularly the story part.

• 1:22:20David Rosenthal?

  Yeah.

• 1:22:21Ben Gilbert?

  I started listening to the show like a year ago and it's like, it's sort of like long-form reading, but just having it sort of read to you. And he starts out with the Netscape, the story of the Netscape IPO dating all the way back to, you know, the founding of the Mosaic project and Marc Andreessen and really like all the incredible drama in there. But the episode that I just listened to that I... Loved that had all sorts of interesting nuggets about the founding of Amazon with Amazon's technical co-founder and employee number one, Shell Kappen. And it's so interesting to get the engineer's perspective on the founding of Amazon because

• 1:23:01Ben Gilbert?

  in, you know, the ensuing years, you kind of get the, the version of it that's in the everything store and you get Jeff talking about it on stage and it's really this like, not quite revisionist history, not quite sensationalized, but definitely through the eyes of and through the lens of what, what Amazon is today. And Shell left Amazon, you know, a few years after they founded it and sort of, he almost feels like his, his viewpoint is frozen in time. And you really get to hear not only the, the perspective of someone who, who remembers just that piece of Amazon history extremely vividly, but you know, he's also like one of those just super endearing, old school engineers.

• 1:23:46Ben Gilbert?

  And the way that he talks about, you know, oh, well, you know, we were using an Oracle database that had never seen this many transactions before. So we crashed that and I wasn't an Oracle guy. So we were just kind of making it work. And then, and like, it's, it's awesome to hear about all these really early stage Amazon stories about when they were kind of patching it all together in the early, early days of the web. So whether you're an engineer or not, I think anybody listening to this show will love that episode.

• 1:24:15David Rosenthal?

  Yeah, totally. And like we said, let us know too, if you like the, the IPO addition to the show. If you guys do, and we, we go forward with it, we're definitely going to have to do Amazon at some point.

• 1:24:26Ben Gilbert?

  Absolutely.

• 1:24:27David Rosenthal?

  No, no shortage of drama in that IPO either.

• 1:24:30Ben Gilbert?

  Nope.

• 1:24:32David Rosenthal?

  But okay, my carve out for the week, I thought would be appropriate, given that we covered Facebook today, is a relatively new book by Parag Khanna called Connectography: Mapping the Future of Global Civilization that I read. This is a really good book and basically the, it's like, um, you know, uh, like a geopolitical like think piece, which usually is not what I'm into, but it had it recommended to me. And it's great. And basically the thesis of the book is that,

• 1:25:06David Rosenthal?

  What the axes of power in the world, like geopolitically, are not nation states and borders and geography and land, or even populations that much anymore. It's connectiveness, connectivity, and that the more connected a nation state is, whether it's physically with like supply chains or like, you know, supply chains for industry or oil pipelines or water or electricity, or the more connected they are to ideas and to trade. Also relevant, very relevant to the election that is happening tomorrow as we record this.

• 1:25:47Ben Gilbert?

  That happened in the past for all of you.

• 1:25:49David Rosenthal?

  And happened in the past for all of you.

• 1:25:52David Rosenthal?

  Anyway, the argument is that the more connected a nation state is, the more powerful it will be. And that really, nobody gets this better right now than China. And if you look at a lot of China's foreign policy, the Silk Road and the essentially massive trading block that they're forming in Asia. It's all kind of based on this and it's delivering, you know, creating massive power and influence for them. Anyway, great book, totally related to Facebook connecting the world.

• 1:26:26Ben Gilbert?

  Yeah.

• 1:26:27David Rosenthal?

  All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 1:26:33Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:26:44David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:27:05Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 1:27:17David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:27:28Ben Gilbert?

  All right, well, that's it for today. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you feel so inclined, we'd love a review on iTunes, maybe a tweet, share on Facebook. It's how we grow the show and it's how we make it even better. So, thank you so much and have a great day.

• 1:27:45Speaker 02

  Who got the truth? Is it you, is it you, is it you? Who got the truth now? Huh?