What's a start-up worth, or reflections on Facebook's IPO fiasco
When its IPO was announced last February, everyone agreed that Facebook was worth somewhere in the ballpark of $100 billion. Today, Facebook has lost 40% of its value – how is this possible?
Facebook, unfortunately, isn’t an EPFL start-up, but the controversy surrounding its overvalued stock market debut (Initial Public Offering, or IPO) nonetheless provides a good opportunity to discuss the value of a start-up, in particular, spin-offs from EPFL laboratories.
A company’s value cannot truly be measured scientifically, even though there are techniques that try to do this via revenues and profits - Logitech and Swissquote, who have historical connections with EPFL, are measured like this. The law of supply and demand rules here: the value of a company is the product of the number of shares and the price per share. Companies listed on the stock exchange are thus hostages of the market and its moods.
When companies are not listed on the stock exchange, as is the case in the majority of start-ups, they can still be valued. Interested readers can learn more in the article “Equity Split in Start-ups.” When EPFL start-ups like Eelcee, Abionic, Aleva and Kandou (see previous articles) recently announced they were looking for financing, they were valued by their investors, even though there was no market in which to buy shares. Switzerland, however, provides some information via the registre du commerce (commerce registry) in which each start-up registers the change in its number of shares. From there, if you know the amount of money that has been raised, you can deduce the price per share and thus the value of the company. But I personally wouldn’t make the calculation, out of respect for the discretion desired by the entrepreneurs and the investors.
Again, value is just a subjective thing that depends on the good will of the investors. Facebook, like Google ten years ago, didn’t completely abide by Wall Street’s rules, by which a company agrees to be under-valued at its IPO so that the ensuing trading result in an upward curve. So far, it’s just simple speculation, and we’ll have to wait several years before we know whether or not Facebook’s IPO was a failure or not.
Our start-ups have a similar problem. I’ve known many entrepreneurs who prefer that their companies have the best possible value when they were looking for funding. They forget that the only real value is that which is created over the long term by their products or services, and that the value of a company is a very volatile thing, as Facebook just illustrated so well. Entrepreneurs tend to retain the lion’s share of their companies, even though by doing this they also seem to be ignoring Logitech founder Daniel Borel’s advice: “We prefer a little pie that we control completely to a big pie that we only control 10%, and this can be a limiting factor.”
I’m convinced (even though I’m often wrong) that Zuckerberg’s impact will be similar to Brin and Page’s. Here in Switzerland, I hope that local companies are created whose value is on a par with those of Daniel Borel, Mark Bürki and Paolo Buzzi.
References (in french)