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5 startup lessons from Facebook IPO
Brian Gondo, Technology Zimbabwe
May 19, 2012

View this article on the Technology Zimbabwe website

So you are Tengesa, ForgetMeNot, Dariro, 6tm solutions, and countless other Zimbabwean and African startups that are hoping to change the world and you are looking at Facebook's IPO; you realise that Mark Zuckerberg and co have reached the promised land. And that's $104 billion worth of real estate. For perspective Econet has a market capitalisation of $710 million and the MTN Group $30 billion.

Last year Techzim, ZOL and other partners launched the inaugural Startup challenge with the view of assisting promising local start-ups on their way to tech stardom. The overwhelming response of entries demonstrated sheer belief among local techies that they too can emulate their counterparts in Silicon Valley and other technological hubs globally.

Looking at the Facebook's IPO, the third largest ever, here are some lessons that local technology entrepreneurs can take away. This is a timely moment of reflection because the winner of the ZOL start-up challenge Mukela Travel is still operating in stealth mode as it seeks more funding. The lessons may also offer invaluable insights for the other top place finishers Sadomba- Mahari and Software House, not to mention countless other start-ups that are sprouting in the Zimbabwean technology firmament.

Lesson 1: Funding - It's more evolution than big bang

On the road to the IPO, Facebook received lots of funding, $2.24 billion worth. In follow-up discussions with participants in the start-up challenge we have discovered that although some have funding they are spending a lot of time looking for what in our view are unrealistic sums of money. For example, we are aware of a start-up challenge company that is looking for $1 million in funding. That may pale in comparison to the figure raised by Facebook but bear in mind that figure is arrived at after years of operation and rounds of raising venture capital. Indeed start-ups are capital hungry and in fact the IPO is really another capital raising round (Facebook raised $16 billion from its IPO), but it's important to approach venture raising activities in a phased manner.

Don't go for a 'Big Bang' approach of trying to raise all the capital you will ever need in your initial round of funding.

Now I've heard some entrepreneurs grumbling that the hope of an IPO is in itself an unattainable goal in this part of the world. To some extent that is true. If you are looking at listing on the Zimbabwe Stock Exchange. The Alternative Exchange (ALT X) in South Africa however offers a much more start-up friendly.

Lesson 2: Stay true to your coding roots

The staffing in technology start-ups by nature should predominantly be engineers, programmers and designers, primarily because the bulk of start-up work is product related. Even though Facebook has outgrown it's start-up roots it is still remains true to those roots.

In the company's S1 filing it devotes a whole section to what Zuckerberg calls "The Hacker Way" and this is how the prospectus defines hacking:

We have cultivated a unique culture and management approach that we call the Hacker Way. The word "hacker" has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I've met tend to be idealistic people who want to have a positive impact on the world.

The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it - often in the face of people who say it's impossible or are content with the status quo.

This is not just the usual fluff you find in prospectuses because the company walks the talk. At the company's Menlo Park headquarters there is a big sign that reads "The Hacker Company" and regularly holds coding events called Hackathons for its engineers and non-technical people. Product features such as chat and timeline are results of these events.

And just after the IPO the company held its 31st Hackathon to celebrate the event. This is a product driven company that lives and breaths coding. A strategic mistake would be to eviscerate this. When you talk to a lot of tech entrepreneurs they are great on the vision part but weak on the execution. This does not mean that you as the company leader should be the star programmer or technologist but it means you should have a good understanding of the underlying product and how you will sell it to the customer. And in a demonstration of its product centred culture the company has said that despite the IPO it will keep innovation paramount. customer focused.

I was fascinated to note that there are few of the newly minted millionaires at FB that are MBAs. Dropbox founder Drew Houston makes a similar point about the need to have a strong technical/product focused team particularly in the early phase of the company.

Lesson 3: Retain control of your vision/company

When early investor Sean Parker (a co-founder of Napster) became president of Facebook in 2004, he was careful to ensure that the young Zuckerberg retained a sizable equity stake in the company and set up the board structure so that Zuckerberg would have two seats, making it tougher for the board to give Zuckerberg a hard time. And when Parker was edged out of the company he gave his own seat to Zuckerberg. You are the founder, you have the vision. Yes you will need advice and input from others and at times to completely change course but at the end of the day it's your vision so don't cede control.

As much as it is a boon to accept VC money it can also be a poisoned chalice. Traditionally startups in the early stage of growth exchange funding for small pieces of equity usually in the 5-25% range. However, given the scarcity of venture funding of any sort in Zimbabwe, entrepreneurs are tempted to part with larger pieces of the pie in order to secure the much needed funding. Venture Capitalists are good are notoriously ruthless in firing founders especially when vision or performance issues are at play.

Lesson 4: Forget about novelty - focus on execution

In my discussions with Zimbabwean entrepreneurs one thing that keeps popping up is the desire to maintain trade secrets. The extreme expression of this desire comes in the form of a non-disclosure agreement (NDA). As reasonable as this may sound but if that's what you think I've got news for you. Firstly if your idea is so unique that only you have thought about it, well it's probably not that good an idea. If there is a gap in the market surely you can't be the only one who has spotted that gap and besides most VCs won't sign NDAs.

Facebook was not the first social network. There are several high profile predecessors in Friendster and Myspace. Remember those names?

Founded in 2002, by the end of 2003 Friendster had raised $13 million in venture capital funding. Friendster took off like a rocket. With the site launched in March 2003, by June it had 835,000 registered members. Four months later, there were more than two million, generating some 10 million page views per day. Having raised close to $50 million in venture capital, Friendster was acquired by Malaysian payments company MOL Global at the end of 2009 for a reported $40 million. Today all Facebook and Friendster have in common is Harvard University; Mark Zuckerberg attended it and Friendster is a Harvard Business School Case study on how not to build a technology company.

Similarly look at the case of Myspace. After it's acquisition by News Corp for $580 million in 2005, Myspace, another high flying social network, reached its peak in December 2008 with 75.9 million monthly unique visitors in the U.S by May 2009 that number had dropped to 34.8 million. Since then myspace has plunged into a downward death spiral with advertising revenues falling from $470 million in 2009 $184 million (circa) in 2011.

So much for first mover advantage hey!?

Lessons 5: Learn from your mistakes: Beacon, privacy Issues

A problematic issue in Facebook's growth is one that is not technological but a user experience and public policy issue. In a word, privacy. After all privacy issues were central to the company's ascendency. Despite the sharing of those rather awkward photos and gushing of emotion that typically fill social network pages, users still value some level of privacy and most of safety.

One of the reasons Facebook overtook Myspace is that the site offered a cleaner ad-free interface. A case in point that helped to destabilise user trust in Myspace was when Connecticut Attorney General Richard Blumenthal in February 2006 announced that he was launching an investigation into minors' exposure to pornography on Myspace. MXit another popular social platform has been dogged by issues relating to child porn.

Privacy however also relates to how social networks use the enormous amounts of user data they collect, who can have access to this data (both from a user and commercial perspective), how long this data can be kept and so on. There many actors who would love to get their hands on such data from marketers, academics, social researchers, government agencies and terrorists.

So when Facebook introduced it's Beacon program. Beacon raised a firestorm of protest from users and privacy activists. Their central gripe was that a user's activities with regards to purchases and buying decisions could be shared with their friends without the user's consent. So if you made an online purchase of a packet of Willard's chips or Kellogg's cornflakes your friends would be notified of your purchase. The benefit for Facebook would be its ability to sell this service to marketers.

The sheer scale of opposition generated by Beacon saw Zuckerberg beating a hasty retreat and issuing an apology to users. Privacy issues have not gone away but the key is that Facebook quickly back down from it's Beacon debacle and started communication regularly and earnestly about privacy issues.

It's impossible to build and ship a product that is 100% perfect technically, in form and function and in the user experience. The best iteration lessons will come from live interaction with users. When you make a mistake learn your lessons quickly, internalise and move on. For those who will be participating in our next start-up challenge, the greatest feedback you are ever going to receive is from real-world users of your product.

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