Why Facebook killed the big IPO

So IPO's are not a great option for an exit what to do? Aivars Lode, Avantce

Why Facebook killed the big IPO What follows is my latest Fortune Magazine column… There are lots of lessons to be drawn from the Facebook IPO: Don't let your CFO scrounge for every last dime. Make sure your CEO pays wardrobe deference to Wall Street. Remove board members who are more loyal to their bank accounts than to the company. But those are all relatively minor compared with the big takeaway from this debacle: Don't go public. Do you remember Facebook before the IPO? It was Fonzie, somehow straddling the invisible line between accessible and unobtainable. Then came May 18, and Facebook suddenly morphed into Potsie -- more style than substance, and just a bit creepy. In short, uncool. Facebook lost favor the moment its shares began trading on Nasdaq, not when it dropped its financial drawers several months earlier. The social network had easily remained a media and venture capital darling after publicly disclosing that its growth had begun to slow (as is normal for an eight-year-old company) and that it faced significant challenges migrating its desktop success to mobile devices. All that really changed on May 18 was that something that once belonged to a relatively small group was now common property. What must really burn up Mark Zuckerberg, of course, is that he knew such a transformation could occur. He was part of a generation of tech entrepreneurs who came of age after the dotcom meltdown and who generally viewed IPOs as an unnecessary evil. Unless your company was desperate for cash, why subject it to analysts' whims, regulatory oversight, and the media scrutiny that accompany public listings? No wonder Zuckerberg's letter to prospective IPO buyers began with the lines: "Facebook was not originally created to be a company. It was built to accomplish a social mission." Translation: I'm being dragged into the public markets kicking and screaming. Like Google before it, Facebook had run up against the arbitrary number of outside shareholders it was allowed to have before being required to publicly disclose certain financial data. For all practical purposes, that meant it was time to list. So Facebook filed for its IPO on Feb. 1. Two months later Congress increased the outside-shareholder limit fourfold, as part of JOBS Act legislation designed to increase initial public offerings (via reduced reporting requirements, etc.). That's right: A pro-IPO bill could have resulted in Facebook's indefinitely postponing one of the largest IPOs in American history. This is where I have to think Zuckerberg would like a mulligan. Congress had given him an easy out, but he ignored it. Maybe he was worried about an employee revolt, given that so many paper millionaires were already scoping out Palo Alto real estate. Maybe he was softened by LinkedIn's IPO success in June 2011, to the point that he overlooked subsequent post-listing troubles for both Groupon and Zynga. Maybe he felt his word to Yuri Milner and Goldman Sachs was his bond. Or perhaps he just got carried along by the momentum of the thing. No matter the ultimate reason Facebook went public, its subsequent experience serves as a stark reminder of how IPOs can flip a company's entire script in a single day. Think of all that the company has lost in exchange for cash it didn't really need. Why wouldn't CEOs of other large tech startups take a serious look at long-term alternatives for shareholder and employee liquidity, perhaps via the burgeoning secondary market for private company stock? Some Silicon Valley folks insist that Facebook is an outlier, an anomaly in terms of how fast it grew and how fast it's falling. But they are wrong. Facebook is the embodiment of why going public often causes problems for large, successful startups. Maybe Congress knew what it was doing by simultaneously seeking to promote IPOs while exempting Facebook from immediate listing. Unfortunately, Zuckerberg didn't take the hint. The uncool kids rarely do.

Infosys to treat its top 50 clients in a special way

Customer intamacy is at the key of our operating philosophy, others are only now starting to get it. Aivars Lode, Avantce

Infosys to treat its top 50 clients in a special way 

Infosys has overhauled its client engagement strategy by dedicating senior executives to watch over each of its top customers, its latest adjustment in the face of complaints that the company may be losing its mojo.

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BANGALORE: InfosysBSE -0.80 % has overhauled its client engagement strategy by dedicating senior executives to watch over each of its top customers, its latest adjustment in the face of complaints that the company may be losing its mojo.

The top 50 clients, who together account for half of Infosys' $7-billion ( Rs 38,000 crore) revenue, will be waited on hand and foot by two executives, with one of them permanently based at the same location as the customer.

The revamped strategy, which is about a month old, has come to light following interactions between customers and analysts who track India's second-largest software exporter.

One of the two senior executives will be designated a 'client partner' and there will also be a 'delivery partner' based in India to ensure that work commitments are adhered to. Together, these senior executives - just two levels removed from the chief executive - will be responsible for not only ensuring client satisfaction but also growing the account.

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"The results of these changes would factor in the September quarter. This is when we would see the first signs of the sales reorientation," said Hitesh Shah, director-research atIDFC Securities. So far, these clients had to deal with several managers who would also have other customers to handle.

Infosys, which has been making a series of adjustments after delivering below-par results in the April-June first quarter, declined to comment citing the silent period before it announces second-quarter earnings next month.

Since July, it has been obvious that the company is attempting to make tactical adjustments which can help it grow sales faster while also engaging more robustly with the media to change perceptions that it is no longer an information technology bellwether. Earlier this month, it announced the acquisition of a Zurich-based consultancy Lodestone, signalling its intention to better use its nearly $4-billion cash hoard.

Infosys, which has guided for a 5% revenue growth in the year to March compared to 11-14% for the industry, has been lagging most peers in its sales growth. By paying more focussed attention to clients, the management believes that some of the 50 key accounts have the potential to scale up to $100 million in annual revenues at least.

Unlike in the past, long-term, multi-billion technology outsourcing contracts are few and far in between, making it necessary for companies such as Infosys to not only retain clients, but generate more future business from them.

"Incumbent (vendors) are under pressure from the market to retain customers and the business," said Sid Pai, partner and managing director at the Indian arm of outsourcing advisory ISG, according to whom several billions of dollars worth of IT contracts signed 7-10 years ago are now nearing the end of their term.

Besides promoting a bulk of its current delivery managers to the new role, Infosys is expected to hire senior professionals from the market. As Infosys waits for the new model to deliver, analysts have flagged its close resemblance to the one followed by its rival Cognizant Technology Solutions Corp. Called 'Two-in-a-Box', it is a name trademarked by the New Jersey-based firm.

"At the surface, Infosys' shift in account strategy appears to be a competitive response to the success of Cognizant's 'Two-in-a-Box' model," said Jesse Hulsing of Pacific Crest Securities in his latest research note on Infosys. "Though late to the game, we view this shift as an appropriate response to Cognizant's client mining success."

Cognizant, which claims to have been following the 'two-in-a-box' model for over a decade-and-a-half, is now adding a consulting partner to the mix, thus making it 'three-in-a-box'.

"The key objective of the consulting partner programme is to help provide greater strategic value to the client organisation by proactively solving clients' business issues, demonstrating domain or functional knowledge and innovation, delivering higher-value strategic and transformational projects," R Chandrasekaran, group chief executive for technology and operations at Cognizant, wrote in an email.

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

VC money the most expensive money you will ever take and a very low percentage chance of being successfull. there are other ways. Aivars Lode, Avantce

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail 

By DEBORAH GAGE

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s.

But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites.

About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

The Wall Street Journal reveals its third annual ranking of the top 50 start-ups in the U.S. backed by venture capitalists.

Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. "We're just getting more light on the entrepreneurial process," he says.

His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says.

Venture capitalists "bury their dead very quietly," Mr. Ghosh says. "They emphasize the successes but they don't talk about the failures at all."

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh's research.

Failure often is harder on entrepreneurs who lose money that they've borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

"When you've bootstrapped a business where you're not drawing a salary and depleting whatever savings you have, that's one of the very difficult things to do," says Toby Stuart, a professor at the Haas School of Business at the University of California, Berkeley.

Venture capitalists make high-risk investments and expect some of them to fail, and entrepreneurs who raise venture capital often draw salaries, he says.

Live Chat Recap

• Harvard professor Noam Wasserman and WSJ small-business editor Vanessa O'Connell took reader questions about avoiding start-up pitfalls on Sept. 20. Replay the event.

Consider Daniel Dreymann, a founder of Goodmail Systems Inc., a service for minimizing spam. Mr. Dreymann moved his family from Israel in 2004 after co-founding Goodmail in Mountain View, Calif., the previous year. The company raised $45 million in venture capital from firms including DCM, Emergence Capital Partners and Bessemer Venture Partners, and built partnerships with AOL Inc., Comcast Corp., and Verizon Communications Inc. At its peak, in 2010, Goodmail had roughly 40 employees.

But the company began to struggle after its relationship with Yahoo Inc. fell apart early that year, Mr. Dreymann says. A Yahoo spokeswoman declined to comment.

In early 2011 an acquisition by a Fortune 500 company fell apart. Soon after, Mr. Dreymann turned over his Goodmail keys to a corporate liquidator.

All Goodmail investors incurred "substantial losses," Mr. Dreymann says. He helped the liquidator return whatever he could to Goodmail's investors, he says. "Those people believed in me and supported me."

Enlarge Image

Alison Yin for the Wall Street J

Daniel Dreymann's antispam service Goodmail failed, despite getting $45 million in venture capital.

How well a failed entrepreneur has managed his company, and how well he worked with his previous investors, makes a difference in his ability to persuade U.S. venture capitalists to back his future start-ups, says Charles Holloway, director of Stanford University's Center for Entrepreneurial Studies.

David Cowan of Bessemer Venture Partners has stuck with Mr. Dreymann. The 20-year venture capitalist is an "angel" investor in Mr. Dreymann's new start-up, Mowingo Inc., which makes a mobile app that rewards shoppers for creating a personal shopping mall and following their favorite stores.

"People are embarrassed to talk about their failures, but the truth is that if you don't have a lot of failures, then you're just not doing it right, because that means that you're not investing in risky ventures," Mr. Cowan says. "I believe failure is an option for entrepreneurs and if you don't believe that, then you can bang your head against the wall trying to make it work."

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don't have the capital to keep going if the business model doesn't work, Harvard's Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn't survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

—Vanessa O'Connell contributed to this article.

Write to Deborah Gage at deborah.gage@dowjones.com

That Sinking Feeling

There is a substantial amount of risk focusing your business on an exit such as an IPO Digital Domain Media case in point. Aivars Lode, Avantce

That Sinking Feeling

By: Robert Cyran

The latest IPO disaster is an epic cautionary tale. Special effects creator Digital Domain Media Group, whose credits include “Titanic,” “Transformers” and the Tupac Shakur hologram, filed for bankruptcy protection on Tuesday less than a year after going public. Elements of the company’s problems are shared by other new technology stocks. It’s a case study for investor skepticism.

Oscar winner Digital Domain looks like a candidate for worst financial picture. Though many recent tech IPOs have run into one sort of trouble or another - most notably Facebook losing some $50 billion of market value in a few short months - none has amassed the collection of missteps Digital Domain has, nor so quickly descended into Chapter 11.

For starters, Chief Executive John Textor had said his company was profitable before going public. It was true up to a point. Subsequent disclosures showed it eked out a small gain in 2009 thanks to some government grants, but quickly returned to its money-losing ways. Demand Media did the same thing ahead of its share sale last year. The content farm racked up some $50 million in losses in the years leading up to its IPO despite claims by CEO Richard Rosenblatt it was in the black.

There also has been an overreliance on hype. The digital rendition of late rapper Tupac that appeared alongside Snoop Dogg and Dr. Dre at Coachella got plenty of attention and helped push the company’s shares up 15 percent after the music festival in April. Facebook and Pandora owners will sympathize. They, too, have ridden a wave of consumer-related adoration to valuations that are pretty much unjustifiable by any fundamental analysis.

Digital Domain’s early backers followed what has become a recognizable Silicon Valley playbook. When it floated last November, it wasn’t quite a bright-line event changing a private firm into a public one. A series of previous fundraising exercises, like ones used by Zynga and others, had sucked much of the financial life from the firm. And similarly to Groupon, Digital Domain liked to emphasize non-traditional profit measures.

Even Hollywood would be hard pressed to imagine a riches-to-rags tale like Digital Domain’s. But when it comes to technology stocks, investors need to be especially creative with their suspicions.

Robert Cyran is a columnist with BreakingViews. Opinions expressed here are entirely his own. 

Listen up, biz leaders: It's time to rethink everything

We are observing in many industries that ultimately there will be a Louis Vuitton and Amazon equivalent. Aivars Lode, Avantce

Listen up, biz leaders: It's time to rethink everything

September 4, 2012: 5:00 AM ET

We're not living in ordinary economic times. Every company needs to determine if its strategy requires an overhaul or just thoughtful tweaks. Here's how to start.

By Geoff Colvin, senior editor-at-large

FORTUNE -- Remember when Motorola (MMI) ruled the mobile phone business worldwide? And then Nokia (NOK) did? And then BlackBerry (RIMM) did? And now none of them do? As Fortune headlined a recent BlackBerry article, "What the Hell Happened?"

We all ask the same question about Kodak, monarch of the global photo industry for a century, now bankrupt, while Instagram, a photo-sharing service with a dozen employees, is sold to Facebook (FB) for $1 billion. And while we're at it, what happened to Hewlett-Packard (HPQ)? To Yahoo (YHOO)?

We're not living in ordinary economic times. The convulsions of the past five years have left many business people asking the most fundamental questions about their companies: Will our strategy work in this environment? What must we change, and what must we not change? Do we need a new business model?

MORE: America's workers: A year of ups and downs

Reconsidering strategy can turn into a miasma that consumes endless time and yields nothing. Yet the process is manageable. One way to think through your strategy in today's uncertain environment is to answer three basic questions.

1. What is our core?

A finding that's consistent across cycles is that the best performing companies keep investing in their core no matter how bad things get. Look at what Dupont (DD) did during the Great Depression. Even as profits plunged, the company resolved to keep funding chemical research -- its core -- no matter what. Among the results: nylon, neoprene, and other products that brought Dupont billions of dollars over the following decades.

In good times, companies often wander into businesses for which they command no special capability. Then, when a downturn hits, those non-core businesses blow up and have to be axed. Pioneer bailed out of the grindingly competitive flat-screen TV business in the recent recession. Home Depot (HD) shut down its Expo chain of home design centers. Google (GOOG) closed non-core businesses that sold advertising on radio stations and in newspapers.

Excellent companies are certain of their core. Early on in the recession, Brad Smith, CEO of software firm Intuit (INTU), said, "We're not going to cut innovation. This company for 25 years has been fueled by new product innovation. We're protecting the innovation pipeline so we come out of this strong." He would cut elsewhere if necessary, but in the realm of personal and small business finance software, he's up against mammoth competitors, including Microsoft (MSFT). He cannot afford to fall even a fraction of a generation behind.

Are you sure of your company's core? If not, you've got to do some corporate soul-searching.

2. How is today's unprecedented environment changing our customers and their behavior?

We're all familiar with the Depression generation's ultra-cautious attitudes toward investing and jobs. Millions of people were shaped for life by the experience of a historic downturn, and similar effects are happening today. In response, as one example among many, several financial firms market "ultra-safe" investment vehicles (often with considerable fees attached). Rattled investors are willing to pay more for safety than they have been in a long time.

MORE: Job hunting? How to spot the right (or wrong) cultural 'fit'

Other effects of bad times are more surprising. In developed economies, physical health tends to improve during a downturn, possibly because people eat healthier food, drink less, possibly smoke less, and drive less. In the previous two recessions, consumers spent less on entertainment, broadly defined, though conventional wisdom holds that people spend more on entertainment to cheer themselves up when times are tough. The category of spending that increased most (among those studied by McKinsey, which compiled this information) was education -- surprising, since it's a discretionary purchase that yields its benefits years into the future. Many people apparently figured they might as well improve their employability at a time when they can't get a job. As the most recent downturn began to take hold, applications to U.S. business schools rose markedly.

How is today's environment changing your customers? The effects may be counterintuitive, and you should discover and address them quickly.

3. Is our industry being deeply restructured, and if so, how will it affect us?

Extreme economic conditions tend to accelerate trends that were already underway. Newspapers have been in decline for years, yet most papers hung on until the most recent recession, which finally pushed many over the edge. The secular decline of the three Detroit automakers was observable for at least 20 years before the recession forced a crisis that changed them dramatically. Those industries will never be the same.

Yet in other industries, even an economic trauma as bad as this one may just throw production temporarily off its long-term trend line. For chipmakers like Qualcomm (QCOM) and Intel (INTC), as an example, growth has lurched through peaks and valleys but over time has followed a reliably rising line. A few years of below-trend growth will most likely be followed by a catch-up period of above-average growth.

MORE: Job-hunting law school grads will face a 'perfect storm'

Is your industry feeling an earthquake or only a thunderclap? Either answer is plausible today. You'd just better be sure you've got the right answer.

Not every company needs to change its strategy, even in these tumultuous times. But every company needs to determine if its strategy requires an overhaul or just thoughtful tweaks. Asking these three questions is a great way to start, and the sooner the better.

Adapted from Geoff Colvin's book The Upside of the Downturn: Management Strategies for Difficult Times, just published in a fully revised and updated edition.

Listen up, biz leaders: It's time to rethink everything

We are observing in many industries that ultimately there will be Louis Vuitton and Amazon equivalents. Aivars Lode Avantce

Listen up, biz leaders: It's time to rethink everything

September 4, 2012: 5:00 AM ET

We're not living in ordinary economic times. Every company needs to determine if its strategy requires an overhaul or just thoughtful tweaks. Here's how to start.

By Geoff Colvin, senior editor-at-large

FORTUNE -- Remember when Motorola (MMI) ruled the mobile phone business worldwide? And then Nokia (NOK) did? And then BlackBerry (RIMM) did? And now none of them do? As Fortune headlined a recent BlackBerry article, "What the Hell Happened?"

We all ask the same question about Kodak, monarch of the global photo industry for a century, now bankrupt, while Instagram, a photo-sharing service with a dozen employees, is sold to Facebook (FB) for $1 billion. And while we're at it, what happened to Hewlett-Packard (HPQ)? To Yahoo (YHOO)?

We're not living in ordinary economic times. The convulsions of the past five years have left many business people asking the most fundamental questions about their companies: Will our strategy work in this environment? What must we change, and what must we not change? Do we need a new business model?

MORE: America's workers: A year of ups and downs

Reconsidering strategy can turn into a miasma that consumes endless time and yields nothing. Yet the process is manageable. One way to think through your strategy in today's uncertain environment is to answer three basic questions.

1. What is our core?

A finding that's consistent across cycles is that the best performing companies keep investing in their core no matter how bad things get. Look at what Dupont (DD) did during the Great Depression. Even as profits plunged, the company resolved to keep funding chemical research -- its core -- no matter what. Among the results: nylon, neoprene, and other products that brought Dupont billions of dollars over the following decades.

In good times, companies often wander into businesses for which they command no special capability. Then, when a downturn hits, those non-core businesses blow up and have to be axed. Pioneer bailed out of the grindingly competitive flat-screen TV business in the recent recession. Home Depot (HD) shut down its Expo chain of home design centers. Google (GOOG) closed non-core businesses that sold advertising on radio stations and in newspapers.

Excellent companies are certain of their core. Early on in the recession, Brad Smith, CEO of software firm Intuit (INTU), said, "We're not going to cut innovation. This company for 25 years has been fueled by new product innovation. We're protecting the innovation pipeline so we come out of this strong." He would cut elsewhere if necessary, but in the realm of personal and small business finance software, he's up against mammoth competitors, including Microsoft (MSFT). He cannot afford to fall even a fraction of a generation behind.

Are you sure of your company's core? If not, you've got to do some corporate soul-searching.

2. How is today's unprecedented environment changing our customers and their behavior?

We're all familiar with the Depression generation's ultra-cautious attitudes toward investing and jobs. Millions of people were shaped for life by the experience of a historic downturn, and similar effects are happening today. In response, as one example among many, several financial firms market "ultra-safe" investment vehicles (often with considerable fees attached). Rattled investors are willing to pay more for safety than they have been in a long time.

MORE: Job hunting? How to spot the right (or wrong) cultural 'fit'

Other effects of bad times are more surprising. In developed economies, physical health tends to improve during a downturn, possibly because people eat healthier food, drink less, possibly smoke less, and drive less. In the previous two recessions, consumers spent less on entertainment, broadly defined, though conventional wisdom holds that people spend more on entertainment to cheer themselves up when times are tough. The category of spending that increased most (among those studied by McKinsey, which compiled this information) was education -- surprising, since it's a discretionary purchase that yields its benefits years into the future. Many people apparently figured they might as well improve their employability at a time when they can't get a job. As the most recent downturn began to take hold, applications to U.S. business schools rose markedly.

How is today's environment changing your customers? The effects may be counterintuitive, and you should discover and address them quickly.

3. Is our industry being deeply restructured, and if so, how will it affect us?

Extreme economic conditions tend to accelerate trends that were already underway. Newspapers have been in decline for years, yet most papers hung on until the most recent recession, which finally pushed many over the edge. The secular decline of the three Detroit automakers was observable for at least 20 years before the recession forced a crisis that changed them dramatically. Those industries will never be the same.

Yet in other industries, even an economic trauma as bad as this one may just throw production temporarily off its long-term trend line. For chipmakers like Qualcomm (QCOM) and Intel (INTC), as an example, growth has lurched through peaks and valleys but over time has followed a reliably rising line. A few years of below-trend growth will most likely be followed by a catch-up period of above-average growth.

MORE: Job-hunting law school grads will face a 'perfect storm'

Is your industry feeling an earthquake or only a thunderclap? Either answer is plausible today. You'd just better be sure you've got the right answer.

Not every company needs to change its strategy, even in these tumultuous times. But every company needs to determine if its strategy requires an overhaul or just thoughtful tweaks. Asking these three questions is a great way to start, and the sooner the better.

Adapted from Geoff Colvin's book The Upside of the Downturn: Management Strategies for Difficult Times, just published in a fully revised and updated edition.