Editor’s note: James Altucher is an investor, programmer, author, and entrepreneur. He is Managing Director of Formula Capital and has written 6 books on investing. His latest book is I Was Blind But Now I See. You can follow him@jaltucher.
Facebook shareholders suck. I know this because this past week I tried to help someone sell about 30 million shares of Facebook for $31 a share. These are weird transactions because never before in history has a private company so large ($80 billion in value) had so many random people buying and selling shares of it.
On the one side are these semi-mythical demigods called “co-founders” who hit the jackpot. On the other side are literally kings of some ancient lost kingdoms in Asia that suddenly want to own tens of millions of shares of Facebook before the IPO. In the middle are enough people to fill a small country. There are at least three lawyers (buyer lawyer, seller lawyer, random middle lawyer that keeps popping up and you never know his name but he’s there somehow and nobody knows why). You have 1-3 broker dealers for the buyer, 1-3 for the seller. (See also, “Why Facebook is Worth $100 billion”)
Then you have to figure out a spread. So the seller has to agree to $30, the buyer $31, and the dollar in the middle is split 15 ways. Its 30 million shares so that’s $30 million in the middle and everyone feels this is the transaction of a lifetime and they need to get a piece. And then, all of a sudden, the secretary of the mistress of the random king wants to get at least half of the spread in the middle or will block the whole thing. So everyone needs to get on the phone again. At 11 pm at night on a Saturday. And hagggle out fees.
I introduced the buyer and the seller as a favor but I have no other involvement. But through the course of this I became an expert on everything you can possibly know about Facebook shares. All the prior transactions. Which shares are “Rofer” (i.e. “right of first refusal” for those not in the “Facebook share biz”), which shares are locked up, have they been already sold and resold, we need to see POF (“proof of funds”), we need to see “Proof of shares” (nobody says “POS”, nobody even jokes like that).
Everybody’s already been screwed once, twice, three times, sold, by people who claim to have shares or funds but don’t. They just want to be in the middle (“we’ll find the shares later,” “we’ll find the cash later”). There’s a king somewhere on his toilet thinking about the 1% of Facebook he will soon own. There’s a demigod in San Francisco or Colorado or also in Asia dreaming about all the cash he will be covered with in his gold-plated jacuzzi.
But nobody will move on price. The sellers think Facebook is going to $100 (so why are they selling?). The buyers think “we have all the cash” and won’t budge. And everyone in the middle cries themselves to sleep because they are dreaming of either new houses for all of their grandkids or they assume the deal is off forever. But then new buyers show up and the old buyers disappear. And new sellers show up and the old sellers are gone. And the ongoing conversation continues but nobody knows who is real. Nobody is real. Someone is real. I need proof of funds. Well, I need proof of shares. They’re in escrow. Series A has the same restrictions as Series B. No they don’t.
(from the Oprah Winfrey Show)
And then: Can you also introduce me to Mark Zuckerberg?
No I can’t. Nor can I introduce you to Randi Zuckerberg. Or Sheryl Sandberg. Or Jessie Eisenberg. I can’t introduce you to anyone who has “berg” as their last syllable.
My wife begged me: don’t write this article if you really want to help your friends. Maybe the deal won’t happen. What deal? Do you think a billion dollars won’t get transacted because I write a few little words? Do you think anyone cares?
But I have to write it. Because it’s all a long segue into “bubble 2.0”.
There’s no bubble 2.0. And while I’m at it: there was never a bubble 1.0.
Let me explain.
A bubble occurs when an asset moves up today only because it moved up yesterday. Think about it. I’m not going to define it more than that.
(fr the Hollywood Reporter - the "co-founders of Facebook")
The Internet went up in 1999 because now, 12 years later, everyone on the planet uses the Internet. And many Internet 1.0 companies: Ebay, Amazon, let’s throw in Apple, lets even throw in Google although it was late to the game, and a slew of others, are at all-time highs in value and create tens of billions in earnings. Because they are real.
Why are they at all-time highs? Because everyone was right about the Internet. Everyone did eventually start using it. It did make commerce easier throughout the world. It did make corporate IT easier. It did allow companies to fire parts of their workforce because they are now replaced by easy to use technology (the real reason for the now probably permanent 8-9% unemployment we have: every corporation used 2008-9 as an excuse to fire the dead weight the Internet created in their workforce. I’ve had Fortune 100 CEOs admit this to me: “well, everyone was firing people. So finally we were able to.”) Just like when cars appeared we were able to fire all the people who rode horses.
Internet usage went from 30 million people to 2 billion people worldwide. That’s not a bubble. Groupon, no matter what you read about their stock, their moat, their people, their competition, their model (“its a coupon business”), is the fastest growing company in revenues in world history and it started in November, 2008. Zynga is another one of the fastest growing companies in world history. Facebook has 800 million users and is slowly but surely figuring out how to extract $2-$3 a year from every customer (which will give it a value of about $100 billion).
Facebook is a mini-Internet. It’s an organized Internet. We’ve all moved our “home pages” to be our “Facebook pages”. Companies flash their Facebook page on their commercials now instead of their own websites. So imagine the value of the entire Internet. Discount it just a little. That’s Facebook. Or maybe Facebook + Twitter + Google. And then everyone who builds tools to service those behemoths. That’s dot-com 2.0. It’s not a bubble.
So why does everyone call dot-com 1.0 a bubble? Wasn’t it? Wasn’t there pets.com? And a sock puppet?
A venture capitalist might invest in 20 companies. 10 might be zeros. 5 might be losses. 3 might be small wins. One or two might be home runs. That’s different from the normal everyday investor portfolio where everyone expects all of their stocks to go up.
In 1999-2000, the public was given the chance to have a venture capitalist-style portfolio. It didn’t work. And in anger it was called a “bubble” and then a “bust”. Tulips! they said. Tulips don’t have $80 billion of cash in the bank like Apple does. Tulips never had $43 billion in revenues like Amazon does. Venture capitalists will wait five to ten years for their payoff. The average investing public will wait five to ten minutes or it’s a bubble. Again: the dream came true: the Internet actually did bloom to billions of users. That’s not a tulip garden. (See, “the worst VC decision I ever made. Plus, 10 unusual things I didn’t know about Google“)
Tulips won’t have a billion in earnings like Zynga will if not next year then the year after. Tulips won’t have billions in earnings like Facebook will in the next several years. Twitter, Facebook, Etsy, Groupon, Zynga, Yelp, Craigslist—these are the dreams come true. We use these companies and they deliver value for us. They’re real.
Now excuse me. The king of Shangri-La wants to buy more Facebook shares. And I have to get on the phone and pretend I can introduce him to Mark Zuckerberg.
Top image by DonkeyHotey