I sure got that one wrong.
At the end of my 2009 year end letter to Lloyd Blankfein, Chairman and CEO of Goldman Sachs, the third in an exchange that took place during the depths of the financial crisis, I predicted that Goldman clients would begin to defect, either of their own volition, or because their own clients would force them to. I predicted “civil war (inside Goldman) could break out after Goldman loses the Facebook IPO for one reason alone: the Goldman Sachs brand.”
Oops.
It’s interesting to reflect back on the clarity I had and intensity I felt when I wrote these letters about the need for Wall Street leadership, beginning with Lloyd Blankfein and Goldman, to step up to the responsibility of financial statesmanship the times demanded. And how differently it turned out than I presumed it would if they failed to do so.
I didn’t really understand Facebook when I wrote that at the end of 2009, probably still don’t today. I had this misguided idea that Facebook’s now 500 million customers, real people with whom the image of the Vampire Squid resonates, would rise up and rebel at even the thought of allowing the company to reward Goldman with “their” IPO. Wrong!
What I missed is that Facebook customers are captured, busy with their lives, or simply can’t be bothered to take on a principle they feel powerless to impose. Their personal information is being used and monetized by Facebook’s shareholders and they take it because they don’t have a better option, and because they “need” the service Facebook offers. Kind of like how I imagine many Goldman customers and trading counterparties feel about Goldman.
So rather than the Facebook community directing the outcome, Facebook’s shrewd venture capital investors no doubt sniffed an extraordinary opportunity to prey on Goldman’s need for reputation resurrection. What prize could be more irresistible to re-establish their brand than the Facebook IPO? Imagine what Goldman would pay for that?
$450 million at a $50 billion valuation, an incredulous multiple of 25 times sales. (Google is valued at “only” 6 times sales.)
You didn’t see existing shareholders Accel Partners or Greylock, or Elevation (Bono’s venture firm) participating at that valuation. And Goldman’s own private equity fund with a fiduciary responsibility to outside investors took a pass (tempting I’m sure). I bet they would have taken a pass at half the price. No, this was a deal for the house account, the one subsidized and backstopped by us tax payers, cementing Goldman’s position as the book runner in the eventual Facebook IPO, the ultimate prize and validation that the Goldman brand is alive and well.
The calculus inside Goldman probably went something like this:
Of course 25 times sales is an absurd valuation. But Jim (Accel partner and Facebook Board Member Jim Breyer) knows he has us by the you know whats. He knows he can just wait, because they don’t really need the money and at their growth rate, he’ll probably get the valuation sooner or later from some sucker. In fact, he’s telling us he has Morgan Stanley willing to do the same deal and he may not be bluffing. This social media thing is real, so our downside is probably that we’re overpaying by half; we’re looking at a $225 million downside risk. We just paid $500 million to settle up with the SEC to get Uncle Sam off our backs. Now, for a risk (not expected loss) of $225 million more and we re-establish our IPO franchise on the most important IPO we can see on the horizon? No brainer. And who knows, chances are we’ll actually make money on the trade with QE2 flooding the world with liquidity and risk appetite returning – how quickly they forget. Sure is nice that our friends in Congress never figured out how to implement that bloody Volker Rule! And furthermore, our effective cost basis on the position is really closer to about half the $450 million after we take a turn on the $1.5 billion we can secure for our private wealth clients (clients come first!) and the eventual IPO fees on the looming multi-billion dollar IPO of the decade, not to mention all the fees we’ll earn advising these guys what to do with all the cash they won’t know what to do with for years to come. So worst case, we will get all the PR benefits and our brand validation for basically no risk. And base case, we’ll keep all the fees, have a new house account to milk for years to come, and even make a modest return on the investment given the frenzy that we can muster for the IPO with the wind from our friends at the Fed at our back. This is a beautiful thing!
Here’s a more outlandish pair of predictions than the one in my 2009 letter to Blankfein:
- Someday there will be a Facebook killer, built on peer-to-peer technology, that allows the community to control who uses their information and allows the community to share in its monetization. It will be governed by its community, in the true spirit of social networking. It will likely not “go public,” but remain owned by the community. It will not need, nor seek to “use,” Goldman Sachs or anyone else. It will become Time’s “Community of the Year”.
- Someday there will be a banking system free of conflicts of interest because firms will be forced to pick a constituency to serve rather than serving themselves, subsidized by society. It will be highly diverse, dynamic, creative in serving the real needs of an economic system going through profound transition to serve the well being of people while respecting the natural laws of the biosphere. It will be appropriately scaled, with no one firm too big to fail. It will resemble a diverse natural ecosystem, with buffers built in, coherent, and balancing efficiency with resiliency. Its participants will hold their heads high.
