Facebook’s IPO debuted at $38 only a few months ago, and as of today (August 3), it’s now around $21.  Other well known companies like Groupon, Zynga and Pandora are well down from their IPO prices as well.

This is a good thing, because none of those companies has a proven and sustainable business model to support their IPO valuations.  Facebook has lots of active users, but has to yet to demonstrate how to make enough money to justify a market cap higher than GE or a price to earnings ratio of five times Apple.  For Facebook to justify even its current stock price (almost half of IPO) it would have to grow its revenue at 20-30% per year for years into the future.  Given how saturated the user base has become, this means Facebook has to figure out how to monetize its current user base, do it quickly, and keep doing it for years to come. It’s possible, but I wouldn’t bet much money on it.

The fact that investors recognize this fact and are not buying up Facebook stock just because it’s sexy, shiny, and has lots of users is a very good thing for entrepreneurs.  The late 90s were different – a time when investors routinely ignored the basic premise of a business (make money!) and instead focused on a hopeful future where lots of users automatically equal lots of money.  Investors threw money at anyone with a .com in their name.  Having lots of users can lead to lots of money (see Google, a very fairly priced stock) but not without great technology, good use cases, a solid business plan, and solid execution.  Facebook has good technology, but the business and use cases are still a work in progress, and their execution (particularly in the PR department) has been weak at best.

I don’t dislike Facebook and hope they succeed and do well, but their stock price should sink to a level that makes more sense.  I just feel bad for the non-institutional investors who didn’t do their homework.

When the stock market crashed in 2000, lots of good companies imploded along with all of the bad ones.  We’re far less likely to experience that again if investors pay more attention to fundamentals.  And that means more good small companies will get the money and support they need to become great big companies.

The value in tech companies like Wikipedia, YouTube, Twitter, Flickr, and so on, is the platform they provide to allow their users to express themselves.  They provide tools that blur the lines between consumers and producers of content and profit by increasing access for their users and by providing the best possible experience.

On the other hand, traditional publishers (music, film, book, academic publishing) are simply a delivery mechanism for the creative work of others.  They profit by restricting and controlling access, in ways not always aligned with the success of the actual author of the work.  The Internet has greatly reduced their traditional value added by physical distribution of media.  Content creators are beginning to find their ways around the traditional publishers, by using technology created by the companies that are protesting the new anti-piracy laws being considered in Congress.

There is nothing inherently wrong with intellectual property protection, and in fact, many of those tech companies fighting against the laws are incredibly protective of their own software IP.  The Google campus is tightly controlled – be prepared to talk to security if you snap a picture with your cell phone inside one of their buildings.  Tech companies stay competitive not with lawyers and lobbyists, but with engineers and product managers.

This is not a battle between those who want to prevent privacy and those who don’t, which is what the laws’ proponents want you to believe.  This is a battle over how much power the government has to regulate access for the majority of web users who do not violate copyright laws in the name of stopping the minority who do.  Laws didn’t push music file sharing sites out of the mainstream – Apple’s iTunes Store did.

Let’s hope the recent online protests force Congress to learn enough about the underlying technology and the new media landscape before they pass laws with unintended consequences.

It’s no wonder these two sides are battling it out in public.  The side that stays in front stands to profit.  Unfortunately for the publishers, unless they find new ways to add value to the content they are distributing, they may win a battle or two, but they will surely lose the war.

It’s fun to watch a 20 month old boy interact with the world.  Ben has discovered a great game to stay entertained:

1. Locate stick.
2. Locate object that is not stick.
3. Hit object with stick repeatedly.
4. If stick breaks, return to step 1.
5. If object breaks, return to step 2.
6. If parent freaks out, continue with step 3 as long as physically possible.