When we say that Facebook (FB) retains a lot of VC shareholdings whose lock-ups have just expired, and then see that the stock price goes up instead of down in response, the temptation is to say that all is well with the company.
But the numbers don't argue that way. At its present market cap of about $57 billion, you're probably paying about 9 times annual revenue for this company, even assuming a blow-out Christmas quarter that would nearly double 2011's $3.7 billion number. And we don't have firm evidence that is happening.
This is not a question of democracy. It's not even a question of privacy. It's a question of credibility. Lots of people start accounts in lots of places. What matters, to the site, is whether they come back, how often they come back.
It's a bit like open source. I don't care how many people downloaded your files. If I'm going to risk money with you I want to know how many are actually using it, what they're using it for, whether they're contributing back to the code base - in short the level of their commitment.
Social networking is a lot like open source in that way. Credibility is the coin of the realm. For every netizen complaining about something, there are probably 10 who are just as angry, and perhaps 10 more who are quietly walking away from you.
A lot of investors are probably hearing all the talk about how Facebook mobile is about to explode revenue. That may be good for an initial pop in sales, but how sustainable is it? Because if you're buying a stock today, you're buying its tomorrows, paying for it with its yesterdays.
VC money does not have to be impatient. If a VC has stock that's worth $1 billion, that is currency they can use without cashing it in. If they think holding shares for a few months, convincing suckers there's a going proposition, is going to make another $500 million that's a small risk for a very large reward.
I've said this before and I'll say it again. Evaluate Facebook in January, after it reports its current quarter. Look at its growth rate, place a multiple on that growth rate, ask yourself what the earnings are worth, and come to your price for the shares. If the stock is trading below that price, then buy. If it's not, don't.
But don't let the hype, or the smart guys with their overhang of cheap VC shares, convince you that buying a pig in a poke is going to make your fortune. Remember that the guys who now hold the stock are probably smarter than you are. Demand proof an investment in any mature company is worthwhile before putting your money to work in it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.