Remember all that hype during the 1990s about the “democratization of finance” — how middle-class Americans with their mutual funds and 401(k)s were joining the “money class”?
Two booms and busts later, it should be obvious that the world of finance is still as rigged for insiders as it ever was. The latest proof comes with the news that Goldman Sachs has invested $450 million in the hottest company on the planet, Facebook, with the right to invest an additional $1.5 billion solicited from the roster of rich clients in its wealth-management division. The $2 billion should be enough to keep even a fast-growing company in cash for quite some time.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
So if you’ve been hoping to get in on the ground floor of the social network’s much-anticipated initial public offering, you might want to take to heart the advice recently offered by Facebook’s young founder, Mark Zuckerberg, when asked about an IPO: “Don’t hold your breath.”
Goldman is hardly the first blue-chip investor in Facebook. The first wave included some of the biggest names in venture capital — Peter Thiel and his partners at the Founders Fund, Jim Breyer and his colleagues at Accel Partners, and the investors at Greylock Partners. Then came Microsoft; Asia’s top billionaire, Li Ka-shing; and Bono and his colleagues at Elevation Partners. Then, last year, Facebook tapped into Russian coffers with an investment from steel-and-telecom oligarch Alisher Usmanov and his holding company, Digital Sky Technologies.
(Full disclosure: The Facebook board of directors now includes Washington Post Co. Chairman Donald E. Graham.)
With each new wave of private investment, Facebook has gained not only the cash it needed to grow but also the cachet to lure still more high-profile investors. And with each round, the company’s estimated market capitalization reached another eye-popping milestone such as this week’s $50 billion valuation.
It’s pretty clear that Facebook could achieve an even higher valuation through a public stock offering, but Zuckerberg and his directors know that’s not how the smart game is played. Rather, the better strategy is for the hot company and its hot investors to play off each other’s reputations, creating such excitement and pent-up demand for Facebook shares that when the public offering finally comes, the full value has already been captured by insiders — and the first wave of public shareholders can be played for suckers. Think of it as a sophisticated update of the old “pump-and-dump” strategy.
In the meantime, many of the insiders are reaping immediate benefits. The venture capitalists are leveraging their Facebook success to lure new investors. The share prices of Microsoft and the publicly traded arm of Digital Sky Technologies have shot up. And Goldman is anticipating $60 million in fees for placing its clients’ money in Facebook plus a cut of 5 percent from any profit they earn — that, along with hundreds of millions of dollars it will almost certainly collect as the lead underwriter for the Facebook stock offering, whenever it finally occurs.