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Facebook, Europe & The Fringe Economy

May 18, 2012

As a fan of Fox’s sci-fi program, Fringe, I’ve been thinking a lot this week about the parallel universes that currently exist between the US and Europe-  economically speaking.   In Fringe, one universe (ours) is relatively healthy while their mirror image universe is slowly deteriorating– and threatening to pull ours down with it.

Today as I watch ‘the business version of a live car chase’ of Facebook’s opening trading moments on CNBC, it seems to me this event celebrates all that is special, unique and great about our economic system… coder-dudes code away at their vision- create something people love- grow it- and, a mere 8 (or so) years later reap untold wealth.  It has been said today that Zuck is now worth more than the Google founders.  And those who provided seed capital along the way are also benefiting in ways they never imagined.  Just a few minutes ago it was said on CNBC that U2’s Bono will make more money on Facebook’s IPO that he has made over the course of his entire career!  While that seems to outrageous to be true, so much about the Facebook story is just that- outrageous.

While many would argue that the US economy is far from healthy, no doubt the Facebook IPO is good for ‘our universe’.  For help in describing the situation, I turn to an old acquaintance, Mike Greeley -a Boston VC-  who penned a piece yesterday echoing what has been observed across the tech community– much of this new wealth will get redeployed into the startup community!

For me what is most interesting is to speculate about what is to become of all this liquidity. The venture industry has struggled mightily to raise capital; in the past few years the VC industry has raised between $12 to $15BN annually. As these proceeds are realized and distributed, do much of these dollars get recycled – that is, will underlying LP’s begin to increase their allocations to VC as they start to see Facebook distributions? The math suggests that one year’s worth of VC fundraising is now in around half dozen VC firms fortunate enough to have invested in Facebook!

Additionally, we are watching a very deep and wealthy pool of new angel investors get created and collectively they will play a powerful role in the next wave of great company formation. Much like the “PayPal Mafia” from the last decade which sponsored many of this cycle’s great companies, the Facebook Mafia should do the same over the course of the next decade. These individual investors themselves could become significant LP’s in many venture funds which, if that were to be the case, would further drive VC industry expansion.

Facebook’s story and the economic system that makes it possible here in the US is something to celebrate… regardless of what happens to the stock price today, tomorrow or next year.  Our entrepreneurial innovation in America is unparalleled in the world and perhaps our biggest global sustainable competitive advantage.

But…  there’s always a but!  The future is more than Facebook…

Regular Wall Street Journal readers may have noticed Rich Karlgaard’s thoughtful piece, “The Future Is More Than Facebook” yesterday.  Rich makes a very compelling case that America’s innovative energies need to be focused in places outside “outfits that make algorithms—bits of software code cleverly strung together to take the form of an iPhone operating system, a LinkedIn social network, or a proprietary trading scheme”.  We’ll let Rich take it from here…

The debate about whether America will own the global economy in the 21st century or else become a dude ranch for rich Chinese and Brazilians hinges on whether innovation can break out of the box. Can it go mainstream and transform the really big things: transportation, energy, electricity, food production, water delivery, health care and education?

If it can’t do that—or if it is thwarted by high taxes and complex regulation—then welcome to the new normal of 2% annual growth. Our future will become sadly familiar. Just follow Spain, France and Great Britain down history’s sinkhole of lost status and influence.

But America can do better than that, and it will. In fact, the seeds are being planted now. In Silicon Valley, investing in social-media companies is already passé. Last year, as private investors were bidding up Facebook’s valuation to $100 billion, the veteran Silicon Valley investor Roger McNamee said “the next 500 social-media companies will lose money.” He’s broadly right. The time to make big returns in Facebook and in social media has passed.

You can read the rest of Rich’s post here.  If it’s paywall-protected, let me know.

Rich goes on to describe the huge opportunities in manufacturing, transportation, and energy.  Karlguaard goes on to give a major plug to 3D printing (a view we share!).

Back to the Fringe-style parallel universes…  Facebook is a blip and a distraction to a stark reality that the world economy is on a precipice and the US  economy- sputtering at best- is about to face a new set of unprecedented challenges.  Consider:

While the list is endless chronicling Europe’s troubles, we chose these four to give a small taste.  In fact, LaunchPad’s work currently involves a project across the pond– and almost daily– we hear comments like  ‘all of Europe is in lockdown right now’.   The ultimate indicator for me that our European parallel universe may very well go economic-radioactive–  the contention that a Europe-wide bank run is a strong possibility– can be read here.

Make no mistake, our economies are inextricably linked.  If Europe goes down depression-style it mean our innovators will need to innovate harder and faster to keep us afloat.  Get moving people!

(We try to stay clear of political topics in this blog, focusing rather on sharing ideas and inspiration for winning markets.  But we can’t help but notice the outcome of welfare states… it’s never good.)

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