The real effect of The Facebook Effect.

The last few days were eventful for Facebook and its ever so precocious young founder.

First, Facebook went public to much fanfare. Here is how the Mercury News summed it all up:

“After opening at a price of $42.05, shares of Facebook’s wildly anticipated initial public offering closed a mere 23 cents above its pre-set price of $38. The failure of Facebook’s shares to rise well past $38 was seen as a disappointment by some observers. Nonetheless, it remained the most successful technology IPO in history and set a record for the number of shares sold — more than 567 million — in a company’s stock market debut.”

Then before we could absorb that news we learn, in stark contrast to the hullabaloo of the IPO, our young CEO-HERO gets married before a humble gathering of 100 people ostensibly there to celebrate the bride’s graduation.

With two such momentous events surrounding our CEO-HERO, we saw endless stories about Mark Zuckerberg as the driving force of Facebook. Even more stories were written about whether Facebook was a good investment for individuals.

But what interested me more was really understanding what was Facebook’s secret sauce that made it worth a $100 B (“B” stands for breathless also – ya’ know). Why did this stock seem to defy all rational evaluation?

No one seemed to really answer that question well.

I knew early on (by about 2010) that social marketing and Facebook were going to be powerful when I observed: “social media was not just a tactic to be tacked onto the backside of a traditional campaign”. Yet everyone, me included, was surprised at the speed of Facebook adoption. It was breathtaking.

Many ascribed that stellar growth to the brilliance of Mark. Yet, it just did not feel right to me to assign Facebook’s unprecedented growth to his vision or drive alone. I give the kid credit – but giving him so much credit just left me unsatisfied.

And because everyone ascribed Facebook’s stellar growth to some alchemy borne of CEO-HERO brilliance, people are willing to suspend critical thought to its value and its future.

For me, the Facebook mystery deepened. At a most fundamental level, why was Facebook worth so much?

The answer came to me in a blinding flash from a recent Harvard Business Review article (“Your brain on Facebook” ) that describes the neuroscience behind Facebook’s meteoric rise. In fact, “a decade’s worth of work reveals some unexpected quirks of the brain that all link to one big idea” – we are social creatures with a “social brain” and that drives a lot of behavior in a lot of unexpected ways.

“Here’s how the social brain works. There is a “default” brain network that is always “on” and it is involved in thinking about yourself and other people.  When not doing anything else, the brain’s favorite pastime is to think about people. We actually have to suppress the activity in this region when we want to do any active processing, such as doing math.” But in the absence of any other cognitive activity – our social brain kicks in!

This explains why Facebook can capture so much of our attention because, neurologically speaking, we are wired to be addicted to being social and “connecting” and “liking”. And like any other addiction, the reward centers in our brain seek ever more satisfaction just to stay “normal.” If you spend a lot of time on Facebook, you are basically “high” all the time. That makes it really hard to focus, think deeply, or perhaps learn something new.

Now that gives a new spin to the term The Facebook Effect because we are, in effect, wired to become Facebook junkies.

That explains, for example, the irrational exuberance the market places in Facebook’s future. It also puts a new spin on Mark Zuckerberg’s success. No doubt he is clever but maybe his real luck was that he became the first efficient digital distributor of social addiction.

Gives one pause – doesn’t it? As well it should and you would not be alone. More and more “resisters”, people to who shun Facebook, are coming forward as an emerging trend. More and more, people are getting ready to kick the Facebook habit:

–  Over 82.2% of people would not pay for Facebook according to a HuffingtonPost poll – April 25, 2012

–  As Facebook grows, millions say, ‘no, thanks’ – USAToday May 16, 2012

–    “Facebook Loses $10mm From General Motors – HuffingtonPost May 17, 2012

–  Silicon Valley Can Do Better Than Facebook – TechCrunch May 20, 2012

What’s next for Facebook as it starts business Monday morning as a public company? I have no idea but while many of us may be hooked on Facebook now – it only takes one disruptor to knock the addiction from our system.

The only question is who or what will that be.

Judy Shapiro

Why the “cha ching” of the $1B Instagram sale might actually bankrupt Boomer parents.

By now, most of you have heard of Facebook’s $1Billion sale of Instagram, an app developed by a bunch of young 20 somethings that lets users post photos. Today, Instagram has about 50 million users which works out to about $20/ person. “Cha ching” for anyone involved …

Punditry aside about whether it is a shrewd deal for Facebook – instead of “cha ching” – all I hear is hissing as the air escapes from Boomers’ retirement funds.

It is alarming and here’s what I mean.

You see, I have worked with tech ventures for over a dozen years, starting at Bell Labs New Ventures and continuing to this very day. In that time, I have worked with many startups, often gratis, because it’s so rewarding when my expertise can really make a difference in the early days of a venture. CEOs have the product vision but they rarely have marketing know-how to get the product to market.  That’s where I step in. I help startups assess their market potential so they can monetize.

And in the dozen years or so I have been doing this, I see an alarming new twist to the never ending parade of venture dreams that haunts me. I liken it to the disturbing “Gold Rush” era where many more prospecting failures bankrupted folks versus the rare, outlier successes.

In today’s day and age – here is how it goes down.

Johnny or Jane are in college and – wham – they hatch an idea for a company often inspired by the innovation incubators on every campus. The idea grabs their passionate attention because at least they can try and make it happen versus trying to get a job which is tough and depressing.

Mr. and Mrs. SupportiveParents are happy their kids have found something that inspires them, so they cover more of their kids’ living expenses so the kids can commit themselves to their “passion.”

After about three or four months, their idea has some substance and the kids realize they need some money to create a “demo”. Of course, there is no cogent business plan (if a business plan even exists) but Mr. and Mrs. SupportiveParents kick in the $10,000 or $20,000 to create said demo –  on top of the extra expenses they are already incurring to keep their kids in school. (This is when you can start to hear the air escaping from Mr. and Mrs. SupportiveParents 401K accounts!)

A couple of months later said demo is “almost done” but not quite because the kids did not really do a business plan and as they worked, the idea kept changing (translation = more cost). “But I only need another $20,000 to finish it off. Then it will take off because it is so cool. Please …” Again, as we would expect, Mr. and Mrs. SupportiveParents step in and shell out what their kids need.

Slowly but surely, over time, as their kids refine their idea; there is steady attrition of the parents’ savings plans because startups need constant funds. This tableau is playing out again and again and I know it because I have met too many Mr. and Mrs. SupportiveParents in the last few months who have depleted their savings by $150,000 or more to help their kids live their passion.

It is frightening to see since most new ventures are “high risk” in the best of circumstances, making them wholly unsuitable investments for most any Boomer given their proximity to retirement.  And if that’s not bad enough, it’s even worse once you understand that kids’ ventures, proportionately, have a higher mortality rate because they are borne of 90% enthusiasm and 10% practicality despite their parents’ 100% support 100% of the time.

This is a dangerous combination – especially in frothy times like ours where opportunities for kids are limited yet perversely, the potential for untold wealth is tantalizingly possible.

And this brings me back my point. The Instagram sale was an aberration – a fluke – an outlier event – possible because of a unique set of circumstances. Yet it infused a new level of Gold Rush fervor into the passionate hearts of ambitious young entrepreneurs despite the reality that the chances of striking it rich today are about equal to striking it rich in the Gold Rush of 1848.  And just as sadly, their loving parents are funding these ventures despite the improbable odds.

So while many people hear the “cha ching” of $1B, all I hear is the air escaping from parent’s retirement funds. It is not a happy sound. Not at all.

Judy Shapiro

P.S. – I am posting this as my personal Mother’s Day present to Mrs. SupportiveParent. Be careful – please!