founder’s letter

The problem with the founder's letter

February 3, 2012: 12:16 PM ET

Like Google and Groupon, Facebook's letter expressed a defiant idealism that -- eventually -- must confront the realities of business.

By Kevin Kelleher, contributors

mark_zuckerbergFORTUNE – For Internet companies going public, the founder's letter is becoming a ritual with a purely symbolic value, a rite of passage into the adulthood of public markets. Larry Page and Sergey Brin started it when Google (GOOG) went public in 2004. Andrew Mason raised it to absurd new heights when Groupon (GRPN) launched its IPO last year.

Now Mark Zuckerberg's has tried his hand at the founder's letter, the naïve declaration of the company's startup ideals. Whether thrust defiantly into the faces of would-be shareholders or proffered delicately as a corporate heirloom of inestimable value, such epistles are doomed to enter into a slow, painful strangulation as market forces have their way.

CEOs of companies going public will occasionally include a letter to shareholders in IPO prospectuses, but it's usually no more than a bit of PR, a friendly cover letter as meaningless as the stock photos that sometimes clutter the filings. But the founder's letter is different. It is a unique product of Silicon Valley, where startups grow up as hybrids of social idealism and cold-blooded capitalism.

MORE: Facebook shares pop on secondary markets

Google's IPO prospectus began with an infamous letter that boldly declared: "Google is not a conventional company. We do not intend to become one" before asserting, "We will optimize for the long term rather than trying to produce smooth earnings for each quarter. We will support selected high-risk, high-reward projects."

But as institutional investors came to own a larger piece of Google, and as many of the company's employees became its shareholders, the realities of being a publicly traded company began to sink in. Google became quite adept at the earnings game it first shunned. By last summer, in Larry Page's first earnings call with investors since being reappointed as CEO, his defiant rhetoric had been toned down. "We may have a few small speculative projects happening at any given time but we're very careful stewards of shareholder money," page told analysts and investors on the call. "We're not betting the farm on this stuff."

When Groupon filed to go public last June, Mason included in the prospectus a founder's letter that, like Google's, shrugged off standard investor concerns like quarterly earnings -- only Mason employed a flakier rhetoric. "We are unusual and we like it that way," Mason said, before rattling on about fire-dancing classes and the importance of not being boring.

Mason also warned would-be investors that Groupon would "invest in long-term growth... regardless of certain short-term consequences" and make decisions based on "what we feel in our gut to be great." Then, in what must be one of the most irreverent lines in a CEO letter to shareholders, "Our customers and merchants are all we care about." Groupon, trading 15% above its $20 offering price, will deliver its first earnings report as a public company next week. Any disappointment in that or future earnings reports could result in investor pressure that adds a third group to the list of things Groupon cares about -- shareholders.

MORE: Facebook's (other) major milestone

In the IPO prospectus Facebook filed Wednesday, Zuckerberg wrote a founder's letter that is more conciliatory than defiant in tone than Groupon or Google's letters. The harshest phrase he used was "we've always cared primarily about our social mission." But the problem is, when he describes that social mission, he ends up sounding pious and, well, plain wrong.

Zuckerberg is simply trying to explain to investors why idealism is important. But he ends up taking the patronizing tone of a brilliant geek telling his date he usually doesn't date girls who don't like computers, so he's going to explain -- in language a fourth-grader could understand -- why they're so important.

"We hope to strengthen how people relate to each other," Zuckerberg wrote. But anyone who has spent time on the site knows that, while Facebook is very good at improving the quantity of friend connections, this comes at the cost of the quality of the interactions. Updates, chats and photos on Facebook are at best placeholders for the meaningful interactions that happen away from the site.

MORE: Meet the man behind the Facebook IPO

He continues: "We don't build services to make money; we make money to build better services." This also seems disingenuous considering that Facebook's biggest triumph is to help advertisers by mining user data to target ads and to train them to treat corporate brands like friends. Zuckerberg's letter mentions the word "people" 41 times in 83 sentences. "Business" is mentioned seven times. Advertising, the real mission that the site is structured around, only once.

The ideals Zuckerberg so nobly expounds as Facebook's mission -- an open world, accountable governments, connecting people, the Hacker Way -- belong not just to Facebook, but to the web itself. They have been a part of the Internet from its earliest days. It's nice that Facebook embraces them too, but take out these generic ideals and you are left with a company that is devilishly good at making money from online ads.

So while Zuckerberg's founder's letter may be better written than those of Page, Brin and Mason, it's also the most hollow of meaning. Like Google and Groupon, Facebook started with an idealism that, confronted with the realities of financial markets, collapses in time. The only difference is, with Facebook, this capitulation happened long before it went public.

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