Facebook’s Rise From Start-Up to Establishment

Facebook's prospectus, released today, offers readers a voyeuristic look at the company's operations, its profits and the riches it will shower on fortunate investors and insiders. Reading between the lines of the prospectus also reveals a case study of how, in an age of income inequality and embedded privilege, an outsider can very quickly become part of the establishment. It shows how a good idea can attract not just capital and customers, but people and other institutions. Facebook has definitively arrived.

It starts literally at the top of the prospectus -- with the lead underwriter. Facebook chose Morgan Stanley, the last remaining white-shoe firm, which traces its lineage to J.P. Morgan.

From the moment he got started, Mark Zuckerberg, an outsider without significant family connections, was able to attract members of the establishment. At Harvard, some of his first funding came from the Winklevoss twins, who were portrayed in The Social Network as aristocratic, rich-guy rowers from Greenwich, Conn.

The roster of significant investors also reveals that members of the establishment -- in Silicon Valley, New York, Boston, Washington, Russia and Hong Kong -- clamored to be a part of the company, even when it was not clear it would be a juggernaut.

Soon after Zuckerberg moved out to Silicon Valley, he began to attract the attention of established players. Peter Thiel, a co-founder of Paypal and ringleader of a group of technology entrepreneurs, in 2004 became the first outsider investor in the company, putting in a reported $500,000 for stock worth 10 percent of the company at the time. As the prospectus shows (see page 128), Thiel has 44.7 million shares, worth about 2.5 percent of the company.

Next came the establishment venture capital firms: Accel Partners, the huge global venture capital firm, which invested $12.7 million in 2005 and now holds an 11.4 percent stake; Greylock Partners, which was founded in 1965 and has a long and distinguished history in the field, came on board in 2006, along with Meritech Capital Partners.

Once Facebook gained critical mass, heavyweight corporations, the classic second and third movers, came knocking on the door. In 2006, Interpublic (IPG), the gigantic advertising conglomeratem bought a sliver of Facebook for $5 million. (It has already sold half its stake). And in 2007, the largest software company in the world, Microsoft (MSFT), paid $240 million for a 1.6 percent stake. The global rich, eager to get in on the next big thing, followed in the footsteps of the corporations. Li-Ka shing, one of the wealthiest men in Hong Kong, invested in two different transactions in 2007 and 2008. Yuri Milner, Russia's dominant entrepreneur, bought a stake in the company for $200 million in 2009. His firm, DST Global, has 5.5 owns of the company. In 2011, Goldman Sachs (GS) came up with a way to let its clients in on the Facebook action. Together, Goldman and entities affiliated with it own 66 million Class A shares.

Of course, as a cash-generating machine, Facebook didn't really need any of this aristocratic capital. It did, however, need grown-up advice and supervision on how to transition from a start-up to a titan. And, here, again, the prospectus shows Zuckerberg's ability to tap into the establishment. Top executives include COO Sheryl Sandberg, a double Harvard graduate, a veteran of the Clinton White House and Google (GOOG). The board of directors includes Marc Andreesen, who founded Netscape (and controls 3.6 million Class B shares), and Reed Hastings, the chief executive officer at Netflix (NFLX). Then there are the requisite graybeards from Washington, such as Donald Graham, CEO of the Washington Post Company, and Erskine Bowles, former White House chief of staff in the Clinton years and co-head of the Bowles-Simpson Commission.

There's a certain irony in this. If The Social Network is to believed, Facebook started in part as a reaction to an establishment that was keeping Mark Zuckerberg and his nerdy buddies out. It then morphed quickly from an elitist network -- remember, at first you had to be a student at Harvard to get onto Facebook -- into a remarkably democratic and open network. At the World Economic Forum in Davos last week, I attended a session in which Sandberg spoke of how the company and technology were allowing those whose voices had yet to be heard to be broadcast loudly throughout the world.

In other words, Zuckerberg and his team have stormed the establishment's barriers by empowering the non-establishment and allowing for the creation of new social networks. In doing so, they've created untold wealth for themselves. But because the establishment is smart enough to be open to new ideas, many of the already-rich are going to get much richer as a result of Facebook's IPO.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.