I don’t understand the Facebook IPO.  Or, more to the point: as a potential (extremely small) investor, I don’t understand clearly enough how it would make me money.

If I were a growth fund manager then yes, I’d be in there all guns blazing … it would make good sense to buy as much Facebook stock as I could get my hands on.  If for no other reason than were I not to, and it did well over the next few years, I’d look like a giant arse.  A laughing stock with angry fund holders wondering how on earth I could miss out on something so blindingly obvious.

Were it to fail, well, all my competitor funds would have bought stock too, so depending on my other investments I might still have out performed my competitors.  It’s a no brainer for a fund manager.

However, as a consumer … it’s not so clear.

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Facebook make money from selling advertising.  As do Google.  But Google’s methodology for targeting ads is so much more solid – it is so much more apparent and understandable than Facebook’s model.  If I’m on Google, and I’ve typed in ‘hedge trimmers’ then it’s a pretty small risk for Google to display an ad for hedge trimmers thinking that I may be looking to buy one.  If I’ve typed in ‘buy hedge trimmers online’ then even better.

In other words, the content a user generates in Google is driven by a desire to find something out.  That desire can then be matched to advertisers offering something to satisfy that desire.

However, the content generated by Facebook is not nearly so directed.  It’s a conversation.  Yesterday, on Facebook, I was involved in a conversation about Frappuccino’s, another about popular birth dates and a third about running.  It’s difficult to target adverts to conversations – I certainly didn’t want to buy a Frappuccino.  The conversations people have on Facebook are rarely about products or services in the same, inquisitive way that Google’s user generated content is.

So, if that’s how Facebook are planning to make money, it doesn’t look as solid to me – and there’s some evidence to suggest that major advertisers are finding it equally difficult and pulling their ads.

Secondly, Facebook acknowledge that mobile is the way forward for social platforms.  Yet, they currently do not make any money from their mobile user base. As of December 31st 2011, Facebook had 845 million monthly active users – 425m of them were mobile users.  But they acknowledge that …

“We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven … ” – Facebook IPO Prospectus (via)

That’s some admission: the future is mobile, and we don’t know how to make money from it.

So, to recap: their advertising model is shaky, and they don’t understand how to make money from over half of their users.  For me, that’s not a solid investment.  I’m not saying the stock won’t do well – I’m sure the IPO will be hugely successful.

What I am saying is that to invest in a company it helps to understand how that company makes money – and how they intend to make money going forward.  If you don’t, then you’re investing in hype.