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How Facebook moved from flop to supremacy

This week is notable for IPO anniversaries. Jeff Bezos took Amazon public 20 years ago. And five years ago Thursday, Facebook shares started trading for the first time.

Just like Amazon, Facebook was hardly a surefire success.

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Even before the trading debut, doubters were already saying Facebook would prove as fleeting as MySpace. Just before it went public, Facebook whispered to some analysts that it was struggling more than expected to make money from surging social network use on smartphones. Six weeks before the IPO, Mark Zuckerberg courted controversy by splurging US$1 billion ($1.35 billion) on Instagram, a start-up with zero revenue and about a dozen employees. Technical glitches marred the first trading day.

The IPO was a belly flop.

The problems fuelled the narrative that Facebook was an overvalued has-been with overmatched management. Facebook shares traded below the IPO price for more than 14 months after its first day of trading. The low point was September 2012, when Facebook's share price hit US$17.55 – less than half the company's $38 IPO price. Zuckerberg had wiped out about $40 billion in stock market value in his first four months leading a public company.

You know how this story turned out. Facebook is now the world's fifth-most-valuable company by market value. Its annual revenue climbed from US$5 billion to more than $30 billion. Along with Google, Facebook dominates the sale of online advertisements, and it's so powerful that the company is criticised for potentially influencing elections.

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What lessons can we learn? First, next time you find yourself doubting Zuckerberg, remember that he has earned the benefit of the doubt. And second, great companies are made, not born. There was nothing preordained about Facebook's rise to a global powerhouse, but rather it was a series of smart decisions large and small.

The big one was how to deal with smartphones, which for a while looked like doom for Facebook. The company – at the same time it was going public – was essentially in the middle of an overhaul of its entire business model. The company ditched the PC-centric ads that were generating US$4 billion to $5 billion in annual revenue and instead devoted itself to new ads that capitalised on people scrolling Facebook on their phones.

It's worth looking back at this September 2012 interview with Zuckerberg, who discussed the company's strategy change.

"It's easy for a lot of folks ... to really underestimate how fundamentally good mobile is for us," he said. "There are going to be more users, each user is going to spend more time, and per amount of time that they spend we're going to be making more money than we are on desktop."

I was there, and I thought he was too confident in Facebook's ability to shift its business model. Surprise: I am not smarter than Mark Zuckerberg.

Commercials mixed into the smartphone news feed was the best advertising idea since Google's web search. Facebook in early 2012 generated 3 per cent of its advertising revenue from mobile. Now it's 85 per cent.

Zuckerberg has powered through doubts before and since. The introduction of the Facebook "news feed" in 2006 was a big controversy, and it became a model for how many digital hangouts are organised. Instagram may be the best technology industry acquisition of the last decade.

Every Amazon and Facebook that proved the doubters wrong must give solace to companies like Snap, which is having a tough start as a public company. Of course, for every Facebook that overcame serious crises, there are many companies that never did. Let me know if you figure out how to tell one from the other.

Bloomberg