Twitter IPO: Why is this company going public?
As we observed more than a year ago in relation to Facebook’s initial public offering, entrepreneurs distinguish between venture investors and stock market investors this way:
“Venture money is expensive money, but it’s smart money. Stock market money is cheap money, but it’s dumb money.”
Twitter, which on Thursday announced plans for a $1-billion IPO, looks to be especially vulnerable to second-guessing by all that dumb money it’s inviting into the Tweetyverse.
As its registration statement reveals, the company isn’t yet profitable. Its potential for growth in users and revenue is very healthy, but it faces a real challenge in managing expenses as it ramps up in users. Its biggest and fastest-rising expense is research and development, which hit $120 million last year, a 50% increase from 2011.
That in itself isn’t a bad trend, since revenue nearly tripled. But compared with other technology companies at the time of their IPOs, Twitter’s size, and perhaps its prospects, are markedly modest.
Facebook, which looked ridiculously overvalued at the time of its IPO last year (and still does) was profitable, as was Google, which went public in 2004. Twitter lost $79 million last year on sales of $394 million, mostly from advertising. The losses are increasing-- the company pegged the red ink for the first six months of 2013 at more than $69 million--though revenue more than doubled to $253 million. Analysts estimate the firm’s full year revenue will be about $650 million.
So there is and will be growth. The company’s real problem as it moves aggressively to push growth higher is that it will be doing so under the watchful eyes of a lot of dumb investors.
That’s not a great position for a company that will have to keep rolling out innovative and fascinating variations on its core service if it hopes to keep ahead of the online world’s fickle zeitgeist. It’s a safe bet that Twitter will have not a few disappointments to report, even if its top and bottom lines show growth. Twitter is still at a fragile stage, when too much monkeying around with the experience, say by loading down the service with intrusive ads and chiseling too far into users’ privacy, could hurt it.
Given Twitter’s reported user numbers and financials, which came in somewhat lower than investors expected, it’s hardly surprising that it chose to file for its IPO under special SEC rules that limit the information prospective investors could see, until now. That said, there are a few positive notes in Twitter’s disclosure.
One is that its management and capital structures will be relatively normal. Its talented CEO, Dick Costolo, won’t be cemented in place, unlike Facebook’s Mark Zuckerberg, who can’t be dislodged even with nuclear weaponry. Investors all will be buying conventional stock--also unlike Facebook, where your shares don’t give you the right to have any say at all in how the company’s run.
But the Twitter IPO statement still raises the question of why the company needs to go public, with all the drawbacks that entails. Its access to private capital is presumably strong, though its last private financing round, for $800 million, came in 2011. But as Matt Yglesias observes, the real goal of the IPO is to give insiders a chance to cash out. Or as the company puts it, “enable access to the public equity markets for us and our stockholders.”
No one would want to begrudge Twitter’s founders and early investors their main chance. But devoted users such as myself--I value Twitter far more than any other social medium--should be a little worried that the imperative to keep dumb investors happy might force Twitter to make bad decisions in the future, ruining it for everybody.
