The good and the bad of the Twitter IPO
Earlier this month, one of the largest still-private startups that seems to have reached ubiquity in today’s ever-connected world announced it had filed for an initial public offering. Given Twitter’s fantastic success as an advertising and communications platform rivaling that of Facebook, the company could be valued at more than $10 billion when it goes public, according to the New York Times, making it the biggest technology IPO since Facebook. Fittingly, this announcement was made public in the form of a tweet from the company itself, informing the public of the company’s sealed and secret filing.
In the public imagination, steeped in the mythos of the tech-startup-turned-omnipresent-gargantuan such as Google, Apple, Microsoft and Yahoo, the public offering of Twitter seems only natural: a sign that the company is ready to move beyond its startup roots and take its place among the established corporations traded on Wall Street. Considered from a financial perspective, however, such an offering inevitably dilutes the founders’ ownership in the company, signaling that they do not believe the company will become exponentially more valuable in the future and that they are willing to divest some ownership of that company.
Alternatively, it could also be a sign to the public that the company needs liquidity and that whatever supposed profitability the organization has, it needs to sell ownership shares in order to raise capital. This was certainly the case for Facebook’s IPO. The company has had problems monetizing the vast amount of advertising potential inherent in its massive user base. This, in addition to various financial problems, led to a disappointing IPO for Facebook, whose shares plummeted from their initial offer values. Facebook has been somewhat successful since 2012, and its shares have surpassed the offer price of $38.00, but other recent startups-gone-public such as Zynga which opened at $11 in 2011 and is now worth about $3.50, have not been as lucky. While there is certainly something to be said about the management of these companies—just search Groupon’s questionable 2011 Super Bowl commercial on Google—many of these companies problems’ stem from the ephemeral nature of their products. Users have come to expect services such as Facebook, Twitter, LinkedIn and even many of Zynga’s games to be free of charge. This expectation necessitates a massive and well-thought-out advertising platform. Google, with its then-revolutionary relevant search results, was incredibly successful with this monetization. Facebook, it has become readily apparent, has not been so lucky, although that may be changing soon.
What does all this mean for Twitter? Potentially nothing: Twitter is a unique company that has produced a surprisingly effective marketing platform for its users. Nonetheless, there are always potential lessons to be learned in the mistakes of others. Before its IPO, what Twitter needs is a very-well-thought-out long-term financial plan. Rather than rushing to market, it needs to understand where its strengths lie and how to best to monetize those strengths. Most importantly, it needs to focus on the long term. Given the massive day-to-day variation in share prices caused by almost anything to do with the company, the most important goal should be to establish a solid foundation upon which the company can thrive.