Why Twitter Won’t IPO in 2013

tweetIPO

There is a quintessential publicity shot. You have seen it a hundred times before. The latest “it” company is standing on a balcony, overlooking a sea of applauding stockbrokers, reporters and other NYSE staff. Having just rung the infamous opening or closing bell, top company brass grin as they realize they have made it. Their company has gone public and the only way to go from here is up, right? Wrong. As top bloggers peer into the future and make bold predictions on the next companies to cross the IPO finish line, let us ask the underlying question: is going public the beginning of the end or the end of the beginning? Personally, I feel it is the former. Hence, here is why Twitter will not IPO in 2013.

Tune out the hype and avoid scrutiny. You know the hype machine has reached a boiling point when the Bravo network comes knocking. Start-ups are sexy. Or at least, network television execs would like you to think so. Hype can do a lot of things for a budding business: skyrocket your company’s awareness, increase web traffic and even catapult you into d-list celebrity as you see with Bravo’s new series “Start-Ups: Silicon Valley“. However, hype has one, if not many, glaring deficiency: it cannot sustain a business. There is no clearer representation of this fact than social gaming start-up and massive IPO failure, Zynga. On December 16th, 2011, Zynga began trading on NASDAQ at $10 before eventually peaking at $14.50. Today, you can purchase Zynga stock at the low low bargain rate of around $2.50 per share. Now, I care not to be such a generalist that I would attribute Zynga’s 83% share price drop to overhyping alone. In fact, Josh Constine of TechCrunch summarizes it perfectly when he says:

“The year was 2008 and Zynga had it all figured out. Facebook became a portal to games for those who had never played. Viral growth there was unchecked. Facebook ad rates were low, so buying traffic was cheap. And most games were played on the desktop. But soon everything changed, and Zynga never recovered”
- “Why Zynga Failed” by Josh Constine

Zynga’s demise was because of many factors; some within their control and some not. However, the scrutiny generated from an unusually high initial offering certainly didn’t help the cause. The press and tech media sunk their teeth into Zynga’s failure and it will take a major brand reconstruction to right the ship. Try it for yourself. Google “Zynga IPO failure” and see the bevvy of Zynga-bashing contributions that are returned. Let the story of Zynga and Mark Pincus serve as a harbinger for those eager to IPO. Be ready for the scrutiny.

Preserve agility. Take a lesson from Microsoft. Becoming a publicly traded market behemoth can afford you the opportunity to pursue “limitless” new markets, products and endeavours in general, but your large size can actually be quite limiting. You will be hard pressed to make the argument that Microsoft is devoid of innovation, but they have been accused of hindering creativity with their arduous approval process (By the way, Apple is guilty of this too. Kurt Eichenwald wrote a particularly poignant piece describing the progression of corporate malaise at Microsoft:

“More employees seeking management slots led to more managers, more managers led to more meetings, more meetings led to more memos, and more red tape led to less inovation. Everything, one executive said, advanced at a snail’s pace”
- Kurt Eichenwald, “Microsoft’s Last Decade”, Vanity Fair August 2012

Far too often, I encounter former founding members of companies that have since been acquired. It is remarkable to listen to them lament the “good ‘ole days” when they were part of a small innovative team, they could switch directions easily and adapt to what the market demanded, instantly. The transition from startup to publicly traded company can be financially rewarding beyond your wildest dreams, but why do so many intrapreneurs (formerly entrepreneurs) long for the glory days? According to InvestorWords.com, a public company is “a company which has issued securities through an offering, and which are now traded on the open market. Also called publicly held or publicly traded”. My focus goes immediately to the last part: publicly held. What public entity do you know that could be characterized as agile or easily adaptive? Companies that IPO, by their public nature alone, can be labored by process, regulations and investors. Doesn’t matter the company, the size, the amount of funding, the talent or even the technology. You live and die by your ability to keep customers. As Sarah Lacy of PandoDaily put it so eloquently in her recent article “Maples’ Law: A million ways your startup can die and only one unsatisfying way to make sure it lives”, “there are a million ways you can die as a startup and only one way you live: Build something great people love”. An inability to adapt to your customers’ needs quickly can spell a slow (or fast) and painful death for a publicly traded company.

Trend to watch: Dell looks to turn back to private. Despite the general message of this article, I do not believe it is entirely doom and gloom for companies looking to IPO. The definitive outlier in tech appears to be enterprise companies. With a strong showing in 2012 from companies like Epam Systems, Brightcove, Demandware, Splunk, Infoblox, ProofPoint, ServiceNow, Palo Alto Networks, Eloqua, Qualys and Workday, enterprise has caught the attention of many investors as companies like Salesforce pave the way. The opening day numbers speak for themselves. The 11 enterprise companies stated previously all found their stock prices collectively higher by 28% over their initial prices. 4 of the 11 companies even have market caps of over $2 billion. Why is enterprise such a good bet? Servicing enterprise is a safer bet than social anything because Social markets can be much more fickle. Look to Facebook’s IPO for a blow-by-blow of how to anger investors. IPO’ing has lost some of its luster. Companies like Dell are looking to become private just to regain their innovative touch.

Take your cues from SurveyMonkey. Quietly and steadily becoming a market giant, SurveyMonkey has been a formidable force in their industry for the last 13 years. All signs pointed to IPO when they completed a $794 million raising of capital recently, which brings their valuation to a respectable $1.35 billion. Don’t fire up your E*Trade account quite yet! SurveyMonkey CEO Dave Goldberg explains why they won’t IPO anytime soon:

“We don’t need the cash to run; we’re profitable. The money isn’t going into the business, it’s going directly to the investors and employees. For us, this approach affords many of the same benefits — like the liquidity — of an IPO, without the roadshow, the distractions and the demands of meeting quarterly projections.”
- Survey Monkey CEO Dave Goldberg, “SurveyMonkey CEO Talks About Why His Company Won’t IPO After Raising $794 And Reveals Other Big-Name Investors by Rip Emson, TechCrunch

For SurveyMonkey and many other smart companies, the answer is no longer black and white. There was a time where IPO’ing was a virtual certainty with massive companies. However, the intense scrutiny from the media and investors can often times limit a company’s ability to do the most important thing that brought them success in the first place, be innovative. Innovation requires risk, confidence and the flexible allocation of company resources. A public offering can take that all away and leave you drowning as you try to stave off younger and more agile private companies aiming for your market share.

I leave you with this analogy: Old Naval Warships vs Drones

Publicly Traded Companies = Old Naval Warships
Massive, powerful, need an army of support staff, able to plow through what lies in front of them, but the mistakes are magnified, costs are astronomically higher, guided by a chain of command that hinders quick responses, harder to change course/direction and are ultimately seen as relics of old warfare.

Private Companies = Drones
Future of warfare, highly accurate/precise, change direction instantly, able to be fixed instantly, require minimal support staff, costs are far less in comparison, streamlined chain of command controlling them and they posses the ability to single-handedly accomplish a mission by themselves. They are the future of warfare.

Despite my best advice, Twitter will most likely IPO in 2013. However, you can’t say I didn’t warn them.