Twitter IPO dampens investors’ projections

It’s March 21, 2006. After another long day of debugging and hashing out code at the startup, co-founder of Twitter — twttr at the time — Jack Dorsey sends out the first-ever tweet.

What Dorsey published was nothing out of the ordinary. The small team at twttr didn’t know what to think of the idea at first. Biz Stone, who worked alongside Dorsey, was passionate about the project, but some people weren’t as thrilled.

In an interview with the Wall Street Journal, Stone said, “A lot of people thought it sounded stupid. Even some of our engineers weren’t interested.”

Whether or not Dorsey or Stone knew just how big Twitter would get, they’ve been running with their product since day one, and they’ve been doing a pretty good job at it. So it might not have come as the biggest surprise when last week, Twitter announced that it intended to raise $1 billion from a share sale.

There are elements that work for and against Twitter. Public companies such as McDonald’s, Priceline and even Salesforce.com have been, for the most part, successful because they offer services and products that can be bought and sold for a direct profit.

It’s risky to go public when the majority of your revenue relies on advertising. Facebook, of course, is the first example that comes to mind. If your company does not offer anything that can generate revenue by being sold, it’s tough to prove to investors that you’ll be in for the long haul.

This is one of the more concerning aspects of Twitter’s initial public offering. Because advertising accounts for 87 percent of its revenue, the only impactful way Twitter could grow is by getting more brands and advertisers who would be willing to advertise.

It’s even riskier to go public when you’re a startup. Back in 2011, Zynga had about 270 million monthly unique users playing its games, particularly FarmVille and CityVille. The gaming startup looked extremely promising then, but now, two years later, its founding CEO, Mark Pincus, has stepped down, its major OMGPOP acquisition has closed shop and shares continue to slide.

King.com has recently filed for an IPO, with a monthly active user base that has surpassed Zynga’s. But despite its success with Facebook apps, it isn’t very clear how much money the website can raise.

Twitter, on the other hand, is not the startup it once was. The company now has nearly 2,000 employees and more than 500 million users. Twitter has also taken the time to prove itself as a viable public company with its strong choices in acquisitions.

MoPub, which Twitter bought recently for $350 million, is a startup that helps mobile publishers maintain their ad inventory. With Facebook posting great numbers in mobile advertising, and considering that 43 percent of people tweet from their phones, it was a tremendously smart move on Twitter’s part — a move that instilled more optimism than pessimism in Twitter’s IPO decision.

Other great acquisitions include Tweetdeck, which not only makes Twitter easier to use (which helps retain users), but also makes delivering sponsored content more effective.

Vine, which, like many startups, hasn’t generated any revenue on its own, was able to gather a very dedicated following and has carved an interesting niche for itself as the six-second entertainment video app.

The similarities between Facebook and Twitter regarding IPOs cannot be overlooked. Sure, Facebook CEO Mark Zuckerberg was a little cockier about going public. Facebook also boasts a larger user base and longer average sessions. Not to mention the fact that Twitter uses an underwriting team that is remarkably similar to that of Facebook, even though Morgan Stanley, one of Twitter’s underwriters, published earnings estimates before the allowed time period.

But here’s the rub — unlike Facebook, which filed for $16 billion just a year ago, Twitter is filing for $15 billion less. Compared to other tech IPOs, that’s $600 million less than Google’s initial offering (2004), the same as Zynga’s (2011) and $900 million more than Apple’s (1980).

Personally, I do think Twitter’s asking price is high, but definitely more reasonable than Facebook’s filing. Though Facebook offers more variety in its advertising in terms of how it’s delivered, including sponsored pages, sidebar ads and mobile ads, there’s a touch more creativity in Twitter’s ads. How about a sponsored tweet? Maybe a sponsored trend?

Twitter isn’t closed-minded, which might sound like a nightmare to some shareholders. But it’s this openness to exploring new ideas that has definitely helped Twitter to distinguish itself. The hashtag, for example, wasn’t planned. After seeing how its users were categorizing their posts, Twitter decided to make it an official part of the site, and now the hashtag has taken on a completely different meaning in today’s society (#crazy, right?).

Vine, which was a risky enough venture, had no plans of becoming an entertainment app. But once it started to become clear that Vine was becoming like YouTube for those with six-second attention spans, Twitter went with the users and introduced channels and, of course, hashtags and tagging.

It’s both a scary and exciting time for Twitter. Once the company officially goes public, it will be harder for its execs to maintain full control. But something tells me Twitter was ready for this, like the first time Dorsey sent off the first recorded tweet. Twitter’s official ticker symbol, TWTR, looks more like an all-caps abbreviation of the original “twttr” moniker — and you can’t help but feel that the ticker symbol is another beginning of financial growth for this grown-up startup.

 

Sara Clayton is a junior majoring in public relations. Her column “Tech Today” runs Tuesdays.

Follow Sara on Twitter @saraclay15