Twitter and IPO Fever

Twitter's nightmare began yesterday afternoon with a slip-up that made its quarterly report public before it supposed to be. The incident has provided new fuel for discussion about whether Twitter itself should be public.

The latest to weigh in is Herb Greenberg, a long-time skeptic who writes on LinkedIn that "many companies that go public shouldn’t go public, or go public too early. Twitter is a classic case of a wonderfully disruptive 'service' that isn’t necessarily a great business. Certainly not a great business right now."

This is still a decidedly contrarian view, but one I have shared for years. Last year I got into a brief exchange with Twitter booster Marc Andreessen about this (on Twitter of course):

(I'm still not sure whether I should be proud about my parting shot, which spins one of Andreessen's most famous observations to make my own point. But I couldn't resist.)

The "Twitter shouldn't have gone IPO" meme also begs the question: What could Twitter do about it anyway — go private again? It's one thing to have argued before they went public that Twitter should figure out what they are first, as I did when I was at Wired, and founder Biz Stone was saying that the company was in no rush to do an IPO. But that's ancient history.

Twitter is an unusual bind. It provides a unique service — I think of it as perfect disclosure — that no one has successfully challenged. A few, among them Google, have tried, and some ordinarily pretty astute observers have declared Twitter dead on more than one occasion. The barrier to entry is high. Near monopolies should have pricing power. Twitter does rake in quite a lot of cash — Andreessen's mic-dropping point back in November — and that is even truer today.

But Twitter provides what has become a commodity service — my point to @pmarca — and commodities, by definition, are difficult to differentiate. Twitter has no hope of making money off its users, so it can only sell them to third parties. And in that endeavor Twitter is no different than everyone else chasing ad dollars, including the 800-pound gorillas that are Facebook and Google.

Twitter's latest earnings may be an early indicator of what Jonathan Ratner in the Financial Post calls a "wall with advertisers." He quotes Mark Mahaney at RBC Capital Markets to make the point:

“Channel checks and our extensive survey work don’t provide convincing evidence that a substantial number of advertisers will commit substantial ad dollars to Twitter,” the analyst said in a research note. “The possible ‘ROI Wall’ increases our concern that Twitter’s lack of real-time commercial intent (a la Google) or detailed, authenticated profiles (a la Facebook) will at some point materially limit Twitter’s ad growth potential.” 

Twitter is committed now, but this is an existential issue that should animate every pre-IPO discussion: Does the business model scale to the point where the startup is investable by the public, with all that implies? Or is the value to users not as valuable to investors as it would appear -- even if you have the chance to become a global household name?

Groupon is an extreme example of overplaying a good hand. There is value in daily deals. They aren't a fad. But is the entire industry —a space with even fewer barriers to entry — so valuable that a single company could alone be worth $16 billion? The market has spoken, and the answer is a resounding no.

Twitter is now trading below $40, more than 20% down off the earnings news and 33% off its lifetime high of $69. In IPO terms, Twitter is under water: below the $41.65 closing price on the day it went public.

By itself this doesn't mean much. But the story that Twitter told on its IPO road show would be same today, and that isn't going well.

Whether you think chatter about Twitter's choice is naive or savvy, the company's trajectory should be a cautionary tale about the choice to go public, which we should all remember is only one option to raise money for a company with growth potential that some may confuse with a rite of passage.

Is Twitter a prime example of a great company that should have stayed private? Or are reports of its "demise" greatly exaggerated?