I just read How LinkedIn became a Wall Street juggernaut on Techcrunch. The article lists four things, three of which relate to being a great company (multiple growth vectors, a product that gets better as it gets bigger, deep competitive advantage). The fourth describes how their approach to the market, which was to under promise and over deliver. As you can see from the chart below the latest projections for 2013 revenues are 2x what they promised in their 2011 IPO, and EBITDA is forecast at over 2x.
Facebook took a very different approach. Rather than focusing on success post IPO they decided to maximise the share price on IPO. That meant ramping promises to the maximum credible level and thereby increasing the chances of disappointment and missing forecasts afterwards. This is, of course, exactly what happened, and after some truly exceptional results over the last six months the share price is only now getting back to the $38 they went out at in May 2012. In the meantime the company has been the subject of intense scrutiny and criticism.
So which is the better approach?
From a purely objective standpoint they are both valid strategies. The Facebook strategy is riskier and requires a thick skin, but if you have confidence in your business then pushing the share price as high as possible to maximise the value of existing shareholders’ stakes can be the right answer, particularly if you are able to limit people’s ability to take action against you by retaining control of the company via the share voting structure. My preference, though, is for the LinkedIn approach, largely because it is more honest.