Twitter’s sensible IPO strategy

By September 27, 2013Exits

NOTE: I wrote the post below a couple of weeks back but failed to hit the publish button. That was before Twitter filed their S1 with a valuation of c$15bn. Whilst that’s not an outrageous increase from $10.5bn from what we know of Twitter’s finances it seems pretty spicy from a multiples perspective – just north of key comps Facebook, LinkedIn and Yelp on a revenue basis at 15x the 2014 estimate of $1bn, and 65x estimated 2014 EBITDA (Facebook 36x, LinkedIn 159x). This is definitely pushing the limits of ‘sensible’ as described below.

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A couple of weeks back Twitter acquired a mobile advertising company called Mopub for around $350m in Twitter shares. Buying a company with shares requires that you place a value on those shares, and hence on the company. The good news is that Twitter gave themselves a relatively conservative valuation of $10.5bn, which is about 15% up from the valuation that Blackrock paid to buy into the company at the beginning of the year.

This is good news because it implies they intend to keep the IPO price reasonable and allow investors to make good money as the stock appreciates in the weeks and months after the listing date. You can think of this as adopting the LinkedIn strategy rather than the Facebook strategy for going public.

There are a number of European companies that are of a size where they could go public on the London market – I’m thinking of companies like Zoopla, Wonga, Just-Eat, and Mindcandy. When they do go public I hope they follow Twitter and LinkedIn and so the shares trade up and the new investors have a happy time. That way the next IPO will be easier and the one after that will be easier again. If the opposite happens and the new investors lose money as they did when Ocado listed then the markets will shut again for tech companies and exit markets will remain more difficult here than they should be. Worse still we will be less likely to get the large independent local tech powerhouses we need to really drive the local ecosystem forward.

  • brianfrumberg

    Nic,

    From a macro perspective on the health if the tech IPO market, I completely agree. And for VCs and bankers, the motivation for keeping IPO prices reasonable is clear, as their businesses are beholden to these markets being healthy for future deals. But for a founder, someone who takes one bite at the apple (as opposed to the many VCs and bankers take), would you not expect their motivation to be to maximize the sale price, taking the most they can get for themselves and their initial investors, many if whom cash out after an IPO?

    All you have to do is look at the Facebook IPO to realize this is clearly not as simple as buy low/sell high scenario, so the question above is not a rhetorical one. This is especially true in regards to Facebook because those early investors, Gotham included, fell victim to the unreasonable IPO price along with the new investors, given the price dropped long before their lock-up period ended (did I just answer my own question?).

    Either way, the questions stands… for the founders of one company (their one bite at the apple), can you reasonably expect them to take the health of the IPO the market into consideration when determining their specific IPO share price?

    Hope all is well!

    ~Brian

  • http://www.theequitykicker.com brisbourne

    Hi Brian,

    Thanks for this. The IPO event is a huge moment in the life of an entrepreneur and her company and it’s natural to focus on the share price at that point. However, the best long term outcome for the wealth of all shareholders at IPO will, I believe in general, be achieved by pricing sensibly at IPO and only selling a small fraction of their shares. That way the benefit from the trade up should outweigh the hit on share price at IPO. That’s why VCs prefer this strategy.

  • brianfrumberg

    Thanks Nic. Certainly makes sense, and amount of equity given up by the founder(s) certainly drives which side of the table they’re on. Very helpful!