Twitter caught most of its employees by surprise when it announced its I.P.O. plans
Twitter, which began as a side project
in a small but failing start-up seven
years ago and grew into one of the
world’s largest platforms for public
conversation, is about to take its biggest
step yet into maturity: selling stock to
the public.
The company announced on Thursday
— in a tweet, one of the 140-character
messages that are the backbone of the
service — that it had filed paperwork
with regulators to eventually sell shares
in an initial public offering. However,
it had filed the first documents months
earlier under a special provision of
securities law that allows a company
with less than $1 billion in annual
revenue to keep its financial data secret
until it begins actively marketing its
stock to investors.
Twitter’s caution follows the disastrous
I.P.O. of its archrival, Facebook . In
May 2012, Facebook sold $16 billion in
stock to investors, only to see its share
price sliced in half in the ensuing
months as shareholders worried that
the company could not make money
from its billion users.
But investors have recently become
enamored of all things social and
mobile, and have become particularly
enchanted by the fast growth of mobile
advertising revenue at social
networking companies. Facebook’s
shares hit a record high this week and
ended Thursday at $44.75, well above
the $38 I.P.O. price. LinkedIn , the
business-oriented social network, is
trading at nosebleed levels, even after
selling another $1 billion in stock to
investors in a secondary offering.
This is an opportune time for Twitter to
join their ranks. Its service is
considered well suited for mobile
phones, with its core tweets resembling
simple text messages, and it has been
rapidly growing both in global users
and in its advertising offerings. The
microblogging service already has well
above 200 million active users and is
fast approaching 300 million,
according to memos shared with staff
members.
By its own estimates, Twitter was
profitable in December of last year and
generated more than $100 million in
revenue in the final quarter of 2012,
according to numbers in an e-mail
shared among staff. These numbers
could not be independently verified.
But it has not been consistently
profitable in 2013 because it has
reinvested money in acquisitions, said
people with knowledge of Twitter ’s
financial data who declined to be
named.
The company makes most of its money
from a type of ad called a sponsored
tweet. The messages look nearly the
same as any other message on the
service, and are inserted into the
stream of other tweets that users get
from the accounts they follow.
Advertisers typically bid for their
messages to appear near certain
demographic groups or around certain
keywords. Twitter is expected to post
around $600 million in revenue this
year and close to $1 billion next year,
according to internal projections and
estimates by the research firm
eMarketer. While it is unclear how
much money Twitter will seek in its
offering, the amount is certain to be in
the billions of dollars.
The company needs to build a war
chest to continue financing its global
expansion, including acquisitions like
its $300 million purchase Monday of
MoPub, an advertising technology
company. And it needs cash to take on
the much larger and better-financed
Facebook as they both vie to create new
products that will help advertisers
reach consumers on the go.
Twitter’s service is simpler than the
more popular Facebook, but also more
confusing for novices. Messages flow
in continuously, most recent on top,
without regard to their importance. Yet
the service, which allows users to post
anonymously, has become an
important source of user-contributed
news and a tool for organizing mass
movements like the Arab Spring
revolutions.
We’ve confidentially submitted an S-1
to the SEC for a planned IPO. This
Tweet does not constitute an offer of
any securities for sale.
— Twitter (@twitter) 12 Sep 13
The I.P.O. provides a way for
employees and the company’s venture
capital shareholders to easily sell some
of their shares.
Since Twitter received its first venture
investment in June 2007, the company
has taken more than $1 billion in
venture funding from firms including
Union Square Ventures, Bezos
Expeditions, Spark Capital and
Institutional Venture Partners.
Twitter notified its employees of the
public offering during a global meeting
on Thursday, catching most of them by
surprise, according to several
employees who were in attendance at
the meeting.
Although Twitter made the news public
on Thursday, the company first filed
for its public offering with the
Securities and Exchange Commission
earlier this summer under the
Jumpstart Our Business Startups, or
JOBS Act, according to several people
with knowledge of the company who
spoke on condition of anonymity.
It has used the confidentiality afforded
by the act to tweak numbers and
estimates and consult with the S.E.C.
staff, in part to avoid the calamities
that befell Facebook during its public
offering, these people said.
While the company hopes to go public
by the end of the year, the actual public
offering could take place in early 2014,
according to people who were briefed
on the matter.
Goldman Sachs is leading the
underwriting for the offering,
according to people briefed on the
matter. It was not yet clear which
other banks would participate, but
JPMorgan Chase and Morgan Stanley
are likely to be involved, according to
several people knowledgeable about the
deal. Twitter first started as a side
project from Odeo, a podcasting
company started by Noah Glass and
Evan Williams, in early 2006. The
original concept was an amalgamation
of ideas from Mr. Glass, Mr. Williams
and two employees of Odeo, Jack
Dorsey and Biz Stone, who wanted to
build a service that would allow people
to connect with friends and share
similar musical tastes.
In its early years, Twitter was regarded
as a management disaster and only
recently took on the appearance of
being ready to bear the scrutiny of a
publicly traded company.
All of the founders have since left the
daily operations of the company, and
Dick Costolo is the company’s chief
executive. Mr. Costolo joined Twitter as
the company’s first chief operating
officer, but took over as the chief
executive in October 2010 after Mr.
Williams stepped down. Mr. Williams
and Mr. Dorsey are still on the
company’s seven-person board.
Trading in Twitter shares has gone on
for years, even though the company is
not yet public, because of the robust
secondary market for stock in
technology companies. Firsthand Tech
Value Fund has bought more than one
million Twitter shares on the
secondary market, acquiring them at
an average cost of $17 a share, which
the portfolio manager Kevin Landis
said valued Twitter at around $9
billion. It most recently bought shares
earlier this year for about $16.50 a
share.
Michael Pachter, an analyst at
WedBush Securities, said Twitter is now
valued at $15 billion to $16 billion
based on buying in the private market.
“Over the last couple of months, shares
in the secondary market have risen to
between $20 and $30. That’s what the
private market values it right now, not
that investors have any information,
but that’s what they are willing to pay.”
Mr. Landis said that in recent months
Twitter had put restrictions on
shareholders, prohibiting them from
selling shares on the secondary market.
“We’d gotten indications that the
market was getting tighter because
there were fewer sellers,“ he said,
adding that the restrictions were a sign
that Twitter was preparing to go public.
Longtime investors welcomed the news
of the offering. “It’s a great time for
the company to be going public,“ said
George Zachary, a general partner at
Charles River Ventures, which invested
$250,000 for 1 percent of Twitter its
first funding round. “Their I.P.O. is
well timed. The recent rise in Facebook
stock price is probably going to bode
well.”
