Wall St. Speaks Out on the Twitter Challenge - Brian Wieser, Pivotal Research

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Twitter and the Venture-to-Public Company Transition Challenge

Twitter's CEO, Dick Costolo, has announced he is departing the company and will be replaced by one of the company's founders on an interim basis. While the change appears to be of Costolo's making, prior to this event, there were issues causing generally unwarranted dissatisfaction among the investment community and among some press towards Twitter which reflects broader issues about venture stage enterprises which have public securities.

There has long been a gap between the expectations put forward by Twitter's management around the potential ubiquity of the company's core product among consumers and the reality of its niche-y scale. Further, in recent quarters investors were concerned about turnover in the company's management during its time as a public company, which never really allowed the company to escape the perception that Twitter was the "clown car that fell into a gold mine." And then came the revenue miss during the first quarter, conveying that guidance provided mere weeks earlier was off-base.

However, what investors generally failed to understand about the company – and perhaps what management failed to fully communicate – was that Twitter was and remains a venture-stage enterprise. It just happens to be traded publicly. For a company to invent what is essentially a different means of communication (let alone use as an advertising and marketing vehicle) involves an awful lot of aspiration. As we've noted previously in this context, sometimes it is necessary to aim for the stars lest one never reach the moon. Getting to the moon is a pretty remarkable place to arrive at, even if it's not as lofty as originally intended. Product iterations and people iterations are necessary byproducts of the effort necessary to attempt to achieve those aspirations, and we can certainly look at some of the turnover within Twitter as reflecting of that iterative nature. We're reasonably sure that similar iterations occur in a lot of other venture-stage companies, if under less visibility. And as for missing guidance…well, one quarter doesn't a year or business make. While we would think that a company as large as Twitter should have systems in place to better assess coming quarters, a slowdown this year never necessarily impacted the long-run share of digital ad revenue the company was capable of generating. Of course, confidence might have reasonably been diminished slightly, but the market's reaction to the first quarter was always an over-reaction (which is largely why we upgraded the stock to Buy following the stock's fall-off).

All of these issues should not be viewed as unique to Twitter. We can only wonder how Facebook would have behaved as a stock were it traded at a similar stage of its commercial development in, say, the year 2010 at which point it too had been generating revenue for only five years (2012 was rough enough, and Facebook was two years more mature than Twitter at that time). There are dozens of large-ish private companies we track in the ad tech space who almost certainly experience similar issues without anything like the glare that Twitter experiences. While the market's lack of receptivity to smaller public companies these days is the primary reason being private is a better choice for many early stage companies, doing what Twitter has to do – aspire, iterate and under- or over-estimate a quarter's results ahead of time – is made easier in private.

With Costolo's departure from the executive suite at Twitter (though not the Board), little changes on these matters. Twitter's new CEO, whomever she or he is, will undoubtedly set stretch goals for the company. They will probably restructure management a few times. And they will probably hit or miss revenue growth in any given quarter. Should Twitter do what many mature companies do instead, setting sights lower, aggressively managing financial expectations (and perhaps massage numbers a little here and there) and retaining certain managers in a pen for future potential use, or just to keep them off the market? We think most would agree "no."

Still, we do think that whomever is running Twitter going forward will need to focus its dialog with the investment community on the commitments they know they can meet and on areas in which they have been successful, like commercial traction with large brands and what seems to us to have been a number of clever strategies to support a strong long-term position within the advertising industry. More clarity on emerging revenue stream segments will be helpful, too. Twitter has a very good story to tell on its MoPub and TellApart acquisitions, among others, but very little in the way of disclosures. More of a display to the investment community of what we think is still a deep bench of management talent at levels below the top wouldn't hurt, either.

But mostly, we think that investors will need to be continually reminded that an investment in Twitter provides public market investors a way to play in venture, for better and worse. The same should be true for all companies at a similar stage of their development.


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