What Twitter’s IPO means

Seeing the signs.
Seeing the signs.
Image: Reuters/Eduardo Munoz
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A few hours after Twitter set a price range for its initial public offering, I met up with one of its employees near the company’s new headquarters on Market Street in San Francisco. He put away his iPhone as I approached.

“Calculating your net worth?” I asked.

“That was earlier,” he said. “Now we’re calculating co-workers’.”

When you join a technology startup, the offer letter typically details your salary, benefits, and how many shares of the company you’ll receive. The last part is often just a number, seemingly chosen at random. And because who knows how large the whole pie is, you have to ask someone if what you’ve been offered is a big slice or a small one. Forget asking how much the shares are worth; in most cases, they are just a daydream of future success.

For a lot of people, Twitter’s IPO is a reminder that it really does happen, that those shares could be worth something someday. Three out of four startups fail, but some go on to be acquired or offer shares to the public. Those are the success stories that fill coffee shops with talk of “exits” and “liquidity events.”

“All of this stock that didn’t mean anything before, all of a sudden has value,” said Adam Nash, a veteran of two IPOs, most recently at LinkedIn, when I reached him on the phone the other day. He’s now the chief operating officer of Wealthfront, a financial advisory startup that’s popular among 20- and 30-somethings who work at technology companies. Employees of Google, Facebook, and LinkedIn are its top customers.

Wealthfront has been pitching a special “IPO service” to people who hold Twitter stock, helping them balance their portfolios over time and manage the tax implications of suddenly striking it rich. Last month, Nash gave a presentation at Twitter headquarters entitled, “Personal Finance for Engineers.” He said the room was packed.

Nash’s premise is that no one is rational with money—”not even these kids with IQs that are off the charts”—and a sudden influx only exacerbates the problem. It’s extremely difficult to handle sensibly a wad of cash you found on the street. Worst of all, it tends to make you think there’s more where that came from.

Well, there’s something worse: watching someone else pick a wad of cash off the ground. Right there, right in front of you. The feeling is not quite envy but mania, and it’s all over Silicon Valley right now. Strike up a casual conversation with someone in the technology industry, and you’ll inevitably end up talking about the intricacies of Twitter’s IPO. Tranches, syndicates, float—everyone is a banker all of a sudden! All of us in search of more wads.

People will call it a bubble, but they’re generally talking finance, as in the reason Pinterest and Snapchat are now worth $4 billion apiece. What I see is a social bubble, the collective delusion that Twitter’s IPO is a celebratory event, even if you’re not one of the few actually holding a stake in the company.

“It’s a big moment for us,” someone who has absolutely nothing to do with Twitter told me. By “us,” he meant the Valley, maybe even society as a whole.

I’m guilty of it, too, obsessively covering an offering of securities by a young and unprofitable company that doesn’t make any tangible goods. Not a word about last month’s wildly successful IPO by Potbelly, a 36-year-old sandwich purveyor that actually makes money. Nothing about the Container Store, which went public last week and promptly doubled in value thanks to enthusiasm for ingenious home organization products.

Later on the same day that Twitter set a price range for its IPO, Eric Ries was speaking at an event thrown by Quartz in San Francisco. He’s best known for his book The Lean Startup, which advocates a certain practicality that can often go missing in the Valley. Lately, Ries has been working on an alternative financial market, the Long-Term Stock Exchange, that he thinks would offer startups better incentives after going public.

“We start companies to do more than help the balance sheets of big conglomerates nobody likes,” he said, referring to financial institutions that profit from IPOs and public companies. “Why is the whole system organized around that purpose, when our rhetoric is all about disruption and making the world a better place?”

Offering shares to the public is simply a financial mechanism for the company’s backers to realize gains on their investments. In Twitter’s case, those winners will largely be venture capital funds that poured money into the startup and private equity firms that picked up shares along the way. The founders own a relatively small slice.

“Walk down the street,” Ries said, pointing north toward Twitter’s headquarters. “We’re building the fresh meat for a system we claim to despise.”

Whether you, in fact, despise the system may depend on how close you are to it. Certainly, the 230 million people who regularly use Twitter are pretty far away from the system. Most will undoubtedly mark Twitter’s IPO with a shrug, at best a tweet. But they must sense what’s going to happen next.

Twitter will have to make money. And then more of it, faster. As it should! That is a public company’s obligation to its shareholders: create value, throw off cash. Get big, and then bigger.

We’ve been through this before. Since going public in May 2012, Facebook has seemed only to focus on becoming more profitable. Users would be hard-pressed to say the service has gotten any better, though the stock price has certainly improved. And this is a company that took pains to protect itself from market influence even as it went public, leaving founder and CEO Mark Zuckerberg with voting control. “We don’t build services to make money; we make money to build better services,” he warned potential investors when Facebook filed for its IPO.

“At Twitter, the user experience is our highest priority and of paramount importance,” Dick Costolo, the company’s chief executive, has been telling potential investors at meetings across the country. But users can already sense that’s not the case. When Twitter recently started displaying images in tweets by default, the most noticeable difference was how big and obtrusive and Facebook-like the ads suddenly were.

There will only be more of that. More ads in more places. More pressure to make more money. Which makes sense, but we don’t have to celebrate it.