While promoting his company’s new Session camera yesterday, GoPro (NASDAQ:GPRO) founder and CEO Nick Woodman talked about the many benefits of becoming a public company a year ago. Despite the stock’s rollercoaster ride, he couldn’t have been more jubilant about the experience or confident that an IPO was the right move.
Contrast that with outgoing Twitter (NYSE:TWTR) CEO Dick Costolo’s comments in a Guardian interview, last week. The former improv comic seemed to lament the company’s IPO, saying “when you go public you’re on a 90-day cadence and there’s a very public voting machine of the stock price that accelerates that short-term thinking.”
You couldn’t find more opposing viewpoints on the public markets. And yet, while the two companies have nearly identical revenues and Twitter is deep in the red, the social media company’s market cap is nearly four times that of profitable GoPro, which dominates the U.S. video camera market. Go figure.
Despite evidence that Wall Street seems to reward companies that overhype and under-deliver over those with solid fundamentals – a bubble sign if there ever was one – there is actually a logical lesson to be learned from these contrasting stories that’s sure to enlighten tech companies sitting on the IPO fence.
It’s all about setting expectations – not just the Street’s expectations of the company, but also the company’s expectations of the Street. Let me explain how that works.
Costolo said he expected the market to value Twitter primarily on financial metrics. Implying that was not the case, he said that, in retrospect, he wishes he had positioned the company differently.
While I like Costolo as much as the next guy, I’ve really got to call B.S. on that statement. If the market had evaluated Twitter based on the company’s fundamentals, I’m pretty sure it could not have gone public. And if it had, the enormous differential between its valuation and GoPro’s would be reversed.
And let’s not forget it was Costolo who set the market’s user growth expectations, not the other way around. It was Costolo’s stated projection that the company would have 400 million users by the end of 2013. Instead, it’s fallen way short of that lofty goal, essentially flat-lining at about 300 million users at present.
As Wall Street began to react to the growing realization that Twitter had a fundamental problem – that the product was simply hard to use and not engaging to a mainstream audience – Costolo kept trying to come up with ever-more creative ways of spinning the story to manage expectations and shuffling his management team in the process.
Here’s the thing about public markets. You can’t set high expectations to go public and then say never mind when the markets ask you to deliver. You can’t have it both ways.
And you can tell your employees not to pay attention to all the noise coming from Street, but when they see their CEO behave so erratically in response to negative market sentiment, that message is completely lost. “Do as I say, not as I do” never works in the business world.
Meanwhile, GoPro’s share price has been just as volatile as Twitter’s: Both stocks are currently trading at about half their post-IPO highs. But the reason why GoPro is up 60% while Twitter is down 20% since their IPOs is all about setting expectations based on fundamentals, maintaining a consistent story and executing. That’s how well run companies keep that “90-day cadence” from becoming a problem.
GoPro did it right and is enjoying the fruits that public markets provide: a more credible brand and a liquid currency that enable scalability and growth. No wonder Woodman had such a resoundingly positive take on taking his company public.
Twitter’s IPO, on the other hand, was almost certainly premature. And while I wouldn’t necessarily call Costolo’s tone disillusioned, I sincerely hope he someday comes to terms with the role he played in the outcome.
The lesson for private companies unsure about going public is a relatively straightforward exercise in tradeoffs. If you want all the benefits of being a public company, hold off until you’ve got a reasonably predictable business model, a demonstrable growth strategy, a consistent story to tell, and a solid team to execute.
If not, the bright lights of Wall Street will be neither flattering nor forgiving. Funny thing is, you’d think an improv comic would have known that.