There are two kinds of rants that just about every public company CEO loves to deliver: The first is about their company’s stock price. It’s never high enough! The second is about Wall Street’s obsession with quarterly earnings reports. They don’t appreciate our long term vision!
Which is why yesterday’s widely shared comments from outgoing Twitter CEO Dick Costolo in the Guardian rang hollow to me. Costolo said the company was under so much pressure from investors that its achievements were obscured. The “90-day cadence” of quarterly earnings reports leads to “short-term thinking,” he added.
It’s hard to disagree with him. Trading long-term strategy for short-term gains kills innovation. It can lead to an obsession with arbitrary metrics, or worse, “juking the stats.” In Twitter (TWTR)‘s case, the company hasn’t even been public for two years. For each of the past two years it has doubled revenue, which is impressive, but investors have been fixated on quarterly profit and user growth, not revenue growth. It doesn’t seem fair. I wrote exactly that when Costolo announced his resignation:
The lesson of Dick Costolo’s Twitter tenure is clear: Do not go public unless you are wildly profitable and growing like gangbusters.
But, given the frequency of anti-Wall Street whines from public company CEOs, especially in tech, I wondered if there is a reasonable rebuttal. Are there any benefits to short-term thinking at big companies? With so many companies putting off going public, is there even a good argument to be made for an IPO? Or is an IPO, as my colleague Stephen Gandel argued in April, a sign of weakness?
One entrepreneur made the case to me that short-term objectives are the only way to achieve long-term success. Beyond that, large corporations can be slow to move, and forcing them to think about each quarter is a way to speed things up.
But the strongest argument for the benefits of going public is that it forces a company to get real. Sure, private companies provide quarterly performance updates to their boards of directors, but that’s nothing like providing quarterly updates to the world, thus, using Costolo’s metaphor, letting the world vote on your performance.
Staying private gives a company room to make occasional mistakes and work through growing pains without hurting its valuation. But eventually the companies have to be valued by traditional standards – not user growth, revenue run rate, customer growth or any of the metrics startups love to tout. (Take Uber, which is seeking a $50 billion valuation, but has told investors it generates $470 million in operating losses with $415 million in revenue, according to Bloomberg.)
Alan Patricof of Greycroft Partners put it best to me in an interview earlier this year:
“People are buying traffic growth and revenue growth, but it’s the ‘emperor has no clothes’ theory,” he says. “At some point all of these companies will be valued on a multiple of Ebitda.”
Twitter only reports “adjusted Ebitda,” a metric that Gandel has criticized for excluding big expenses like stock-based compensation, a cost companies are required to include when calculating their earnings. Twitter hasn’t been profitable, and its losses even increased leading up to its IPO.
No CEO wants short-term investors holding their company’s stock. Luckily for CEOs, it happens to be their job to convince investors of their long term vision. If investors aren’t biting on the long-term plan, there’s one thing that speaks louder than any visionary gobbledy-gook or PR, and that’s profits.
By that rationale, Twitter is not a victim of unkind short-term public market mercenaries. Instead, it’s struggling to get real. So I’ll amend my prior warning to highly valued startups: Growth is nice. But do not go public not unless you are wildly profitable – end of story.