Great startup lesson from Twitter IPO

On Thursday 7th 2013 Twitter went public, collecting over $1.8 billion from the 70 million shares it had on offer. When the shares went to the stock market, the shares were in high demand managing to close the first day trading at 73% higher than the IPO price of $26 a share.

Following the bad performance of Facebook shares, the public were a bit skeptical about Twitter’s IPO. Skeptics were not just concerned about the performance of Facebook’s IPO but also the fact that Twitter was on loss making spree. In the post, Uncouth but practical way to get Twitter Followers, we had shared with you the following statistics about Twitter’s revenues and profits:

1. The monthly active users on Twitter are about 218 million. 100 million of them are daily active users each tweeting an average of 5 tweets a day.

2. Twitter collected $317 million dollars in 2012. In 2011 they had collected $106 million.

3. In the first six months of 2013 it already collected $254 million compared to $122 million it collected in the first six months of 2012.

4. Instead of making profits from the increased revenue collection, they are making losses. In 2012 they made a net loss of $79 million. Again, despite increased revenue in first six months this year, they have already incurred a loss of $69 million.

It is obvious from the statistics that Twitter has been improving over time in revenue collection, but, as point 4 above noted, they made a net loss of $79 million in 2012 and another $69 million just in the first half of 2013. For any investor mindful of returns on investment, there is no way one could have bought Twitter shares, forget about buying the shares at a price 73% higher than the IPO price.

The rather unrealistic behavior of investors to go ahead and buy Twitter shares at up to 93% higher than the IPO price (some bought the shares at $50 a share), caught my interest and made me wonder what is it with Twitter that charmed the Investors! Facebook on the other hand was making profits at the time of their IPO in May 2012 but yet again their shares did not entice investors that much not until close to one and a half years later. Although I have not found any certain answers to the behavior of Investors in regards to Twitter’s IPO experience, one thing is obvious though, Twitter is a great product worth investing in.

Twitter is a great product worth investing in

It doesn’t matter that Twitter is making losses. It doesn’t matter that Twitter management was probably mismanaging the revenues they were collecting over the years. What matters is that Twitter as a brand is a trusted, working and liked. Twitter is a product that can have massive ROI if properly managed. The only thing lucking in Twitter is a working strategy.

We know how great Twitter is when it comes to 411, formal and informal discussions (trending topics) and analyzing products and services both from governments and private sector. Twitter also has tools useful for policy formulators, security agencies, marketers, researchers and scientists from almost all fields of science and research. Solutions offered by Twitter on people’s perceptions, leaning, tastes, and interests are enormous. As a product, Twitter is great to invest in.

What this tells startups is that you don’t need to worry about profitability, revenue or management issues (especially when you cannot fund good managers). The one important thing that startups should worry about is creating a timeless quality product that offers practical solution; whether the solution is connecting people, saving money, or making people work faster. A solution that works will interest investors; or rather, should interest investors.

Investors should invest in great products

Many a times investors ask for financial performance of startups to evaluate their investment risk. Investors should instead focus on the Startup’s product portfolio, evaluate the likability of the products and practical solutions offered then decide whether the product if properly and strategically managed and marketed can offer ROI.

Investors should know that startups are faced with funding challenges ranging from financial institutions not willing to provide loans to customers not willing to be pay for products and services at delivery. An entrepreneur puts his/her own savings to set up an SME, funds LPOs and operations, and has to wait for over 60 days to get payment. These challenges are what investors need to focus on solving, and the biggest investor should be the government.

Now that I am talking about investors and the hurdles faced by startups, my friend and I were a few days ago were ‘just saying’ that a new law for SMEs should be enacted. Our ‘just saying’ was that this law should allow SMEs not more than 2 years of age to be:

  1. Given a startup loan (e.g. from Uwezo fund) based on product valuation alone
  2. Given operations funds and management expertise also based on product portfolio valuation
  3. Paid immediately for product delivery or at completion of projects by customers i.e. 30 to 60 days credit period should not apply to SMEs less than 2 years of age.

The three points to be discussed in details in next article.


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