Author: Barry Randall, Crabtree Asset Management
Covestor model: Crabtree Technology
It’s interesting to see the lengths to which Mark Zuckerberg is going to avoid taking Facebook public. Never mind that Facebook has actually filed to go public with the SEC and will actually do its IPO this Friday. You’d think poor Mark was trying to avoid going to the dentist.
But of course the moment that Facebook accepted its first venture capital from Accel Partners in 2005, Zuckerberg implicitly agreed to eventually take the company public, even if he didn’t understand it at the time. And in becoming a public company, the shareholders will be in charge. Well, mostly. Thanks to Facebook’s dual share classes, Zuckerberg will continue to own 57% of the voting power.
As someone who has analyzed technology IPOs for nearly 20 years, I’m continually fascinated with CEOs’ fear of becoming a public company. Often this fear centers around a company’s relationship with “Wall Street” and its supposed “fixation on short-term results.” When Google went public eight years ago, its founders included a letter within the IPO prospectus that served as a kind of manifesto of independence from dreaded Wall Street pressures. It included the following sentence:
In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to ‘make their quarter.’
Facebook’s own IPO prospectus includes the following passage in its Risk Factors section:
Our culture also prioritizes our user engagement over short-term financial results, and we frequently make product decisions that may reduce our short-term revenue or profitability[.]
I suppose investors should be grateful that these great and glorious enterprises have deigned to alert us to their principled stand against myopia and abeyance to the baser impulses of the money changers. Thank you lords, for warning us!
But these “protest-to-much” memos from soon-to-be billionaires mostly serve to reinforce their self-importance. And self-importance is a common characteristic of technology CEOs, quite a few of whom are no longer CEOs, and not because they didn’t “make the quarter.” Scott McNealy of Sun Microsystems, Ken Olsen of Digital Equipment, and Messrs. Balsillie and Lazaridis of Research in Motion are just four former tech titans, brought low not because they didn’t play Wall Street’s ‘games,’ but simply because their firms’ products attracted fewer and fewer buyers.
Here’s the secret to running a public company, Mark: communication and execution. Describe what you plan to do and how you’re going to do it. Tell us what your business model is and how it differs from others’. Make your best projection on what you plan to spend. Then execute on those plans and the opportunities in front of you.
The truth is: great long term performance, where you achieve all your and your company’s goals, is nothing but…a series of great short-term performances. Feel free to lose money in a quarter, if that is the way forward. Feel free to make a transformative acquisition that requires all your available cash, so long as you mentioned previously that it was a possibility. Feel free to accelerate your capital spending plans, if per your prior quarterly comments you noted an rising competitive threat. If you keep your investors informed of your plans, and then largely execute upon them, then you have nothing to fear from the great Wall Street analyst hydra.
Think I’m kidding? Look at Intuit (INTU), a public company since 1993. Look at a chart of INTU’s share price, which, as we say here on Wall Street, has consistently gone, “up and to the right.” Now consider that in Intuit’s early days, including for years after going public, the company lost money in one or even two of its quarters, EVERY YEAR. Heavens! They LOST money! Gah! Circle the wagons! Issue a news release!
But Intuit didn’t have anything to fear. First and most important, Intuit’s tax and accounting products progressively found more and more customers. And second, the company’s leaders, including founder Bill Campbell and long-time CEO Scott Cook consistently explained the seasonality in their business (tax software, go figure) and how revenues might rise and fall, but expenses were more constant: hence the money-losing quarters. Meanwhile Intuit bought and sold companies, hired and fired people and generally just got on with it. $2 invested in INTU in 1993 is now worth $56.
Facebook can enjoy a similar ride, provided it follows the same path as Intuit: communicate and execute, each and every quarter. But fail to do either, or worse, both and the outcome will be less pleasant.
Open wide (your plans) – this won’t hurt a bit.
