SAN FRANCISCO -- Facebook, Groupon and Zynga were hot start-ups that went cold went IPO time came. Twitter is trying to avoid the same fate by doing things differently.
"They have the good fortune of seeing what happened to some of the high-flying tech IPOs of 2011 and 2012," says Rob Solomon, former chief operating officer of Groupon and a partner at venture capital firm Accel Partners, an early backer of Facebook. "Twitter knows what can happen if you make certain mistakes and they will make sure they don't repeat any of those."
Twitter announced Thursday on its own messaging service that it had filed an IPO registration statement confidentially with the Securities and Exchange Commission, using a new law that lets companies with less than $1 billion in annual revenue keep such documents private.
When Groupon launched its IPO in the summer of 2011, this law did not exist and the daily deal company filed publicly. Soon after, the SEC questioned its accounting and each subsequent update by the company was picked apart by reporters and commentators. IPO rules prevented Groupon from responding to criticism and when executives including CEO Andrew Mason tried, they got into trouble.
Facebook also filed its IPO registration statement publicly in 2012. The company had to update the document to warn about problems monetizing the growth of its mobile service, casting a pall over its offering right before important investor road shows started.
Twitter's private filing avoids this because any questions from the SEC and any changes stemming from those inquiries will not be made public during most of the IPO process. The company will need to file publicly about three weeks before it starts its road show. That is typically followed by pricing of the shares and the first day of trading.
Tweeting about the confidential filing was also "a good way to pre-empt any rumors or leaks by just saying, 'look it's on file,'" says Kevin Hartz, CEO of start-up Eventbrite, who has invested in several other successful start-ups including PayPal, Pinterest and Airbnb.
Zynga Founder Mark Pincus reportedly cut some employees' stock grants before the social-gaming company's IPO in late 2011, creating bad blood within the ranks. In contrast, Twitter doled out new stock grants to key employees in recent weeks and the awards will vest over four years, a move designed to prevent a post-IPO brain drain, tech blog AllThingsD reported Thursday.
Facebook picked Morgan Stanley as the led investment bank to underwrite its IPO, while Twitter chose Goldman Sachs, according to a person familiar with the situation. Twitter and Goldman declined to comment.
Morgan Stanley got into regulatory hot water when it and other banks underwriting the Facebook offering told some investors, but not all, that their analysts were cutting estimates just as the road shows were starting.
Shares of Facebook, Groupon and Zynga slumped by 50% or more following their IPOs. Only Facebook has recovered as the company has succeeded in generating lots of ad revenue from its mobile service.
One problem that plagued all three IPOs was the valuation they got from trading in the private, pre-IPO market, which lets shareholders and stock-owning employees of start-ups sell some of their stakes to other investors.
Facebook traded in the private market at $38 to $40 before its IPO and that gave Morgan Stanley and the other underwriting banks confidence that similar valuations could be supported in the public stock market. But the public-market demand did not materialize, according to Lou Kerner, founder of the Social Internet Fund, which invests in start-ups in the private market.
"They've learned that private markets can get distorted by low availability of shares to buy," Kerner says.
Indeed, Twitter has been much more restrictive than Facebook about which investors can buy its shares in the private market, Kerner noted.
Twitter's valuation has gone as high as $15 billion in the private market, but on very thin trading volume, he added.
"The bankers, having had the experience of Facebook, will not put as much weight on the private transactions to guide their pricing," Kerner says.
