In their audited financials, Twitter vividly reveals one of the lessons clearly NOT learned by the market in the faux ‘tech’ bubble of the late 90s. From 2010 to June 30, 2013, the 140 character “conversation” platform has lost over $181 million on revenue of $705 million. This money-losing corporate enigma is seeking to raise $1 billion on a projected valuation of nearly $15 billion. And, if history is any indication, they’ll get a swarm of investor interest for their IPO just in time to have a Facebook-style swoon. In a time when Facebook, Instagram and others are suffering backlash for pushing advertisements onto social media platforms and in an era where Google and Bing are increasingly ineffective and unreliable given search engine optimization algorithm result manipulations, the Twitter S-1 filing relies on many of these rejected ‘business strategies’.
Twitter states that it has “6 issued U.S. patents and approximately 80 patent applications on file in the United States and abroad.” Being a geek, I wanted to check out the Twitter portfolio and, as of October 5, 2013, the United States Patent & Trademark Office records two patents issued to the Assignee Twitter Inc. (8,448,084 and 8,401,009). To find the rest of their patents, you have to weed through acquisition records that are not publicly indexed – something that the average investor will not do (nor their advisors). And, the two that they have publicly associated with their name have already drawn the attention of other patent holders (including infringement allegations by TechRadium, Inc) along with a recent lawsuit by Cooper Notification Inc. Adding sales, promotion, video, or news feed as push features – all contemplated in the S-1, will vastly increase the size of the bulls-eye on Twitter’s little blue tail.
Now Page Mill Road legal sensation Wilson Sonsini Goodrich & Rosati, P.C. has certainly done their customary diligence on the proprietary rights of Twitter, its current, and proposed future business. But what they may have overlooked is the potential plaintiffs who could be waiting in the wings with rights that a profitable Twitter could experience coming back to pluck their feathers – patent holding firms like Microsoft, IBM, Intel, Research in Motion, Nokia, Cisco and others. During Twitter’s money-losing launch and ascent, 1,812 patents have been issued to third parties including over 580 that include direct reference to the platform. Goldman, Sachs & Co, the lead underwriter for the IPO (along with BofA Merrill Lynch, Allen & Company, J.P. Morgan, Deutsche Bank, Morgan Stanley, and CODE Advisors) have no underwriting standard that includes an independent review of S-1 filing’s statements about the proprietary rights surrounding the businesses they promote to investors. And in a world where fighting over intellectual property is a certainty, this opacity directly harms investors. However, as the Securities and Exchange Commission turns a blind eye to this issue, they’ve got no reason to care.
Why is it that Twitter, like the hundreds of ill-advised IPOs that have preceded theirs, continue to extoll the merits of unprofitable business models, ignore the proprietary landscape into which their plans are directed, and seduce investors with the siren song of meteoric casino returns? One simple reason: fees. If you take a look at the S-1, you quickly see that the “sell-side” promotion of this venture – like many others they collectively promote – generates gargantuan fees for the promoters and advisors. It lands a couple people on the stage at Davos or TED to talk about “innovation” and the “digital economy”. The problem is that we don’t need more of these types. And the only thing that’s digital is the certain loss that investors will experience when the avoidable risks surface.
Twitter’s IPO is another sell-side win with a buy-side yawning loss crater waiting to swallow the blind capital of Vegas-style managers. #badidea.