Twitter IPO: Risk factors and people

In the second of our series covering risk factors in Twitter's S-1 filing we look at people and how Twitter’s users and staff could impact its ability to grow advertising and impact our experience after IPO.

Twitter IPO influencers users spammers
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Twitter has submitted its filing to the U.S. Securities and Exchange Commission (SEC) listing potential risks to the business across several different areas.

In this series, we look at these risks and what this means for investors.

From the filing (in bold):

"If our users do not continue to contribute content or their contributions are not valuable to other users, we may experience a decline in the number of users accessing our products and services and user engagement, which could result in the loss of advertisers and revenue."

We make Twitter successful. Our updates, retweets and favourites make Twitter what it is today. Twitter uses this data to analyse what is important to users around the world and it sells advertising relevant to its traffic.

Twitter wishes to expand into new international markets, and it needs relevant local content in these markets propagated by journalists, politicians, celebrities and influencers.

Without useful, relevant newsworthy data that is propagated around the Twitterverse by users the platform would quickly become irrelevant and key users such as politicians and celebrities would no longer use the product.

"Spam could diminish the user experience on our platform, which could damage our reputation and deter our current and potential users from using our products and services."

Spam – whether email, phone, or social media -- is annoying and disruptive. Twitter spam can change our online experience of Twitter. As soon as a topic starts to trend, the spam bots flood the stream with irrelevant and dangerous links, which spoils our experience.

Although it deletes spam accounts when it is alerted to them, Twitter has a growing issue to deal with. Spammers find ways to get around Twitter’s controls and continue to frustrate valid uses of the service.

"If we are unable to maintain and promote our brand, our business and operating results may be harmed."

Twitter needs to continue to grow to attract new investment and satisfy shareholders. It also needs to satisfy its advertising partners so that they continue to advertise on the platform.

If Twitter changes its offering and advertisers experience a reduced return on their investment then these advertisers will stop using Twitter to promote their businesses.

In April 2013 the Twitter account of Associated Press’ employees was compromised, a Tweet was posted reporting explosions at the White House. The Dow index plunged .

Twitter has warned that these attacks are likely to continue – with an associated risk to its business.

"Our future performance depends in part on support from platform partners and data partners."

Most of us access Twitter from a third party app – especially if we use a mobile device to access the platform. Changes to the UI such as Twitter Cards allow partners to take advantage of this and deliver smart applications to users.

If partners choose not to develop applications then Twitter’s business relationship with these partners might suffer. 

"Existing executive officers, directors and holders of 5 percent or more of our common stock will collectively beneficially own percent of our common stock and continue to have substantial control over us after this offering, which will limit your ability to influence the outcome of important transactions, including a change in control."

Twitter is concerned about an aggressive shareholder mutiny – where shareholders essentially hold Twitter to ransom and force it to change its business direction. 

If a group of shareholders get together and challenge Twitters existing business process, then Twitter will be forced to go with the decision of the majority shareholders.

This may negatively change Twitter’s business.   

"Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt."

Twitter has made provisions to try and delay or prevent aggressive takeover attempts of the business. It has allowed its directors to issue stock – without shareholder approval.

It has also protected its directors from liability and limited ordinary shareholders from calling extraordinary meetings that could impact Twitters business.

Shareholders that own more than 15 percent of Twitter stock would also need to seek the approval of shareholders that collectively own over 66 percent of stock before making any business decisions that might impact Twitter – also protecting it from takeover. 

"We depend on highly skilled personnel to grow and operate our business, and if we are unable to hire, retain and motivate our personnel, we may not be able to grow effectively."

Twitter needs to hire great people to keep its business expanding and growing. It needs good technical people to continue to innovate and it needs strong leaders to drive the business strategy forward.

Twitter is headquartered in the San Francisco Bay area – as are many other high tech start-ups, all competing for talent. If staff do not like the direction that Twitter is going, then they will move to another high tech company. This talent drain could negatively impact Twitters business.

Based on the above risk factors would I buy Twitter shares? 

There are a lot of challenges that are out of Twitter’s control. Spam attacks, loss of reputation, user migration to a different social network. Although it has put strong provisions in place to prevent a takeover, this could still happen.

Losing its key staff could change its business direction and start its decline. Acquisitions happen regularly in the tech world -- and often the acquired company disappears without trace. It is a big risk to a successful organisation.

Based on these risks, I would be hesitant to buy Twitter stock.

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