The MIT Technology Review named the top 50 smartest companies and Fast Company named the top 50 most innovative companies of the year. Not surprisingly Microsoft was not named on them as innovations stalled in part due to its soul searching. Surprisingly though, Facebook and Twitter were not on those lists either. Last year they were the poster child of innovation, where are they now?
Fast Company had an explanation as to why they were not on the list: they talked about how they didn’t do innovations, which is true, but the real question is why. One word: IPO.
Doing an IPO changes everything. Whether you like it or not, your number one priority is not your users anymore but your investors, at least for the time being. Investors want only one thing: growth. Once you show growth then you have earned your investors’ trust. Facebook’s biggest achievement last year was not coming from innovation but from revenue. Not a small task by any means, they accomplished mobile monetization. Twitter is struggling to get there too, but they are already focused on that issue.
So how do you show fast growth after an IPO? Use all that cash and go on an acquisition spree. It is no coincidence that after their IPO Facebook bought Instagram and just announced that they are buying WhatsApp. Acquisitions can help a company in several ways: the first is intellectual property (IP). Facebook could add Instagram photo filters to your uploaded photos, which would be cool but probably wouldn’t help with growth. IP can help with new features or better systems but generally it does not help with growth.
Second, its employees. How can you grow if you don’t have enough people to build new flashy products? Yahoo’s Marissa Mayer talked about how it’s really hard to get talent (especially in the Bay!) so the best way to get the best people is to buy their company. Now, in the case of Instagram (13 employees) and WhatsApp (55 employees) acquisitions, the paid price for each employee was pretty high: for example, each employee acquired from WhatsApp cost almost 350 million.
Third, the press; buying a company gives a “free” PR coverage. For example, yesterday everybody talked about WhatsApp, and even if someone has been living under a rock and didn’t know about it, they probably know now.
Fourth, get rid of the competition. If a company can preemptively buy a potential competitor, why not do it?
Lastly, get more users. Increasing your user base by acquiring a company is a good way to get new eyeballs on your brand. In Twitter’s and Facebook’s business models, new eyeballs means more bargaining power with advertisers and more revenue. In WhatsApp’s case, this not only brings new users but it helps Facebook diversify their revenue stream with a subscription model.
So does an IPO mean the end of Facebook’s and Twitter’s innovations? I doubt it. These two companies have innovation in their blood and they have just been distracted. Once they claim their trust back from investors, they will start diversifying and innovating again. Just look at two companies that appear in the lists above, who have been in the stock market for years: Amazon (since 1997) and Google (since 2004). We can clearly say those are highly innovative companies and that they went through the same post-IPO issues. It was a matter of getting over the initial growth phase to start innovating again.
The final question is, how long will it take them to move their focus from growth to innovation?
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