A friend sent me a link today to Jeff Bezos’ letter to shareholders from Amazon’s 1997 Annual Report. It’s a great read. Bezos lays out his long-term operating principles and basically cautions investors that Amazon will (a) focus on long-term strategy and dominance; and (b) this will mean that it will sacrifice short-term profitability. Amazon continues to follow this strategy today as it invests heavily in long-term bets (AWS, Kindle, logistics infrastructure, etc.) and runs a low-margin business. And investors continue to reward the company. The stock is at an all-time high and it’s market cap is approaching that of traditional software giants like Oracle. The latter fact is pretty astounding when you realize that Oracle had $5b of operating income quarter, whereas Amazon had <$100m.
I say all of this because one of the big debates in Silicon Valley over the last 4 years has been over the merits of going public versus staying private. And one of the most often cited reasons for staying private is the ability to “innovate” outside the quarterly earnings pressure of public markets (other reasons are the distraction of the IPO process itself, cost of filings and ongoing SOX compliance, etc.) In most cases, I don’t think the idea that Wall St is too short-term is a valid reason to stay private, though there may be other reasons.
There are two related arguments people make. One is that the market is too focused on short-term earnings. The other is that public companies can’t innovate because of this. So I ask: what’s the evidence for this? Some of the most innovative companies in tech – Google, Apple, Amazon, VMWare, eBay, Tesla, Netflix, Linkedin – are public. These companies don’t have any trouble pursuing new initiatives, speculative ventures, interesting M&A, high R&D spend, etc. under the glare of the public market. And every company on this list has been richly rewarded by the market.
In fact, some of these companies actively shun Wall St’s supposedly myopic focus on short-term earnings. Amazon continues to be an incredibly low margin business and continues to invest heavily in growth and new businesses. Similarly, Google doesn’t even provide quarterly guidance to investors.
The reality is that the public companies that face supposed Wall St “short termism” are the ones that have flawed business models. Would Zynga and Dell (to name two troubled companies) rather be private right now? Of course, well at least we know for sure in the latter company’s case. It would take the heat off. But the reason there’s heat to begin with is they’re flawed companies. People don’t want to play expense-to-produce Zynga style social games on their desktop, and PCs are rapidly losing favor to the tablet revolution. Public markets are very efficient at recognizing this.
If Dell and Zynga laid out a credible, long-term story to investors then I public markets could be receptive. But they haven’t. Dell has been trying to transform itself in to an IBM style enterprise software and services company for years. It has spent billions of dollars in the process, which incidentally it may not have had access to as a private company. Similarly, Zynga hasn’t laid out a credible story for where it goes from here, for example backtracking on earlier talk of exploring the online gambling market. Zynga might even be in a worse position right now if private because they wouldn’t have access to the $1.1b of cash they currently have on their balance sheet. Ditto all of this for other companies like RIM, which is also reportedly thinking of going private to “refocus with less scrutiny.”
Maybe the point of all of this is that a few exceptions withstanding, the best companies go public and they have no problem doing so. They’re able to think about the long-term and invest in innovation without difficulty.
If you can’t compete effectively under the lights of the public market, don’t blame Wall St. Look in the mirror instead.