The Icahn was coming from inside the house: Why the campaign against Dick Costolo changes the Valley
In case you missed it: Dick Costolo stepped down as CEO of Twitter today.
You should know that I’m incredibly conflicted in writing about this news. Not financially-- we have no business relationship with Twitter whatsoever.
No, I’m conflicted in the more real way: Emotionally. In a Valley full of enemies, frenemies, and “friends,” I count Costolo as one of my only actual friends-- not just on Facebook and with no quotation marks or asterisks around the word. One reason is what I’ve said about Costolo many times: He’s one of the only people I’ve known in a 15 year career writing about “overnight successes” who went from semi-nobody to massive success without changing one jot.
Maybe as the CEO of a public company going up against activist shareholders who care only about day-to-day price fluctuations, that was ultimately his undoing.
VCs like Bill Gurley can talk about the “big leagues,” “The World Series,” “The Superbowl” or any other sports metaphors all they want when they describe why entrepreneurs should want to go public. There’s a very real reason creator-CEOs do not: Once you go public, it doesn’t matter what rock-solid assurances you might have been given, you are replaceable for the flimsiest of reasons. Every time an entrepreneur thinks he’s “hacked” that system, we see their company stumble and their worst fears come to pass.
It doesn’t matter that you have the mantle of the founder. It doesn’t matter if you have dual classes of shares that give you “a moat” against a proxy war. It doesn’t matter if your board is behind you “100 percent.” It doesn’t matter if you are the only reason the company ever got to an IPO, and you made the same people trying to oust you rich. It doesn’t matter if you are doing the right things by the product, the core users, and the team. It doesn’t matter that the gargantuan lesson of the last 10 years of Yahoo’s life -- which has been swapping out a CEO to appease activist shareholders -- solves nothing.
Two things matter: Growth and expectations. And in the very short term, both are largely outside any human being’s control.
Dick Costolo made one big mistake: He ran Twitter during the era of Facebook. Nearly every hedge fund manager I’ve spoken to over the last year this drama played out has said they like Costolo as a CEO and like Twitter as a business. It’s just not close to worth the price it’s trading at.
From the initial pricing on, the multiple of Twitter was always inflated so that it could be an alternative to Facebook. After all-- both are social media platforms right? Both started around the same time? Both are ad supported? Both are massive, integral parts of pop culture? Twitter’s greatest curse was that it was never gonna come close to being Facebook.
Costolo stubbornly stuck to what made Twitter so unique. The reason it was one of the only major social networks not owned by Mark Zuckerberg. He had a long term plan. He kept his head down.
But that’s not life as a public company CEO.
I have no insight into how this went down. I was as shocked as anyone. It’s certainly safe to assume that anyone grabbing credit is full of shit, and that those staying still and quiet were heavily involved.
Costolo being replaced by “interim” CEO Jack Dorsey is just the kind of twist that would seem unrealistic if it were written by Aaron Sorkin or Mike Judge. First off, Dorsey has always had Steve Jobs- like stars in his eyes and, pre-Square stumbles, he was compared to Jobs by Valley power players like Yuri Milner. Now the once-ousted founder has come back to right the ship. Don’t pay attention to that struggling payments company in the distance-- the one that was once valued at billions even in the pre-unicorn times, with the shuttered e-wallet, now trying to duct tape its unicorn horn by selling services to small businesses. That was Dorsey’s “Next.” Twitter was his original baby. Sure, a lot of the particulars aren’t exact. John Sculley and Gil Amelio were lousy culture fits, and the company was stalling. Twitter merely isn’t growing fast enough.
Still, you can almost see the scene in the Walter Issacson bio of Dorsey in twenty years where he plays the Dylan song on repeat. “The loser now will be later to win…”
The more interesting similarity to think about is that between Dorsey and Evan Williams-- the other member of the highly dysfunctional club of ousted Twitter CEOs. Early on Williams didn’t want to be the CEO of Twitter, post-Odeo spin out. He’d been a CEO before and decided it wasn’t for him. Instead he wanted to run the incubator Obvious and spin up ideas. But as Twitter grew and stumbled under Dorsey’s then-inexperienced leadership, he changed his mind. Cynics have painted him as an opportunist who waited until Twitter was a thing and then grabbed it for himself, although that’s not fair. But Dorsey didn't feel he wasn’t given a fair shot or fair notice, and the ouster was very personal. He’d once idolized Williams and trusted him with this idea. Whether it was the right move or not, he felt blindsided.
It was Costolo who brought Dorsey back in an operational role when he took over as CEO, which Dorsey eventually dropped as his responsibilities and challenges at Square became greater. But Costolo has always trusted and respected Dorsey as Twitter’s principal creator, and seemingly Dorsey had Costolo’s back, too, as the man who made it a functional business. Did he ultimately “Evan Williams” him in his attempt to “Steve Jobs” himself?
I don’t know, and if I did I likely couldn’t write it anyway. I know this: Twitter under Dorsey is no doubt better than Twitter under some consultant or professional CEO from another industry. He is an insanely talented product savant with a deep emotional connection to the product. Not only that, from all accounts Square’s challenges have sharpened his skills as a CEO. Reputationally, he may not be quite at the top of his game, but mutual friends have told me that professionally he is.
My worry is that with both Square and Twitter Dorsey has a track record for building seemingly obvious (no pun intended, @Ev) but wildly transformational products that have had far reaching social change-- anyone can now take a credit card in the case of Square and Twitter has changed regimes. But those products tend to do more to change the world than to make billions of dollars from it. As a user, I’d love nothing more than to see Dorsey fold Square into a larger company, focus on Twitter, and make it a company Wall Street can support and users can still love.
We will see.
So back to the lesson for Valley entrepreneurs who are running a good company. You know, a company big enough that it could go public and attract mega- investor attention, but small enough it’s not the next Facebook. Expect more consternation over how little Wall Street understands tech platforms, how impatient it is for anyone trying to build a different kind of company or take a long view.
In the early Web 2.0 days-- the primordial soup that both Facebook and Twitter grew out of-- there was so much post-bubble-and-bust mistrust of Wall Street that many entrepreneurs sold prematurely or swapped themselves out as CEO before getting near that point. That’s eased a bit-- as valuations have swelled and there’s pressure to actually be worth $1 billion… you know, with some actual liquid stock that people can buy and sell.
But for many entrepreneurs it’s an unsettling choice of doors that reward you for beating the business odds: Replace yourself, sell to someone that will probably destroy what you built, or become a public company CEO.
There was a lot of hope that this generation of entrepreneurs would find another way. Chad Dickerson of Etsy had talked about as much, as had Dave Goldberg in structuring Survey Monkey. Fred Wilson wrote early on that he hoped secondary markets and early liquidity might lead to different options for VCs and early insiders to get paid without handing the soul of a company over to one entity or another that didn’t create it, and inherently doesn’t care about it.
So far, we’re still mostly stuck with those three options. Why do you think Mark Zuckerberg has spent more than $20 billion and a healthy percentage of his market cap buying nearly any company for nearly any price that seems to get escape velocity? He knows what ultimately hangs in the balance should the activist Rube Goldberg machine start up, and he wants to keep building his company.
Seem unlikely? After its less than stellar market debut Reuters was calling for his head. The Wall Street refrain? Facebook had missed mobile. Enter $1 billion for Instagram, $19 billion for Whatsapp, an offer for Snapchat that didn't materialize, and $2 billion for Oculus just in case "You've missed virtual reality!" is coming next
Wall Street is dying to have these companies go public. Then Wall Street treats them like crap once they're public. Same old story. Nothing has changed and in a world where venture capital wasn’t the industry’s lifeblood, the best private companies would just stay private.
Except this time, the Costolo one has a twist: The Icahn was coming from inside the house! The activist shareholder who manipulated the press, sounded off publicly and privately, went on financial television, and pulled every tool in his arsenal to nudge consensus to the side of ousting Costolo wasn’t some Wall Street guy who didn’t “get” Silicon Valley, Twitter, or tech. It was “one of ours”... Chris Sacca.
It’s telling he went on Bloomberg today and offered advice for Icahn. Hell, maybe Icahn should listen. Sacca has gotten pretty good at the media-darling activist playbook.
Sacca doesn’t bleed aqua. He bleeds green. He presents as a classic VC/ angel investor, but he’s never built a company himself, and he made his fortune buying and selling shares of Twitter as it went up. A move he tried to pull with Uber-- and one that got him unceremoniously banned from the company’s inner circle. He’s not a creator; he’s an arbitrager.
That isn’t necessarily a bad thing. It takes all types to make capitalism work. But most VCs will tell you to call the companies they invested in where things haven’t gone well if you want an honest assessment of how they behave when the shit hits the fan. In the case of Sacca, it’s worth noting the status of his relationships with the companies where he made the most money. One he publicly criticized in a relentless “concern trolling” campaign, and the other won’t speak to him.