Twilio opens trading at $23.99 per share | Hacker News Reader

Twilio opens trading at $23.99 per share

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358 pointsdoppp168 comments

Stock prices aren't very useful, I prefer to look at total marketcap.

They IPO'd at 15 dollars with a valuation of 1.23 billion dollars, which means they're now about 1.97 billion dollars.

https://techcrunch.com/2016/06/22/twilio-prices-its-ipo-at-1...

Actually, for an IPO the stock price is very useful. It opened at $15 which was higher than the previously announced range of $12-14 and have shot up 70% in early trading. It's a great start for a tech IPO, hopefully this will encourage more companies to list.

> hopefully this will encourage more companies to list

hopefully this will encourage more VC's to fund.

Quick edit: not saying there isn't a lot of funding already happening but there's fear that VC might dry up. Hope it doesn't happen.

Doesn't that mean the company missed out on about half its value?

Yep that's called money on the table.

Not really, they only sold a small percentage of the company in the initial offering.

Still looks like ~$100,000,000 was missed.

Define missed in this context. Missed to means they had an opportunity to sell those 10mm shares @ $23.99 elsewhere. I don't think that would have been remotely possible.

The conventional logic is that you don't want to try picking up nickels in front of a steamroller by pricing your IPO too high and having it sag out of the gate. You want demand for the shares and then let the market price them. If Twilio had priced their shares at $24 they almost certainly wouldn't have sold them all and it would have been a really ugly IPO that resulted in a lower total market cap.

tl;dr sentiment is very important for IPOs

> sentiment is very important for IPOs

Who cares. Compare Twitter ("popping" IPO) vs. Facebook ("sagging" IPO).

I don't see the point in comparing the two but if you want to, Twitter had much better near-term post-IPO performance than Facebook did. We all know what happened after that. It's almost as if during a period where little fundamental information is available (post-IPO), something else must be driving trading (sentiment), while when more fundamental information is available (first earnings report), fundamental information plays more of a role.

Why would then companies want to cater to sentiment-driven investors?

How are investors supposed to value the company right now at this moment?

By selling at $20, they would have picked up another $50 million.

Probably, GS and JPM got a lot it instead.

Eh thats kinda hard to say. Looking at the quoted price of a stock is a little bit misleading without looking at the Bid and Ask volumes.

Currently the bid of ~1000 shares are available at 24.97 (these number will vary second to second)

That doesn't mean that all of the shares IPOed could have been sold for that price.

Was there likely money left on the table? Yes. But its pretty difficult to put a dollar amount to it.

Literally no one in the industry looks at IPOs that way.

There exists at least one in the industry who looks at IPOs this way (as manifested by the parent comment).

The OP's profile leads me to believe they're not in finance although I could be wrong.

Change in market cap is a very awkward way to look at a recent public company because it's a very volatile measure and also is harder to mentally extrapolate other metrics from.

It's useful in comparison to the IPO price, which was $15. This means they left a lot of money on the table.

Or they had to price at a larger discount to encourage a full book and enough of a pop to support the stock.

So if they sold at their true price via the Google-style reverse auction, they would have $9 * 10 million more to use for business growth. Instead lots of hedge funds and high net-worth individuals that are big clients of GS and JPM made an easy $100k this morning.

Think about it this way: 9 * 10m = $90 million. But probably they couldn't have sold the whole 10M slug at 24. Let's guess and say they left more like $45M on the table.

They are currently at a ~2B valuation.

45M / 2B = 2.25%

Twilio is (in theory) a high growth tech company. Say they want to grow at 15% a year. 2.25% / 15% = .15 or about 2 months worth of growth.

2 months is certainly something, but in the grand scheme of things isn't the hugest deal in the world.

Sentiment behind tech IPOs is already negative and complicating the IPO process would only further that sentiment. Hard to imagine the bookrunners would ever agree to that.

> true price via the Google-style reverse auction

Even with the auction, Google IPO'd at $85, and the stock opened at $100. If you think that the investment banks gave away $90M of Twilio's money to their friends, do you believe that Google did the same thing with $300M of their own money?

Or they would have pissed everyone off by having an auction instead of a regular IPO and they wouldn't have had nearly as much interest in their shares. Google was a very special company and even then nearly managed to screw up their IPO.

No need for an auction. I don't know about this specific IPO, but often there are predictions of what the true stock price is (i.e. the "first trading day" stock price) floating around before the stock starts trading. E.g. for Facebook, the expected share price was about 37, the IPO was at 37, and the trading opened at 37. Facebook got the "premium", instead of the hedge funds and banks.

Facebook may be the worst example of an IPO done right you could have picked. NASDAQ bungled it so badly they got sued:

http://www.reuters.com/article/us-nasdaq-omx-facebook-litiga...

The article says it was technical issues. That has nothing to do with the discussion.

It absolutely has to do with the discussion. The reason for the tightness of the IPO and first day closing price of Facebook was because of those technical issues. Trading was disastrous and had Facebook not been a household name, it's easily believable that it would have traded even lower.

Actually, the news prior to the IPO about FB's advertising not being quite as effective made people lose a lot of confidence in FB and want to pull out.

This exposed a race condition within the IPO process that bungled it up. The post mortem talks about "order modifications" which are actually order cancels right up to the point of the cross was supposed to take place.

http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2012-20

Pricing the IPO lower would have had people not feeling that the IPO was overpriced. The overpriced feeling people got caused them to want to tap out and brought out the particular race condition that Nasdaq hit. Normally, IPOs get lots of buying interest. The all-in, then folding behavior was unprecedented as people who didn't believe in the company IPO would never have put in bids in the first place.

How are you tying efficacy of advertising with busted exchange? I don't see it.

This deal was upsized very close to the IPO date and completely oversubscribed with huge retail interest. Everyone wanted this deal to succeed and news behind it was extremely positive. Don't see how random chatter about advertising causes a stock exchange to blow up.

To piggyback on the weird comparisons, why didn't Square encounter any issues on their IPO? News was extremely negative and it was said that they were forced to IPO to cash out investors.

But that's good for the GGP's argument. Going down means they extracted maximum value from the market. It's a very successful public offering by GGP's metric.

What do you mean by "going down"? The IPO price was the IPO price. If people are unable to trade during the day and the price is unchanged, it just means that the stock didn't have an opportunity to trade up.

But Facebook didn't trade at a higher price when there was no longer any trouble. Nothing material changed about Facebook in those few days. So either the price would have gone down (meaning Facebook did the right thing), it would have stayed flat (same here), or if it would go up, it would go up when the exchange fixed their trouble (it didn't).

Nothing indicates that this went poorly for Facebook. It seems to indicate the opposite.

That's not necessarily true. They were selling 10 million shares all at once in the IPO. Just because a smaller number of shares are trading higher now doesn't necessarily mean that they would have been able to sell that whole slug of 10 million at 23.99.

Yeah, I think this is classic econ 101.

Share price is a function of quantity supplied. You reduce quantity supplied, and for any market with a downward-sloping demand curve, the price will go up.

Perhaps a better way to look at this is that (1) market participants have differing views of the fair value of the securities, and (2) given the current market price, only market participants who think the shares are worth >= $24 (last trade) will buy. There is no "true price", just a lot of opinions resulting in individual buy/sell decisions.

Indeed! This is the same reason that when companies get bought (like LinkedIn) the price is generally a decent premium over the last traded share price.

And yet finance 101 disagrees.

Yes, market cap should be independent of number of shares, and the market cap = # of shares * $ per share formula still holds, which is why many prefer to think about market caps rather than accounting units.

But it's also the case that a firm issuing a share for the price of $15, increases book value of the firm by $15, and this directly offsets the resulting shareholder dilution. Arguing it was impossible to find buyers at 24 dollars a share is a bit silly, given that the market immediately did just that.

Let's say that HarryCo, my own personal widget company, was IPOing. I'm selling 100 shares in the IPO.

Goldman Sachs would like to buy 50 shares for $14 each. Morgan Stanley would like to buy 50 shares for $15 each. Barclays would like to buy 50 shares for $16 each.

Citizen Bob would like to buy 5 shares for $24 each.

So what happens? HarryCo IPOs at $15 (the maximum I can get to cover all 100 shares) and then immediately pops to $24 when Bob buys 5 shares from Morgan Stanley.

I did not leave $900 "on the table" in my IPO because there wasn't enough demand to sell 100 shares at $24.

You missed the last part:

> And then immediately crashes back to $16 because there are no other buyers willing to buy at $24.

Which obviously didn't happen.

A lot of your hypothetical hinges on GS / MS buying at 15 and holding at prices below 24. Which is a lot like saying they actually value it at 24, but were somehow allocated shares at a bid lower than that. IMO, Google did it right with the Vickrey / second price auction, and apparently this has been formalized OpenIPO: into https://en.wikipedia.org/wiki/OpenIPO

If we assume that GS and MS have a reserve price of 24, as evidenced by the market open, then their strategic 15 and 16 bids do represent money left on the table.

Fact is Goldman Sachs - and maybe other banks - were allocated shares with a priviledged price during the FB's IPO as they were working on the IPO while buying stocks for their own clients. I know this was a special IPO, but my guess is that it is likely to happen for others

The special IPO is the one where that _doesn't_ happen.

I'll grant that that's the commonly-accepted way to look at market cap, but I think it leaves out a crucial assumption: "Given the current supply and demand for/of the firm's equity".

But I think that's not always a great assumption, because sometimes things happen that don't affect firm fundamentals (profit, revenues, margins) but do affect valuation, like changes in interest rates, shifting investor sentiment on the sector, a lighthouse investor publicly stating their intention to buy/sell, etc -- all of these things change market cap without altering the business per se.

All this to say, I think the simple CAP=SHARES*PRICE formula is too simplistic. I think it's more accurate to think in terms of ranges of what the firm's equity might be worth, and realize that it's a highly subjective assessment based more on aggregate opinion, than some hard objective law of physics.

But classic econ 101 would also say that if the above was true, then everybody who thought the shares were worth only $15 (plus spread) would sell, resulting in share price dropping back to around $15.

I think you're wrong. My reasoning is simple. If the IPO investors thought that the company was worth less than $24 (e.g. $16), they would have sold already, and the price would have dropped. If they thought the company is worth $24 (or more), they would have bought the IPO at any price between $16 and $24 (minus spread) as well.

Really, the only argument for under-pricing the IPO is as a favor to the banks/hedge funds. But the question is, did the banks ever return the favor?

I think it's very hard to argue that day 1 or near-term price action on any IPO is solely based on value instead of sentiment.

Isn't there some law that all investors buying stock at around the same time have to be offered the same terms?

I'm not a lawyer but I think this is part of what's behind the trend toward convertible notes in company financing in SV, compared to the traditional priced equity round -- too hard to give a different deal to different investors, for what amounts to the same shares?

Would love to hear more from someone who knows more about this.

The volume is 12 million and it hasn't traded under 23. So, yes, in theory they could have sold the block for more than $15, possibly as high as 23 and change.

Ya, I agree that it's likely that some money was left on the table though I'm skeptical that they could have gotten as high as 23. Comparing volume to the size of the IPO block is a bit of an Apples to Oranges comparison.

Oh, for sure. And it's better to "leave money on the table" than come out with a whimper. The pop will almost certainly help them do a secondary in the next 4-18 months.

There may be an effect there, but IMHO it would be a lot smaller than what we're seeing. As of 1:49, about 14.5 million shares have traded on the open market with an average price of about 25. Seems like there's healthy appetite for the shares far above the IPO price.

It's troubling to think of the conflicts of interest that go into the pricing of an IPO. The company would like it to be as high as possble, holding the number of shares sold constant. Investment bankers would like to preserve their good relationship with the hoardes of potential IPO investors, and therefore would like the IPO price to be below the "true value" of the stock, to provide their clients with a nice short term return. Another interesting bit, is that most of the employees of the company going public actually care about the price of the stock six months from now when their lockup ends, so their incentives are not exactly aligned either.

In short, the whole "big price pop on day 1 == good" idea needs to go away.

> Investment bankers would like to preserve their good relationship with the hoardes of potential IPO investors, and therefore would like the IPO price to be below the "true value" of the stock, to provide their clients with a nice short term return.

Do you have a source for this? It was my understanding that the investment bankers want the IPO to be priced as high as possible because that's how they make their commission. See the potential windfall for JP Morgan on the Saudi Aramco IPO

Both are true. The bankers make more money on this deal the higher it prices, but they can't get the next deal done unless they're on good terms with investors.

This is correct. It is a balancing act between two conflicting parties.

Commissions don't align interests very well (real estate, cars, etc.) because you have a much greater incentive to increase your turnover and number of clients than to get a slightly higher price for one sale.

Investment banks often have to make guarantees about selling all of the shares, and the worst thing that can happen for them is to have a broken IPO (shares close below the open price). The investment bank that led Facebook's IPO had to buy back shares immediately to prevent that from happening.

Also, many of the initial shares are bought from the investment bank's book of contacts that they reached out to on their roadshow. If you lose money for your fund manager buddies, they won't invest in your next IPO.

This comment is confusing... I don't know if is me not knowing how an IPO works or parent.

For what I know during the normal stock exchange you sell to the highest price and buy to the lowest.

Suppose there a stock EXMPL, and some people want to buy and other want to sell.

Now put all those people in a line with the seller facing the buyer sorted by price.

So in front of seller line there is the one that want to sell at 100, followed by the one who want to sell at 101, then 103 and so on.

In front of the buyer line there is the one who want to buy for 99, followed by 98, and then 97 and so on.

In this situation no exchange is been made because they cannot agree on the price.

Now suppose that someone is betting heavily on EXMPL and decide to buy 100 shares at 102$. It goes in the first position of the line and ask to the one who is selling at 100: 1> "how many share can you sell me at 100?"

2> "75 share for a total of 7500$"

1> "Deal, here the money!"

Now our buyer goes talking with the second of the line...

1> "how many share can you sell me at 101?"

3> "100 share for a total of 10100$"

1> "I only need 25 for a total of 2525$, here are the money"

2> "Deal, here are the share!"

And the 102$/share guy left.

At this point the last tick sign 101$ which is the "price" of the stock, note that nobody is buying anymore at more than 99$.

During an IPO I wouldn't expect much difference...

In my understanding the money "left on the table" are just the one needed to rise the price...

Am I missing something?

You're overanalyzing it. The company priced 10mm shares at $15 with the banks running the IPO so:

company -> banks

The first actual public trade was $23.99 so

banks/clients of banks -> public markets.

Aaah it makes more sense now :) thanks

IPOs are sold by salespeople with pitch decks to brokerage firms, who then sell to their clients. It's not done through an exchange; it's done on handshakes and phone calls, on human time scales, in the weeks/months leading up to the first day of trading.

People sometimes refer to the first day of trading as an "IPO", but that's not quite right.

Thank you :)

That's a bit of a mis-nomer because a pop sets them up much better for a secondary. Among other benefits of a pop. Absence of a pop gives the impression of "failure" which takes awhile to overcome.

"Failure" like Facebook?

A more serious question: how many secondary offerings are there?

It depends, especially on the sector. Experimental Biotech companies will do many secondary offerings throughout their existence.

In this case the underwriter who controlled this IPO likely has what is known as a "green shoe". The green shoe is an agreement to sell more shares (up to 15%) after the IPO and they acquire them from the company at the IPO price. This means the bank could sell 15% more stock that wasn't part of the original IPO at current market prices and only have to pay the company the original IPO price. The company raises more money and the underwriter makes more profit. This happens when there is a successful IPO where the market prices the stock higher than the IPO price.

Give things a few months to settle. Right now there are lock-ins that keep prices higher than they might eventually be. One the lock-ins are over, the price will be more realistic.

I'm with you that huge first day bumps don't help the company much. A little PR is nice, but if the price stays that high, they underpriced.

The investment banks have huge incentives to have these first day pops, as it's free cash for some of their high-volume customers.

"Leaving" sounds like a choice, there are lots of considerations. We don't know how the roadshow went, so we don't know what people were saying about participating at different prices. We also don't know what constraints they had on dilution from previous term sheets.

Personally I'm glad to see a "Unicorn" step out of the corral and survive in the wild. If it is still above a $B valuation after the employee lockup period ends that will definitely classified as a success.

Google finance is showing price $28, cap $4.6bn at the mo.

Side note, some of the Twilio dev team is currently running a "code jam" from the NYSE trading floor and broadcasting it via Twitch. https://www.twitch.tv/twilio

[Now Over]

So far I've seen Flask, Node/Express and Sinatra being used ^^ https://twitter.com/mitsuhiko/status/745985282659524608

Makes me unreasonably happy :)

Kenny's a coder!

I think this is actually pretty incredible. They got trader who's been there for 35 years writing his first Twilio app (and first app ever) live and it works. It feels like an awesome message that we can empower people to code with the right tools and they can feel incredible doing it.

Well done, Twilio!

Edit: And we just finished a conference call with Kenny that he created and we all chanted his name. This is amazing.

The most epic thing I've seen today! Always nice to see people running their first line of code

Can some one explain the purpose of this other than marketing? I feel, we take it too far these days. This thing seems straight out of Silicon Valley HBO show. It is difficult to tell reality from fiction. Why code jam from NYC trade floor? What is the intrinsic value of this code jam to Twilio other than marketing. May be I am a bit being harsh. May be I am old school when I think we should all be rolling like Wozniak's (apple co-founder) not flashy brogrammers who would do anything for marketing.

It's not just empty fluff marketing. If I asked people on my floor if they knew what the company does, they would have no idea. Watching a demo like this enables the company to emphasize the simplicity involved in their product and enables understanding of what the company actually does vs "idk some tech company".

That sounds like marketing to me. But don't know what's wrong with marketing in the first place. Having good marketing is essential.

I think the above poster wasn't disputing the "marketing" part, he/she was saying this wasn't "empty fluff" marketing (meaning it was potentially USEFUL marketing).

This is 100% a marketing tactic. A good one at that and Twilio will probably see a decent ROI from it.

> May be I am old school when I think we should all be rolling like Wozniak's (apple co-founder) not flashy brogrammers who would do anything for marketing.

Woz would be a no one without marketing. And similarly Jobs would be a no one with Woz's product development. I'm not sure why you feel the need to address "has marketing gone too far" when you can simply chose to ignore it?

I just posted pretty much exactly this point and then read further down the read and saw this.

I think people get caught up in the product, and forget that sales is just as important to the core business.

Wait, why does it have to have a purpose besides marketing?

They're marketing directly to people who would want to know about why they would IPO in the first place. Mission accomplished, non?

One way it could have happened: marketing says "let's have someone live code from the NYSE trade floor, that'll be great marketing"- and an engineer begrudgingly does it.

Another way it could have happened: some engineer nerded out, and said at a team meeting "can I live code from the NYSE trade floor? It's silly but would be super fun!". To which marketing replies "yeah, and that'd be great for the company image too- do it!".

You seem to interpret it as the first version, but for all we know it could be the second. Something that would not be out of line with the personality of someone like Woz either.

Honestly? I think this is Twilio's "we told you so"/fuck you" to wall street.

Investor sentiment around developer tools in Silicon Valley is still broadly negative. I worked for 3yrs at a company funded by prominent valley VCs and, unequivocally, they were trying to get us out of the "developer tools" business and "sell more to the enterprise market". The subtext being, "developers don't control budget in real companies".

And I think there's a grain of truth to that sentiment. You have to realize how much Twilio is a company built against the prevailing Silicon Valley wisdom of "how companies are built". These guys have a bit of a counterculture narrative, of "we're a developer tools company, we're growing, we're having a successful IPO, see, it can be done".

I, for one, think it's a great, harmless PR stunt. :)

> Twilio is a company built against the prevailing Silicon Valley wisdom of "how companies are built"

Sell NYSE:TWLO!

Puts my friend, puts are where its at.

Newly listed IPO stocks do not have options for a while.

You're correct, it takes a bit for an options market to form around a new security.

Let's get beyond the first day of trading before we start telling Wall Street, "Fuck you."

I love Twilio and wish the best for them with their IPO but having lived through the 1999 dotcom crash, publicity stunts and stock price hubris rub me the wrong way.

I worked in Twilio's marketing department from 2011-14. A key part of our marketing 101 classes for new recruits was that marketing was not a bad word. In fact, to not market a product is an insult to it. The highest honor you can pay to all the hard work that went in to the product, is to market the hell out of it and make sure it gets used.

Exactly. If someone doesn't want to get their product out to customers, it's a shame they don't have a product they believe in.

It's also a shame when true believers market their product endlessly.

Much easier for someone who doesn't want to hear it to simply not listen than for someone to hear about a product they need that the creators are unwilling to talk about.

How did you tackle internal negativity from engineers who as a whole tend to skew towards the "anti-marketing" sentiment?

Are engineers against marketing, or are they against emotion based marketing (think car or clothing ads)?

I've encountered engineers throughout my career that have been against all of it.

Also from the Twilio marketing team (2011-2013) as a developer evangelist...

First, by being developers. The first word in our title was "developer" and each of us had 10+ years of serious ship-it experience on projects large and small from all over various industries. Even if we didn't know that specific problem, we had shared experiences and mindsets.

Next, by treating everyone with respect. It didn't matter if you were in a "boring" job behind the scenes or the most amazing job with accolades and attention or the person making the purchasing decision, you are someone to be treated with dignity and respect.

Finally, by being hero makers. That was our internal code name at the time. Our job was not to promote ourselves and get our names out there. It was to help make that developer, that hacker, that entrepreneur be admired and a hero in their organization. That meant helping them design, build, and ship useful tools quickly that would work today, tomorrow, and a year from now.

My 0.02.

It's weird to dismiss this as marketing is somehow not a valid reason to do something! The entire IPO process is heavily about marketing yourself - to bankers, to asset management companies, to other investors, to future employees, to analysts, etc. Twilio is an API company, do you know how boring that is to most people? Most people can barely grip the idea of what an API even is, never mind what it does or why on earth you'd want to invest in it. This is an excellent demonstration of what the product does - it's giving physical form and a real world demo to an API company, and that's incredibly meaningful! Not to mention they are all over the news media today - this is their day, and this provides a great TV shot and provides good info to viewers. When Square IPO'd, they brought the readers to show off to viewers. When you have an API company, you have to be a little more creative. It's just a really great idea, don't be so hard on them :)

"we should all be rolling like Wozniak's (apple co-founder)"

Apple wouldn't be Apple if it rolled like Woz.

>> "...the purpose of this other than marketing..."

In fact the whole purpose of having a stock exchange floor is 100% marketing. The real action happens in a colo in New Jersey; the trading floor only exists for the cameras and the NYSE would carry on perfectly fine without one.

Why in the world would there need to be ANY other reason other than marketing?

I think it's neat demonstration. They've got a simple point to get across, and this is a decent enough way to make it.

While that sounds great for Twilio (and in some ways it is), it's actually a bit of a bummer because this means they left around $90M on the table.

This is because of how IPOs work:

In an IPO, the company (eg. Twilio) sells the issued shares to an underwriter (eg. JP Morgan) at an agreed amount (eg. $15) and then the underwriter turns around and sells those on the market for whatever people will pay for them (eg. $24).

If those first shares get bought for less than the offering price ($15) the company got a good deal on their shares and the underwriter loses money. If the shares get bought for more than the offering price, the company loses money and the underwriter profits.

This is one way underwriters make money, by being able to turn around and sell those shares to the public market for more than they bought them for.

Twilio issued $10m shares at $15 and the market opened up 60%, so they raised $150M and left $90M on the table.

10m shares * (24 - 15) $/share = $90M

A big (and important) reason IPOs are frequently priced below where they open is that the underwriter is try to ensure that the IPO is fully subscribed. If the IPO opens below the IPO price, then the new shareholders won't be too pleased, and will be less likely to purchase shares of the next IPO.

Too many investors losing money on IPOs --> less demand for IPO shares --> less capital available to (generally) smaller companies.

On the other hand, if investors are constantly making money from IPOs, there will be much more demand in the future, and capital will be much easier for these companies to access.

But why should Twilio care about the next guy in line? Their job is to get the best deal on capital they can get and giving some of that available capital to the underwriters is a bad idea from a shareholders perspective.

These days, the purpose of an IPO is as much or more to provide liquidity to insiders as it is to actually raise capital.

This was the same thing with Facebook. This is how the financial banks that prepared the IPO are making a lot of money easily and probably how Twilio negotiated a low price for the IPO.

LinkedIn too, if I remember correctly. Underwriters make a killing off these IPOs.

Which makes me wonder... are there any safeguards in place to make sure that companies don't get ripped off? In would seem like it would be in the underwriters best interest to value the stocks at a very low price so they can make a lot of money from an IPO.

This is almost completely backwards. Here's an example from the Facebook IPO: http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stan....

This is how an IPO works:

1. The underwriters talk to potential buyers to gauge how much interest there is and how much they're willing to pay.

2. The underwriters set the IPO price in consultation with the company. Then they buy X shares from the company at the IPO price minus a fixed-percentage underwriter's fee, and sell Y shares at the IPO price to investors. Since the percent fee is negotiated ahead of time, the underwriters have an incentive to price the IPO as high as possible so that their fee is higher.

3. In step 2, Y is typically greater than X, by up to 15%. The underwriters sell more stock than they bought, so they make money if the price falls after the IPO. The reason that the company allows (or encourages) this is so the underwriters can buy back the stock after it opens, at or slightly below the IPO price, and prevent the stock price from falling.

So: the underwriters make larger fees if the IPO prices higher, and they make larger trading profits if the price drops following the IPO.

Can someone explain one aspect of their business model to me? Their cost of goods sold is rather high at 45% and hasn't shown much operating leverage - no bueno. They explain that this is mostly payments to "network service providers"...would this mean the carriers? If so, what options are available to Twilio to lower these costs as a percent of revenue? This is the only aspect of the business model that concerns me. I read that Bandwidth.com actually owns a CLEC in order to lower these costs, might Twilio be able to do the same? Any help much appreciated.

There are a lot of industries with a much higher COGS that do fine. To me it sounds like they're selling goods at 122% markup.

This is my read exactly.

Investors need to understand that internet application service providers aren't software companies, and that it isn't reasonable to expect software-company margins (selling CDs for hundreds of dollars) from services providers.

Companies like New Relic, Twilio, etc. have real costs to operate their infrastructure, especially so in Twilio's case where they likely have to make payments to the downstream network operators (not sure on that last point, I assume, but would love to be corrected if I'm wrong)

One thing they do is send out international bulk SMS to their users, probably through large SMS aggregators. This has a cost per SMS that's pretty hard to get around.

> There are a lot of industries with a much higher COGS that do fine.

But not many that have such a ridiculously high PE ratio. One of the main reasons tech businesses (specifically SaaS) can command such a high valuation is because their gross margins are amazingly high (some up to 90%, on average around 70-80%), which means 90% of their revenue can be reinvested back into growth (S&M and R&D). I think it's certainly fine to discredit Twilio when looking through the lens of publicly traded SaaS businesses (they're on the low side of gross margins), but if you compare to other industries, you're right, it's a very healthy business.

Good read on this:

http://tomtunguz.com/not-all-revenue-dollars-are-created-equ...

Another reason is because of growth, 100% y/y for them right now. That's the main reason.

Yeah, Twilio is actually really expensive compared to Plivo, Bandwith & Nexmo. Which they've managed to achieve with many years of high quality service and marketing.

Apple has a cost of goods of about 60% and it has done fairly well over the past 10 years.

Anyone local in SF who wants to meet and go through the fundamentals on this? I've gotten through about 40 pages of the S-1 (of about 160) and want to compare notes.

In no particular order, a few thoughts:

- I'm not sure how defensible this is against AWS or another infrastructure provider cross-selling to existing customers. AWS/Azure already has lots of relationships with buyers and both have the engineering muscle to build a competitive product. Maybe the existing knowledge of the API and general head start will cause people not to switch?

- How large is the addressable market? Can Twilio grow it? Are they planning to do anything beyond their existing "bringing telephony to the Internet" product line?

- Dual-class share structure a concern for any? Interesting that it ceases to exist after a few years.

I'm thinking about buying a few hundred shares as a long-term hold (3+ years at least) but the first-day pop is making me rethink, maybe it'll cool after a few days, who knows?

>Maybe the existing knowledge of the API and general head start will cause people not to switch?

It's hard to imagine anyone switching. Presumably if Amazon started trying to compete on price then Twilio could lower their prices enough to not make it worthwhile for anyone to switch. Especially given that they're going to be integrated pretty tightly, it shouldn't be too hard for them to not make it worth the cost to switch.

The real question would be if they were able to continue growing if GC, AWS and Azure introduced the functionality. Lots of companies are willing to pay a little more to keep everything in one ecosystem.

The only difference is that integrating with all the mobile carriers is a totally different problem than anything else AWS, GCE and Azure do. It's not just an infrastructure/technology challenge, there is also the relationship building and negotiating which isn't something you have to deal with when you're building out, say, media transcoding as a service.

Another question is what happens if the current SMS-Voice use cases migrate to platforms such as FB Messenger and Whatsapp? The seamless integration of alternative platforms in to iOS 10 could be a hint of a future where carrier are just interchangeable with any available data provider.

Their biggest threats aren't AWS/Azure. AWS just hosts their stuff, the same way they host Netflix. This is no different than Samsung building smartphones, but selling memory chips to everyone else, even Apple.

Twilio's biggest worry is every incumbent IM provider trying to court businesses with replacing telephony.

Their future competitors are therefore Facebook Messenger, WhatsApp (hey, also Facebook!), and anyone else who wants to push their messaging/call platform to replace more and more of what people used to use business-to-consumer and consumer-to-business phone calls and texts.

> AWS just hosts their stuff, the same way they host Netflix.

Uh, AWS already has a competing web services product, it's functionality is just severely lacking when you compare to Twilio: https://aws.amazon.com/sns/

> Their future competitors are therefore Facebook Messenger, WhatsApp (hey, also Facebook!)

Funny enough, Twilio's largest customer is actually WhatsApp. If Facebook wants to increase some margin and can do it more cost effectively than using Twilio as a provider (I don't see why not) then this is a huge threat to Twilio commercially speaking.

Good point on SNS, but AWS' approach is to offer a kitchen-sink menagerie of services. I stand by my accidental analogy that they're the Samsung of the web services world: have one product for every possible need, but only focus on a handful.

With regard to Facebook, I'm talking about initiatives like these [1] [2] [3] which leverage Facebook's ubiquity and better discoverability tools than PTSN to de-emphasize it for B2C and C2B communication.

[1] https://www.facebook.com/business/news/find-and-contact-busi...

[2] https://www.facebook.com/business/news/new-tools-for-managin...

[3] https://developers.facebook.com/docs/messenger-platform

If whatsapp gets into this business, I have to applaud their pokerface.

Matt Yglesias wrote that amazon is a "charitable institution being run by elements of the investment community for the benefit of consumers."

I feel that applies more to Whatsapp than amazon. When you install Whatsapp, you are still presented (with a package in the UI that links to a blog post from 2012(!) about how companies "know literally everything about you, your friends, your interests, and they use it all to sell ads."

https://blog.whatsapp.com/245/Why-we-dont-sell-ads?

If they pivot to sell services after their lofty position, I would expect significant user anger.

WhatsApp doesn't have to get into this business because Facebook Messenger is already in this business.

If this were in the grocery store, WhatsApp is the organic, GMO-free product and Facebook Messenger is the mainstream product, but they're both made by Facebook -- a product for every need.

They are investing heavily on video conferencing as well.. https://www.twilio.com/webrtc

Just read here [1] the Twilio net profits are these:

2013: -$26.9m

2014: -$26.8m

2015: -$35.5m

1/1-3/31/2016: -$6.5m

[1] https://twitter.com/jammasternate/status/737314901572616193

Edit: removed note against HN policies.

Shut the company down, someone's onto us

> being downvoted in HN for publishing this? Crazy

The HN guidelines specifically ask you not to do this. Please reread them: https://news.ycombinator.com/newsguidelines.html.

The net profit numbers by themselves don't tell you much about the health and prospects of the company.

One big issue is that customer acquisition cost tends to be upfront whereas the life time value lags behind. E.g. you have to hire sales people now, it takes X months for them to become productive, and another Y months for those new customers to fully onboard.

So to put those numbers in to context, you would have to look at revenue growth, margins, customer churn, cac, ltv, etc.

> The net profit numbers by themselves don't tell you much about the health and prospects of the company.

I am not saying they do but they help to discuss the IPO.

I'm not from this part of the world, but what I've found is that if you can juice your growth numbers for the public markets or raise more investor money on the notion that you'll blitzkrieg the market, LTV matters less and less for public markets.

Even SalesForce and Amazon sort of go by this model. They make no profits. I'm not sure if I agree with this whole thing, esp. given the coliseum of a city they're building while being not-profitable, but I do understand some of the context of why the companies are valued so high.

It is weird that Google Finance [1] is not displaying the stock while Yahoo does [2].

[1] https://www.google.com/finance?q=NYSE%3ATWLO&ei=WRRsV5j0KtD9...

[2] http://finance.yahoo.com/q?s=TWLO&ql=0

Do this check for any IPO stock on any given day, it always is the same case. GF has taken a week sometimes to get them on their feeds.

Yahoo! Finance is probably the last respected Yahoo product on the market. The serious investors I know always use Yahoo Finance as their free data source (they also have expensive private data sources, of course).

Plus Yahoo Finance makes it super easy to download historical closing price data in CSV format to do your own analysis.

So does google actually.

No the Google Finance download feature is far worse, and effectively useless for many types of analysis. The data only goes back to 2000, whereas Yahoo goes back to 1986. And the Google closing prices aren't adjusted for dividends which makes it impossible to calculate actual returns unless you pull that data in from another source. Yahoo includes a separate column which has that built in.

Plus they have option prices.

Thank god they rolled back the terrible beta redesign.

TradingView has worked well for me for a few years now: https://www.tradingview.com/

Not strange at all. When Ferrari had their IPO I had to use Yahoo finance because of the same issue.

Based on IPO stock price ($15) and market cap ($1.23Bn) and Twilio's revenue run rate around $150M, so that's x8.2 for Revenue and x20.5 for EBITDA (40% margin seems reasonable in the telcos industry). Pretty strong figures - AT&T trades at 5xEBITDA - but not excessive. They might have chosen the bear/base case for the IPO pricing given i) the IPOs of tech companies that got delayed over the last months ii) their unique situation as a pure API player - they're the only one out there with that positioning

> and x20.5 for EBITDA (40% margin seems reasonable in the telcos industry)

There EBITDA appears to be negative. 40% margin is "Gross margin" and is certainly not a valid EBITDA figure.

40% is a valid EBITDA margin for telcos. Twilio is indeed slightly negative in terms of adjusted EBITDA (around -5%) but market cap of tech companies is usually rather based on NTM EBITDA or industry average EBITDA - see prospectus of IPOs

> market cap of tech companies is usually rather based on NTM EBITDA

This is almost entirely false.

> 40% is a valid EBITDA margin for telcos

Uh what? I didn't state that 40% wasn't valid. I simply stated that gross margin != EBITDA.

For a company with a yearly gross profit of USD92 millions and net losses of USD35 millinos, I cannot imagine who is buying shares at a USD1.8 billion market cap.

Are we in the 2000 again?

Of course not. This time it's different.

"This time it's different." It is great to see how history is repeated.

I think this is a deserving company with genuinely useful tools. On top of it, it is super easy to use Twilio to automate telephony, so I am happy for them.

Did anyone do a S1 summary of Twilio already? Will be great, if you can point to it.

There was another HN thread about the S1 filing. https://news.ycombinator.com/item?id=11779453 https://www.sec.gov/Archives/edgar/data/1447669/000104746916...

Lots of haters there, which I don't get. Twilio seems to have a lot of substance.

Good service but still very overvalued.

This post is an amusing summary of the six years of Twilio haters: https://kev.inburke.com/kevin/six-years-of-hacker-news-comme...

It seems like a running that their primary competitor (Plivo) is ahead on features, and has better prices. I think those are completely fair criticisms of any company. It's a little strange that this compilation goes to great lengths to never mention the competitor by name.

you can click on the links and see they are each about a different competitor.

"Hater News" heh... yeah sometimes people do tend to hate around here, but it's nowhere near as bad as Reddit.

I used to work for a company that vaguely competed with them. It was frustrating to have people ask "why does your service cost so much compared to Twilio" and to bite my tongue and say something diplomatic rather than "because we're running an actual business that makes money rather than a VC-funded playpen". Apparently they're not even cash-flow positive at this point?

s-1 https://news.ycombinator.com/item?id=11779453

s-2 amendment https://news.ycombinator.com/item?id=11893368

Summary https://davidcummings.org/2016/05/26/notes-from-twilio-s-1-i...

For employees sake, stock price should remain that high after 6 months...

Actually, it might go up quickly once they start filling up their financial results every 3 months. If they have a steady growth the market will react positively and the employees owning shares will benefit from it.

I used Twilio to make a simple SMS wrapper around an app. It took maybe 30 minutes and I had never used it before. Very cool product.

One wonders what is the competitive threat here?

Is it that Apple and Google introduce their own messaging infrastructure for developers?

Nexmo or Plivo, but neither appear to be doing too well comparatively...... [0] although Plivo appears cheaper from other comments posted here.

[0] (paywall warning: "display:none;" the interstitial modal window) http://stackshare.io/stackups/twilio-vs-nexmo-vs-plivo

Is anyone on here buying shares?

Exciting day indeed.

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I don't think that Twilio is a YC company.

stock price on IPO day is not helpful. You should better check it out after 3months or after first ER.

I wrote a blog post about their API - IPO.

At one point when I was building a SAAS sms app, I emailed 579 SMS providers to find quotes on better pricing.

https://medium.com/@datarade/twilio-ipo-thoughts-997c36c9440...

One thing that I find incredibly surprising is that they often white-label and sell on top of other providers like infobip/nexmo. They don't have tier 1 connections and as well they don't scale very well internationally.

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