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"Dear Parag and Ned" - An Open Letter to Twitter Leadership

"Dear Parag and Ned" - An Open Letter to Twitter Leadership
By Compound248 • Issue #3 • View online
FROM THE OFFICE OF COMPOUND248
Somewhere in the Twitterverse
December 17, 2021
Dear Parag and Ned,
Congrats, Parag! I can only imagine the whirlwind. I speak for so many when I say we are excited to see this next chapter of Twitter unfold - the world is cheering for you.
Many thanks to both of you, as well the broader #OneTeam, for all you do. I am a passionate user of the service and am excited at the product direction.
In addition to sharing my enthusiasm, I write with more terrestrial aims - I own a sizeable stake in Twitter shares, making me both a power user and a meaningful owner. I believe in Twitter and would like to share a few thoughts on its future. Jack’s final request was for Twitter to be the most transparent company in the world - with that in mind, I intend to publish a short series of open letters on Revue over the coming weeks. Activism is generally not my style, but suggestivism is in my wheelhouse.
I am an owner, not a renter - I could care less about the day-to-day oscillations of our stock price. I own Twitter with a view on the horizon of 2031, not the sunset of 2021. While a decade-long time horizon may sound abstract, it is not: if we don’t know where we are going, any path will take us there. The steps we take today inform the options we have tomorrow.
Twitter is the communal gathering place of the curious, the engaged, the creative, the passionate. Fulfilling their desires serves the shared purpose of all stakeholders: building a service of extreme value to the world.
From a financial perspective, accomplishing that goal can be observed via two primary revenue drivers: Users and ARPU. ARPU itself is comprised of two additional KPIs: engagement per user and dollars per unit of engagement. When Twitter fulfills its mission, more people use the service (mDAU), they use it in a deeply engaged way (mDAU and ARPU), and we know them well enough to help them find information, products, and services that make their lives better (ARPU).
Of course, the point of investment is not revenue growth: it is growth in intrinsic value PER SHARE, to which revenue is but one important input. As the last two years have shown us, the vicissitudes of stock price movements cannot be our measuring stick. Rather, we must stay focused on the inputs that drive intrinsic value per share: the sum of all future cash flows, discounted back to today. Ultimately, share price moves toward intrinsic value, even if its short-term moves seem manic.
To simplify, we can bucket intrinsic value’s drivers into five categories. I plan to dive into each of these in the coming weeks:
  1. Moat (business durability)
  2. Revenue
  3. Margin
  4. Capital Intensity
  5. Balance Sheet and Share Issuance
Focusing on any one of these five requires short-term tradeoffs with the others. A maniacal focus on revenue can be counterproductive if it costs too much, comes at the expense of capital efficiency, or is funded by excessive share issuance. A singular focus on expanding margins often weakens durability by eating the seeds of tomorrow’s plantings. As with so much in life, balance matters. Balance requires knowing and feeding your strengths, while identifying and shoring up your vulnerabilities.
At a high level, Twitter’s core strength is that it is an interest network built around communities of one’s interest graph, not a social network built around one’s social graph. On Twitter, “community” coalesces around “interests,” rather than vice versa. This distinguishes it from Instagram, Facebook, and Snap. The community element may develop second, but community plays a critical role in pulling us back to the service again and again. Community differentiates Twitter from other interest platforms like Google and Pinterest.
Despite Twitter’s market cap being on the smaller end of that group, Twitter has a deeply entrenched position. That begs the question, “why does the market assign so little value to Twitter?” Alphabet and Meta have daily fluctuations that are larger than Twitter’s entire market cap.
Twitter lost its way in the first half of the last decade, when it thought its purpose was “Live.” This misplaced focus led Twitter to forfeit massive strategic opportunities. Simultaneously, while mistakenly believing itself to be a media company, it accumulated substantial tech debt. As other leading tech companies progressed nimbly forward, Twitter was mired in its past.
Happily, the past five years have been transformative. Under your leadership - alongside Jack, Kayvon, Bruce, and an increasingly deep team - Twitter has rediscovered itself. You helped the company pay down tech debt, improve platform health, increase product development cadence, establish financial stability, and return to growth.
That sounds like progress and yet $TWTR finds itself as unloved as ever. Why?
During this multi-year turnaround, management wisely chose to focus on Moat and Revenue. In doing so, it unnecessarily lost sight of other value drivers, drowning owners in dilutive share issuance and massive operating costs. When owners lose, time horizons shrink. As we have discovered, if shareholders don’t perceive themselves as central to the mission of the company they own, they will fight.
Fighting represents a lack of trust and reduces management’s degrees of freedom. Conversely, time horizons extend with high trust. It is imperative that Twitter leadership build trust by consistently showing you are working on behalf of Twitter’s owners. Owners want to see leadership maniacally focused on the five value creation drivers I laid out above.
One of Warren Buffett’s lesser-known quotes is apt: “intensity is the price of excellence.” For Twitter to fulfill both its mission and its owners’ expectations, you will be required to make hard choices and provide sustained effort. My hope is that you two lead a balanced company, moving fast and decisively, but with the efficiency of an entrepreneurial startup rather than the inefficiency of a bloated media business. In the near-term, I believe Revenue and Moat continue to deserve primacy. But that can no longer come at the expense of shareholders via wasteful spending and an ongoing deluge of share issuance. Intensity truly is the price of excellence. The world needs an excellent Twitter. It’s time to decide if #OneTeam burns with the requisite 🔥.
I invite you to begin thinking about how those five traits play against each other in advance of my next letter. My DMs are open if you would ever like to chat.
I am excited for you both as you take on this next chapter. Give my love to the Tweeps.
Respectfully,
PS: Parag, Ned, others - make sure to subscribe to ensure you receive the next letter.

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Compound248

"That thing that rich people do where they turn money into more money. Can you teach me how to do that, Jack?”
- TIna Fey, 30 Rock.

“With my eyes closed.”
- Jack

I also blog at www.compound248.com

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