I am not being sarcastic, but Twitter’s $100M funding round at a $900M pre-money or $1B post-money (hmm… does that detail really matter now) makes a lot of sense.
Twitter’s valuation is a perfect:
- manifestation of market supply and demand and
- reflection of the wanton destruction of old media companies and the fact that digital media has overtaken traditional media for good.
Searching for Hits
Over the past few years,
- MySpace stole Friendster’s thunder (if it could be called that) and was acquired by News Corp. for $580M
- then YouTube stole MySpace’s thunder (by piggybacking on MySpace) and it was acquired by Google for $1.65B
- then Facebook also stole MySpace’s thunder (by now a 60W lightbulb, mind you) and it turned down acquisition offers ranging from $800M to $2.3B, ultimately raising over $500M in capital and valuing itself at $15B courtesy of Bill Gates and Steve Ballmer.
While that valuation seemed crazy and Facebook might not ever sell raise money at that valuation - let alone sell for that amount - the recent crossing of 300M users, revenue figures over $500M per year for 2009 and rumored profitability (albeit brief or accounting-driven) suggests that Facebook did the right thing (yes, I admit it). After all, despite all of the naysayers, it did raise another $200M from Digital Sky Technologies at a $10B valuation.
Yes, $10B is 33% off the $15B MSFT valued it just last year, but that was last year. Last year, $5B was a rounding error, even for MSFT. This year, CBS as a whole is worth $5B (ok, so right now it’s $7.5B). While we’re at it, guess how much CBS was worth last year? Yep, that’s right: $15B. That has more to do with systematic factors in old media than CBS, mind you, but still.
But the main point I want to make is, in hindsight, Facebook has to its credit proved a lot of naysayers wrong - at least if we limit history to the period between 2008 and 2009.
Sure, in 2010, Facebook might hit a wall and it might never generate the kind of returns one expects a $10B-$15B valued company to generate… but that is not their main concern now.
And sure, Facebook might never IPO. But the point is, when someone comes to you with $50M or $100M and is willing to invest at any valuation, I am not sure you can blame anyone for saying “nyet”. Though as a fellow entrepreneur who has yet to succumb to VC money and/or crazy paper valuations, I whole heartedly agree with Bill Gates and Zoho’s Sridhar.
So back to Twitter, regardless of the lack of business model, the demand for the company’s stock far outstrips supply. This is why the company’s raised more and more money regardless of the answer to “how will they make money”.
In fact, I can attest that the main problem I have encountered when pontificating with VCs is specifically being able to paint in very clear and candid terms how our company makes money now and how it will make more of it. And therein lies the reason why Twitter is backing up the truck and looting the bank. The instant Twitter dives into “monetization”, investors will have to put down their bongs and start to value the company on an accounting basis, whereas right now, it’s all finance.
In finance, the formula for Total Return is simply
Return = Income Gain + Capital Gain
Income Gain includes like dividends. No self-respecting web company- including cash-rich Google - pays out dividends.
The Greater Fool Theory
So investors - be it private or public ones - make money on the Capital Gain, which calls for a stock to be worth more tomorrow than it is today. Judging by the sharp rise in capital invested in Twitter in such a short time span, the investors are basically betting that traditional media will continue to shrink, new media will continue to grow… and there will be more investors looking to ride the Twitter train:
A hat tip to Crunch Base for the valuation and funding info.
Twitter is once again following in Facebook’s footsteps and raising a lot of money before focusing on revenue…
To be perfectly fair, if Facebook’s $500M 2009 revenue figure is correct, it might not be that bad of an idea. However, this means Twitter will ultimately have to IPO because with a $1B paper valuation, getting any kind of return in an M&A will be unlikely. Sure, some tech companies like Google, MSFT, Cisco and Apple have a lot of cash on their balance sheets, but with most media buyers being battered and bruised, I am not sure if an M&A is in the stars.
So if an IPO is the long term bet, then it’s fitting to see T. Rowe Price joining Insight Venture Partners to pony up the $100M to Twitter’s war-chest.
T. Rowe Price previously invested in Slide’s $500M round, so I guess this new Twitter investment is either
- proof that they are happy with their Slide investment despite what some of the cynics were saying,
or
- an example of poor diversification in every sense of the word.
Fred Wilson who invested in Feedburner and sold it for $100M, and who is an investor in darling Twitter, seems to have his fingerprints all over the news today that Feedburner’s former CEO Dick Costolo has become Twitter’s COO.
It’s a shame, when you think about it, that Google basically paid $100M for Feedburner but hasn’t exactly taken RSS to the next level.
A lot of people view Twitter as the evolution of email lists/newsletter/RSS feeds, and today’s announcement that Costolo is joining the party is only going to increase expectations of great things to come from Twitter.
Oddly enough, the very same boosters who last year “swore” that Facebook was worth $5-10B (but is now so uncool, or less cool) are saying Twitter is worth $5-10B.
Once every while, the greater fool theory is proven to be true when someone comes along and pushes up the paper value ever so higher than the previous fool (I mean fool here in that cool way, you know: “man, that Michael Jordan is such a fool”). But jokes aside, Twitter and Facebook are actually worth a bundle, but the arguments being used are in fact not in of themselves supporting the multi-billion dollar rationale:
- Celebs use Twitter. Yes, they also used MySpace and today everyone thinks MySpace is dead and worthless.
- Businesses can use Twitter to communicate directly with customers. Yes, same thing could be achieved with a newsletter.
Yes, I am over-simplifying it, and sure, “I don’t get it”. What I do get is “liquidity”, or lack thereof:
No one will come and sign a check for anything remotely near those figures, and the public markets remain untested for products such as Twitter and Facebook.
The point is, unless some kind of liquidity transaction, it’s all moot. So we can all speculate all we want, like the fools we all are.
More on the matter:
You’ve probably been hearing a lot about twitter and tweets lately, but if you’re like me you may still be wondering what it is.
Here are some basic answers to the latest social network phenomena.
What is Twitter?
Twitter is what is known as a microblogging service. It’s a service to post short messages (140 characters) or “tweets” online.
These tweets can be read by anyone who has subscribed to your tweets.
The easiest and most obvious way to join is through Twitter’s home page- Twitter.com
What should my first steps be?
First sign up with a username that is uniquely you. Next, it’s time to create your profile. You get one image and 160 characters to explain who you are and what you do to the ‘Twitterverse. You also want to gather a following by fun and interesting tweets
What should I put in my tweets?
You can tweet anything that you like! Let your personalty show through with links or status updates.
How do I get someone to follow me?
This is the most difficult part of Twitter. Your best bet is to provide interesting, clever and fun tweets. You can also block and user that you would prefer to not have follow you.
Find out more
Contuining on the Twitter is the Facebook of 2009 theme, weren’t we having the same “what is the business model” discussions about Facebook last year?
Yes, we were.
Oddly enough, we were also looking at the same things
—Search: Twitter’s real-time search capabilities have been well-documented (so much so, that even Google has stepped up its real-time search features); Thau said the startup will monetize its search traffic “in some way”—though he didn’t elaborate.
—Carriers: Much of Twitter’s traffic comes from mobile: both through data plans and via SMS. Thau said getting some sort of a cut of the carriers’ data business wouldn’t be a huge source of revenue—but definitely a portion. Twitter’s also working on handset deals that would “integrate the service” into certain devices right out of the box.
—Content: MTV is sharing ad revs from an upcoming show with Twitter, so will we see an influx of similar content deals? Thau said yes—which is partly why they hired a new exec to focus on the media/entertainment business. “The media industry is looking for ways to stay fresh and interactive; you’re already seeing CNN and ABC Nightline using it, and we think more media companies will start using Twitter as a utility.”
Last year, Facebook’s search was “the” threat to Google’s search. Nope. Same thing about carrier (Facebook Mobile) and Content opportunities for media companies and brands (Beacon, Fan, etc).
Don’t get me wrong: both Facebook and Twitter are interesting communications products, but the next Google?
No cigar. Not even close.
Seeing how Twitter’s every move is being scrutinized, it reminds me a lot of Facebook circa 2007-08.
Like Facebook, Twitter is essentially a communications tool. But unlike email and chat, what Facebook and Twitter (as it continues to grow) are also navigation tools, look at the Top 10 beneficiaries of Twitter’s surging traffic:
And here is the trendline for each:
Twitter’s growth has been nothing short of spectacular, but I repeat what I said: Twitter is 2009’s version of Facebook… and before you know, I predict Crapstr will come along and steal Twitter’s thunder in 2010.
To buy or to build, that is one question.
Another question, it seems, is to buy or to pay out.
ZDNet summarizes Bernstein analyst Jeffrey Lindsay’s obervations on Twitter and then runs down a bunch of “big hairy audacious” acquisitions:
to conclude that investors would be better served to receive a one-time dividend than to see the money spent on an acquisition:
Lindsay’s point: Buying pre-businesses generally doesn’t pay. Here’s a suggestion: If a company really wants to blow a few billion on a pre-business just give shareholders a one-time dividend.
However, I think that is over-simplifying: the entire purpose of the acquisition is to boost growth, yet by paying out a dividend you’re putting up the white flag and admitting that your growth is stalling and that you are now a 21st century equivalent of a utility.
I do think that executives, however, prefer to a) build, because technically this is why they earn the big bucks. Then they prefer to b) buy, provided it’s in their mandate. Lastly, they want to see money being paid out as dividends, partially because executives generally have little stakes in the companies relative to institutional investors, owners, controlling families, etc.
Still, an interesting debate. For more on M&As, check out our own list of top 10 best Web M&As here.
The economic meltdown and accompanying advertising slowdown is the best thing that could happen to Twitter, much the same way that Google benefited from dot com bubble bursting. Had the dot com bubble not burst, Google’s business model would have been to slap Doubleclick (version 1.0) display banners everywhere. Instead, the bubble burst, display banner went bust and Google pioneered borrowed ripped off and scaled GoTo.com Overture’s pay per click model.
The rest is history: today Google owns Doubleclick (version 2.0).
When Twitter first began to take off, I wrote that Twitter should lose the “Google envy” (to build a ubiquitous online advertising model) and focus on what its natural disposition was: e-commerce and referal. Read more in Twitter’s 140 Problems.
When you see its most popular users include brands such as Zappos, you realize that this is Twitter’s niche anyway, and that forcing “yesterday’s ad model” into the product would only hinder its growth.
Now, I will say this, if Twitter were smart, it could leverage its fanboy’s noise about how “Twitter is search” to get Microsoft to consider pay a crazy amount for it (as it did for PoweRset), which might prompt Google to outbid Microsoft, as it did for Doubleclick.
Ultimately though, Twitter is not search, at least not yet, and its long term utility has yet to be determined. In no way is this a knock. It’s an observation. It’s also reality. Twitter is evolving, and the market meltdown could prove to be a blessing in disguise… were it not for one thing (which we’ll delicately/respectfully get to in a second).
Twitter might be search, it might be news, it might be classifieds, which is what I think Google actually was… but the point it, 1% of 1% of people would turn to Twitter for search in its current incarnation. If MSFT’s own Don Dodge argues that 1% market share of search was (pre-crash) $1B, then 1% of that is $10M. Not too shabby, but Twitter’s raised over $30M on a $250M valuation. So if I were Twitter (in its current incarnation), I wouldn’t push the “search” tagline too much… maybe Twitter is a part of the future of news. But let’s face it, news organizations are so shackled now (due to their print pedigree) that they won’t know what to do with it either, and even if they did, they could not.
Ultimately, Twitter only has 6M users, which is nothing to sneeze at, but having won over a vocal minority isn’t enough to talk down to players like Google… and just as it was ridiculous to say last year that “Facebook would kybosh Google“, it’s more ridiculous to say that about Twitter.
Which leads us to make the following recommendation to some of the company’s financial backers: get the hell out of the spotlight and let the company operate and execute instead of looking for a soapbox to inflate expectations out of any realm of possibility.
The best summation of all of this is a commentor on the SAI blog:
A guy with a multi-million dollar vested interest in Twitter tells you that he swears they have a secret business model, and you idiots print it as news. That’s great guys.
After all, the most successful companies of the last decade (starting with Google) all underpromised and overdelivered. In other words, for a company that likes to limit expression to 140 words, some of its backers are doing way too much yacking for the firm’s own good… Come to think of it, the same can be said for most of the company’s supporters, too.
PLAY
