Yesterday Henry Blodget reported that Twitter is looking to raise a Series C financing round of up to $15M on a $60M pre-money. If investors bite, that would give the short-form publishing platform a $75M post money valuation and effectively dilute the company by 20%.
Previous, Twitter had raised $5M on a $20M valuation, whereby they had sold off 20% of the company.
- Listen to your Money-man
Fred Wilson published a piece on how raising too much money before you have defined a successful business model. I covered this here and heaped a lot of praise on Wilson for admitting that too much VC money is what oftentimes kills businesses. He said:
Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.
When recently asked by a user to describe what that is business model actually was, Fred replied:
build a service that tens of millions of people love using every day, then build a revenue model that is native and appropriate
That sounds really great in abstract terms, but it fails to define what model that will actually be… My guess, frankly, is that no one really knows but they all have plenty of ideas and opinions. You know what they say about opinions…
This funding then must be for IT and infrastructure which users say is unreliable. It’s not a coincident that changes at Twitter’s IR brain trust have been numerous of late: first Blaine Cook, then Lee Mighdoll.
You can call it a coincidence, but in a culture where money and success outweigh personal lifestyle, I don’t buy it. This is what I think happened:
- The company’s management team has to change some things and people before raising more money, investors probably told them, and this was the purge, veiled under these seemingly independent and unrelated moves. People don’t leave “hot” startups in the Valley.
OR
- The CEO had to get senior management members to sign off individually to certain things, and the IT guys did not agree to those metrics, objectives and steps in getting there. So, they left and in order not to freak out would-be investors, they concocted a personal reason to leave. It happens all the time.
Notice the VP of Sales did not have to sign off on anything, presumably because sales are not a top priority right now… and this might become problematic, more on this below. Better question: is there a senior level executive in charge of sales planning and strategizing? I doubt it. What many companies do is build all of these assumptions and promise numerous things to investors then hire a sales guy to make it happen. Sales guy knows this is all rubbish, but to get the job, stock options, etc., agrees to it all during interviews, because sales guys are like that… then afterwards they realize “what did I get myself into?”
So seeing that Twitter fails to have any semblance of a business model, then I assume they are not going to go against Fred’s advice and this additional funding is probably indeed for IT purposes first.
- When in doubt, Blame Ruby [on Rails]
When I thought of writing this post, I knew I had to address the IT matter but I am not a techie so I figured I should asked one, ideally someone knows about Ruby on Rails, the platform that Twitter is built on.
I asked Heri Rakotomalala who is a Ruby expert, runs a Ruby consulting shop and writes the authoritative blog on Montreal startups (he’s always been extremely supportive of our company). Anyway, not being an expert on Ruby on Rails, I thought it would be prudent to ask him why Ruby gets some flack before pontificating on the matter.
I asked him: “why do I keep hearing Rails does not scale?”
He answered:
Because you read too much techmeme and stories about twitter.
more seriously, rails is a relatively young framework. very powerful but also very easy to use. developers who don’t have experience in architecturing big systems can use it to develop a web2.0 website with full features etc. then they are surprised it can’t handle the load. the equivalent of giving kids a battlecruiser.
also, at its beginning, some developers saw their server stopped working unexpectedly, but there are solid tools now to prevent this (monit, nagios, god etc to monitor the server)
fiy, here is a list of big companies using rails
for me, we are going through the same things that Java went through, at its beginnings, it was very slow, too complex, irrelevant to IT etc. And now 10 years later, it’s king in banks systems, insurance firms, healthcare etc. Rails is going the same way.
- Lesson from Facebook I: Cool is a passing state of mind
When Twitter launched at SXSW last year, it blew up and all of the early adopters jumped on the bandwagon. This is generally a smart and clever way to go about. However, early adopters tend to move on quickly, too.
Just this past winter, Facebook was the hottest thing in the world, fetching a valuation of $15B and raising an additional $240M (and then much more by way of Li Ka-Shing). Today, there’s talk of Facebook hate and API frustration.
Facebook’s time has passed in a way, because it is still searching for a business model and every avenue it goes down in hurts the user experience or frustrates the same lot that hyped it last year.
I see Twitter facing the very same challenge, already!
- Social Media: Cool until you wanna make a buck
Let’s face it: we’re seeing a purge in Web 2.0 Bullshit. The social media hype train just past the 6th inning. Right about now, in case of rain, the game is over. This year, investors are growing spines as advertisers are searching for quality.
But even if you boast quality in social media, it does not translate to advertising success and financial payoff.
As an advertising-centric executive and business guy, I personally don’t see anything exciting and revolutionary (heck, even evolutionary) that would really help advertising come to the Web at a faster clip, in bigger portions…Digg, Slide, Twitter, Facebook, etc. - all of these companies deservedly get props and rave reviews from developers and fanboys but none of them, frankly, are what advertisers are looking for or what will make online advertising surge.
Social media is one dangerous, double-edged sword: it attracts and sucks out a lot of attention but it fails to live up to any conventional advertising metric. I wrote about this some more here and here.
Yet to then tell marketers “tough, pound sand and adapt” is foolish. We want online media to remain a free ad-supported environment, so we have to play along with advertisers (not kowtow to them, but listen and understand to them).
Spewing nonsense about how the web changes all of the rules is mumbu-jumbo. Even if there will be many revolutionary shifts in the paradigm (insert many more buzzwords) it won’t mean that overnight things shall change all that much.
- Marketing: Promotional vs. Commercial
Most of the new platforms, services and sites we see these days are both promotional and commercial. Commercial in this context does not imply e-commerce, it includes advertising revenue. In other words, as I’ve outlined here, YouTube is a perfect example of a service that gives tremendous promotional value but does not clearly allow all content owners to monetize it via advertising. We’ve started to do that successfully, but we also have a big presence on YouTube. MySpace is also very similar. Facebook too, but in different ways.
Twitter, I suppose offers some promotional utility but as a commercial/advertising service, I doubt it has much promise now. However, as a commercial e-commerce/shopping platform… that I see. In fact, I’ve been testing it because writing about something without ever trying it is pretty incredible (as is, would lack credibility) and I see some ways that Twitter could make money.
The problem here is that thanks to Google envy, everyone wants to be in the advertising game. eBay? Amazon? So passe…
But what if Twitter overlooks the e-commerce angle because of Google envy? The more funding it gets, the more it has to adopt an advertising strategy, and as we have seen, social media and advertising don’t go hand in hand.
- Advertising: Push vs. Pull
If Twitter were to want to pursue an [eventual] advertising sales strategy. Then it needs to understand and accept how their one major variable plays into advertising: Twitter is a push mechanism, not a pull one. As with email, this creates an instant spam issue. But even devoid of spam, it creates a barrier to its growth.
When you go to Google and search something, you are pulling data: be it organic or paid results.
When you use Twitter you push out data; Twitter cannot push out ads and expect a) as little resistance or b) as much success as Google due to that variable.
This nuance deserves a considerably longer discussion and this post is getting long enough… so we’ll come back to it at a later date.
- Bad Culture: Business Model Bad; Financing Good
But the key theme I am hinting at is Twitter: as one entrepreneur to another [admittedly more successful] bunch: don’t fall in the trap of raising too much money, too soon. Most companies fail because of that.
Build a company and a business first, then start to worry about investors’ lack of understanding of advertising models. Don’t start to put up with investors’ lack of advertising models while you are trying to define one. It will never end.
VCs know a lot about many things, but ad sales ain’t one of them.
Two years ago, I could not raise a dime because I was being unfairly sued in a meritless and frivolous lawsuit which created a liability around my neck that made an albatross look like a nice pet to own. I won that case and it’s behind me.
Last year, I could not raise a dime on my terms because video content was not in vogue as investors were investing in more platforms and video tools.
Today, content is the new “it” in thing in video all of a sudden and we can raise money pretty easily, especially as overall video funding does not cease to grow and you see more and more digital media content funds.
However, I am still biding my time because I want the model to be very clear so I don’t have to waste 4 hours a day talking to know-it-all VCs. Yes, I said that.
For the record, I am not saying we’ll never raise money, I resign to the fact that entrepreneurs like to build HUGE companies and inevitably you need outside financing to scale (assuming we don’t finally accept a buyout offer), but once you define a business model and successfully start to build on that, you have leverage to do way with draconian terms and unrealistic growth plans, which, I suspect explains why Twitter’s IT guys are out.
Raising too much money is an instant fail because some companies cannot even spend that much money within a year and end up wasting it. When you waste, you destroy value.
Once you have a culture and mindset of waste, it’s over. You will never be able to right the ship.
Twitter is probably raising more money because it sees other raising money. That almost becomes the entrepreneur’s greater fool theory…
- Lesson from Facebook II: Don’t Overfund Yourself
At Tech Crunch 40, Evan Williams (co-founder of Twitter and founder of Blogger - which was acquired by Google) said something that stuck with me as an entrepreneur. He said (I am paraphrasing):
When someone comes to you and wants to buy the company you started, if it’s relatively young, then it’s about what amount it will take for you to sell. It’s less about revenues, profits, multiples, etc., and more about that question.
Connecting the dots, once you start to raise more and more money and your “startup” becomes a well of VC’s money, then your head becomes a moving target and your company becomes unsellable. I fear that this Twitter round is going to do just that: could you imagine Twitter having $25M in funding? There was even talk of a $150M round.
Beware: a VC who would want 5x, 10x, 100x or 1000x return on their investment won’t be happy with a small exit. MySpace fetched $580M not because the Silicon Valley early adopting digerati and technorati loved it, au contraire, everyone else did…
Facebook tweaked their Status bar and became an overnight competitor. Pownce launched something and copied it in a week. Twitter’s team should focus on a more modest approach to build something. This is one case where too much money will ruin a, well, a thing. Whether or not Twitter proves to become a good thing remains to be seen.
However, the fact that Alley Insider just-so-happened to get its hands on this leak suggests that this is Twitter’s founders and investors to let would-be buyers one last chance to pay what Evan (and I presume, Biz Stone) are asking for before the clearing price goes up…
Time will tell.
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