On Twitter: What's Valuation Got to Do With Revenue?
While it's unlikely that Twitter CEO Evan Williams was wearing a Dr. Evil costume when he delivered the news, he had the pleasure of announcing his company's $1 billion dollar valuation today at an all hands meeting. According to TechCrunch, the company has raised a $50 million dollar funding round and the money will be in the bank shortly. Given the fact that Twitter turned down an offer to be purchased by Facebook earlier in the year, it appears the two are about to tango.
Yesterday Facebook announced reaching the 300 million user mark. The company's success has been credited to its ability to transform from a basic life streaming service into a platform. After Twitter rejected the company's acquisition offer, it was no coincidence that real time updates, friend following and improved activity streams were incorporated into Facebook's redesign. This new round of funding suggests that Twitter is taking a page out of the Facebook playbook and attempting to increase its abilities as a platform.
In the past, ReadWriteWeb has looked at Twitter's platform potential. The service has already been used to create meme trackers, emergency alert services, news feeds and brand monitoring tools. As the infrastructure and search have improved, Twitter has become the go-to site for real time media. But can the company make a Facebook-like leap?
In late May, Facebook had a valuation of $10 billion dollars based on a $200 million investment from Digital Sky Technologies. And like Twitter, while we've seen huge traffic numbers, Facebook only yesterday announced becoming cash-flow positive. If Twitter is attempting to become the "pulse of the planet" as suggested by the widely criticized leak of the company's internal documents, then perhaps $1 billion dollars isn't entirely off. Does Twitter have the assets to warrant such a high valuation, or are we looking at the makings of a speculative investment disaster? Let us know your thoughts in the comments below.
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I love that you used the Dr. Evil photo. This is the best coverage of this news I've seen all day.
Thanks Ryan. Flattery will get you everywhere.
You don't mean to imply that this is bubble thinking... right? I'm shocked. SHOCKED.
The truth is that twitter has this mind disease through and through. Their full feed is unaffordable, for example -- as if tweets about what someone's cat did are worth money.
Earth has this funny property of pulling back to it all these high flyers and making them land with a thud or even a splat. It's called gravity, which of course only works in real life and not the lala land inhabited by the likes of twitter's CEO and his funders. Time will tell.
Thanks for not drinking the kool-aid and asking the questions.
Mind share doesn't put money into the pockets of investors. Though it helps the story. But how long will the buzz will continue in Twitter's favor? Twitter as cool as it is still has to prove it's worth by showing it can generate something called revenue.
Oh yeah, there's still the issues of scalability and up-time!
"Twitter has become the go-to site for real time media"
With everything else on the web becoming real time, where will twitter stand. PSHB and RSSCloud are two services that will challenge Twitter's real time edge shortly, and they are wide open for development.
I really think that Twitter can make some revenue, especially by capitalizing on real-time search. But $1 billion USD valuation? You've got to be kidding me!! They aren't making a dime as it stands now.
Because you have posted an outstanding Weblog entry about Twitter, you have compelled me to share my thoughts about Evan Williams (hereafter known as E.V.) and the company.
These days, E.V. has the heightened confidence of a Hollywood stuntman and the delusional persona of a desperate housewife person. He and his cohorts turned down Facebook's $500 million acquisition offer, then plotted in secret to be the "pulse of the planet;" recently, they researched the Twitter's platform potential, then disclosed the company's $1 billion dollar valuation at a recent all hands meeting.
Dana, what's going on?!
Do you think Twitter the 25-pound chimp really want to tango with Facebook... an 800-lbs gorilla? If so, who would promote that lopsided death match? Vincent K. McMahon of WWE?
Twitter's state of affairs seem bizarre to me.
Perhaps E.V. has some insider information to which we spectators are not privy. Duh! Of course he does!
Oh, well.. I better ReTweet your Weblog entry before the death match begins.
Given what's happening elsewhere in the World it surprises me that such valuations are being placed on a company with negligible revenues and STILL no clear business plan.
And yet that model is supporting a microeconomy of other companies, some of which are doing quite well on the back of what Twitter provides (Salesforce.com, RightNow, Radian6 to name but 3).
I've said all along that Twitter could do much worse than keep the service free to use through their site, but charge for use of the API. That way they'd not discourage use too badly, but ensure they're making something from those guys successfully selling product on the back of their platform.
I'd even pay a small fee for access to TweetDeck (and they could always offer an ad funded version for those who won't).
Ian Hendry
CEO, WeCanDo.BIZ
http://www.wecando.biz
Here is an explanation from "the suit" aka a biz guy who has done deals like this. In a high profile deal there are "optics" (the PR/headline story that is for public consumption) and the fundamentals (how investors make money). They are very different.
The key to the fundamentals is the Liquidation Preference. Google it if you don't know the term. Basically, on exit investor gets their money out plus interest before the entrepreneurs do. That's reasonable. The team has not built a business worth $1bn, they are only saying (with some credibility) that they can do that.
Lets say interest on Liquidation Preference is 10% and the exit is 1 year away and this round was for $50m. The investor get $55m back ($50m + 10%) as long as Twitter exits for more than $55m (pretty safe bet).
Disclosure: I have NO inside info on this deal, no idea what the Liquidation Preference interest rate actually is on this deal. But I would be very, very surprised to find there is none and it will be somewhere around 10%. IOW, that was for illustration.
So with downside covered, everybody can focus on upside. This is where optics matter. With this deal, the entrepreneurs can say to any acquirors a) the negotiations start at $1bn, clearly cannot be lower than that and b) we have plenty of runway, if you don't do this deal now the price will only be higher later.
In this case, the optics are critical. Twitter ideally exits before revenue, when revenue potential is infinite. As soon as there is actual revenue three bad things happen:
1. acquirors say "lets wait and see how this pans out"
2. costs go up - you have paying customers who demand real service
3. revenue targets may go south - hockey stick exponential growth is hard enough on a free service (kudos to Twitter for doing that brilliantly) but way, way, way harder when money changes hands. Somebody sending real money to Twitter (not investment money) is friction, it is no longer a frictionless flywheel.
Twitter does have enough cash now to exit on a revenue plan and last out the sit on the fence acquirers. So, any which way, this looks like a smart deal. It is not "evil", this is all business between consenting adults. What would be evil would be selling stock to "widows and orphans" in the public market who a) don't have Preference and b) don't have the means to evaluate risk on a deal like this. That was bubble 1.0 and it won't happen again. This is different fundamentally even if the optics may look similar.
I think we're just beginning to see the value from Twitter and it's such a big space that there will be room for more than a single player even as Facebook, Google, and others evolve. More thoughts here - http://bit.ly/J0Ep1, but to me this makes sense as a high risk, high reward bet by investors.
It's unlikely that IVP got anything more than a gratuitous liquidity preference, if even that. There's a lot of unsolicited money chasing Twitter and at this point bidders aren't in a position to be demanding much of anything on that front.
Beyond that, can we please move beyond this inane whining aboout "but Twitter doesn't even have revenue, or even a plan to generate revenue". If you don't think Twitter has a revenue plan then you're an idiot. And they certainly don't have a need to announce to anybody what that plan is until they execute it.
Several months ago I mentioned in a post to Fred Wilson that I wished I could do an arb trade between Twitter & Facebook: Long 40 shares of Twitter (at it’s then valuation of $250K) and short 1 share of Facebook (at it’s then valuation of $10 Billion). That would make it a balanced $10B against $10B. That trade is only going to get better in Twitter's favor – count on it.
Wow twitter is higest increasing microblogging, so it's fair for $1 billion dollar valuation