
Twitter Raises $200 Million at $3.7 Billion Valuation; Adds New Board Members - mgrouchy
http://kara.allthingsd.com/20101215/exclusive-twitter-raises-200-million-at-3-7-billion-valuation-adds-mccue-and-rosenblatt-to-board/
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mmaunder
There's an assumption that people who invest $200 million have information you
don't have or that they're smarter than you are. I worked for eToys and
watched the company simply run out of money after raising $250 million. I
worked for Jobster and watched the company become walking dead after raising
$55 million.

The Madoff investors are also a prime example of what economists call
"asymmetric information" at work.

There is an odd inverse correlation where the larger the deal, the less
insider info the investors have.

Today Twitter burns cash at a furious rate, has only 25 million uniques on
their website, has a product riddled with bugs, has a terrible uptime record
and after years of trying to scale, continue to have terrible uptime and app
performance.

But most important of all: Twitter do not yet have a business model, and the
experiments they're doing, like the groupon twitter clone, demonstrate that
they are flailing around in the dark.

It's quite possible that Twitter may go the way of eToys.com and other big
busts: After raising a spectacular amount of money they will simply run out of
cash and have their assets bought for a pittance.

So lets explore this scenario briefly: If twitter does simply implode, it will
be catastrophic for our industry because the press will brand it as a wider
systemic problem and will most likely describe it as the "second dot-com
bubble bursting". The mainstream press have been particularly kind to Twitter,
so expect them to be just as unkind if it dies. VC and angel money will dry up
for a time and the correction that guys like Fred Wilson have been predicting
(see his recent comments re an angel investment bubble) will come to pass.

Lets hope Twitter becomes profitable and sustainable or we will all be hurt
badly by the shrapnel.

~~~
mikeryan
I'm not sure Twitter is burning money as furiously as you think. Last year
they claimed they were cash flow positive[1] just on firehose deal worth $25M
a year.

I'm not saying they are worth 3.5B but it looks like Twitter is setting
themselves up for a really long runway before they would crash

[1]
[http://www.businessweek.com/technology/content/dec2009/tc200...](http://www.businessweek.com/technology/content/dec2009/tc20091220_549879.htm)

~~~
mmaunder
I'm not sure either, but here's some data:

Employees: 350 (Source: Forbes, Dec 15th, 2010) Avg salary, lets assume 80K.
(probably too low) TCO per employee $110K

$110K * 350 = $38.5 Million per year on employees.

They've been paying NTT for managed hosting thus far - so much that NTT has
cited it as a reason they're expanding their hosting network. They're about to
open their own data center in Sacramento - probably because they're realizing
how expensive NTT is. My guess is they could be spending as much as $30
million per year on hosting and infrastructure.

Add another $10 for office, admin and legal and you've got a burn rate of just
under $80 million per year or $400 million over 5 years.

~~~
olalonde
The WTF here is that they have 350 employees.

~~~
iamjustlooking
I speculate that it must feel ok to keep hiring when you're using other
peoples money to hire them.

------
axiom
I'm probably just ignorant, so I'd really be interested in hearing what those
with expertise have to say.

At a $3.7 billion valuation doesn't that mean that twitter has to IPO or be
bought for at least $10 billion to make it worth it? and aren't those exits
exceedingly rare?

I'm sure people investing $200million aren't idiots, so it's not like this
logic is lost on them, so I'd be really interested in what the investment
terms are to make this a sensible deal.

~~~
jackowayed
Given its popularity, do you really think Twitter is going to exit for less
than $10B? Those exits are rare, but so is the position that Twitter is in.

~~~
axiom
Well, couldn't that same argument have been made about Friendster, or MySpace,
or Digg etc.?

I don't know what the odds are, but surely there's at least a 25% chance that
twitter will fizzle out. So it's 25% chance of nothing, and 75% chance of,
say, a 3x exit. I dunno, that seems crazy risky to me.

Someone commented below about the secondary market - that actually makes a lot
of sense I think. I guess when you're investing in twitter there's enough
liquidity in the secondary market that you can probably get out if you need
to.

~~~
harryh
1) Even if twitter fizzles it won't be worth $0. 2) It's possible that the
investors in this round have a preference to get their money out first.

So 25% chance of nothing is almost certainly wrong.

~~~
dotcoma
are you sure? How much is MySpace worth, given that they probably are losing
money? (not to mention, members)

~~~
elbrodeur
MySpace's exit was $580MM. They had an estimated revenue of $300-$400MM in
2009. They might not be Facebook, and may never have a very high valuation,
but the exit was very profitable for those involved.

Twitter can just as easily be great for it's stakeholders and fizzle out as a
service.

~~~
dotcoma
yeah, but their 'exit' is similar to twitter's current round: it's a measure
of how much somebody thought they could/would be worth. I'm asking how much
they are worth now!

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nl
I'm currently find this discussion ignorant and annoying.

People are claiming a $3.7 B valuation implies a $10 B exit, and that this is
absurd somehow, so therefor the VC's must be stupid.

Here's the Math so you can understand the logic.

Google claim they can make $10/year from advertising, per user on Android
phones[1]. Current speculation is that Facebook is on course to make around
$1.6 B from 500 million users this year (ie, $3.2/user/year)[2]. If Google and
Facebook can do this, than surely Twitter can make a comparable number - but
lets say $2/user/year to be conservative. Twitter has ~150/million users, so
they should be able to make around $300M/year. Google's P/E is ~20, but they
are a mature company, and Facebook seems to be trading at a P/E of ~50. For
out estimates we'll split the difference and give Twitter a P/E of 30. 300M *
30 = $9 Billion.

People seem to think that Twitter can't make any money from advertising. In my
view, this is a pretty extraordinary claim - everyone else can make money, so
why can't Twitter? They actually have a lot of advantages (eg, desktop &
mobile installs) that most websites don't have. Many companies _pay_ to be
included on toolbars etc that end up on people computers, and yet to here
people here talk you'd think having millions of people install your thick
client is a disadvantage!

[1][http://blogs.computerworld.com/17099/google_says_android_alr...](http://blogs.computerworld.com/17099/google_says_android_already_breaks_even_will_be_a_10_billion_business)

[2][http://www.marketingpilgrim.com/2010/09/facebook-revenue-
est...](http://www.marketingpilgrim.com/2010/09/facebook-revenue-estimates-
continue-to-rise.html)

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bcrescimanno
Though I may simply be ignorant to their plans, I have yet to see compelling
evidence that Twitter really knows how on earth it can really monetize itself.
My guess (as I said in an earlier Tweet) is that the network itself is worth
millions of dollars to businesses (quite likely even more than the $3.7
billion valuation) but I don't see how it translates into real revenue for
Twitter, the company, as operator of that network.

One of the things that's always amazed me about Twitter is that with
everything the company has done to make a really cool service, they seem to be
in the absolute worst position possible to actually monetize that service.

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ryanwanger
An interesting aside: plenty of people (myself included) have been saying
things like "the people at Twitter can't figure out how to monetize".

This is true but it assumes that there is some easy monetization, they just
haven't discovered it. Yet - I haven't heard anyone else come up with a
reasonable plan to do so, and it's not like twitter doesn't have thousands of
people who are intelligent, experienced at this, and want desperately for them
to succeed.

Sure it might look like they are flailing, but lets not keep implying that
it's because they don't know what they are doing, don't have the right people
in charge, aren't savvy enough to figure it out, etc.

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kayoone
Stop talking about profits. Twitter creates value for millions of users, they
will figure out how to monetize those users. If you put profits above all, it
will slow you down.

People were saying the same things about Facebook and they figured it out.
Same for Youtube, same for Google, etc etc. Twitter is a 4 year old company,
there are thousands of companies that dont make any profits in their first 4
years, it even took Amazon 7 years to be profitable.

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elvirs
The fact that Twitter revealed a online form to buy ads at the same time with
closing new round of financing says a lot. for me it says that twitter is
desperately screaming: 'please, dont call us money burning losers. there is a
possibility for us to make money, look we even have a online form to buy ads'
:)

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faramarz
Below is my tweet in reaction to the news. Hopefully someone can justify this
_growth_ capital for me.

    
    
      Nobody is directly competing with you @Twitter. 
      What the hell is the rush that you need $200mm for??
      This is a goddamn #bubblebath

~~~
axod
Lots of things compete with twitter (and beat it by miles).

Instant messaging apps - AIM etc do _far_ higher volume of messages. IRC does.
Facebook does.

Sure, it's not apples for apples identical, but can you imagine ICQ being
valued at this price?

~~~
nivertech
ICQ had low valuation because it was not popular in US. It had 2 reason for
discount:

1\. Users mostly international: Europe and Russia

2\. Israeli-based - for two absolutely identical companies one in SFBA and one
in Israel - the Israeli will have ~ 30% discount.

~~~
nir
Question is, in the ~13 years since, was ICQ worth its $400m price? Is Twitter
really worth x2.5 that?

~~~
yayadarsh
Does ICQ have potential uses in the multi-billion dollar corporate marketing
industry?

~~~
nir
Depends what potential uses you're referring to. If it's context-sensitive
advertising, ICQ did have (has?) ads and supposedly could match an ad to a
message text or a user's history.

~~~
robryan
It's still only traditional advertising, the thing about Twitter is it has the
ability to make people forget they are bing advertised at. People follow
company account on Twitter very willingly and receive a stream of what would
be considered advertising from the company right mixed in with everything else
they are doing.

The ICQ equivalent would be to have someone like starbucks open up a chat with
users and still manage to somehow retain the users.

~~~
nir
Fair point - but, this relies on the user actively using Twitter over some
time, which seems like the minority. Couldn't companies achieve the same with
Facebook pages, which seem to have a larger and more devoted audience?

~~~
robryan
Yeah, at the moment though Twitter has more potential in this area. They are
seen as more of a broadcast platform whereas on Facebook the pages are tacked
on to a platform for more personal communication between friends.

Certainly though I see this growing on Facebook to, I don't think there is
only room for one game in town here though, so far companies have been happy
to work across both platforms. Depends a lot on Twitters future user retention
and engagement I guess.

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ohashi
Congrats to them, hopefully we see some good features (more stability) and a
business model that doesn't piss everyone off and kill it :)

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newmediaclay
Looking at Costolo's blog post, I was shocked to see they only have 350
employees!

Each employee represents $10 million in valuation.

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nir
Damn, gotta open CNN to see what people are tweeting about this!

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ddemchuk
Reading this makes me lose all faith in business, startups, and humanity in
general. 5 years later and they aren't profitable, aren't stable, and aren't
really innovating anymore. It's like they're dying to become the pets.com of
the late 2000's

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lotusleaf1987
If Google was willing to pay $6 Billion for Groupon, how is Twitter not worth
more? That's a serious question, not a snarky one.

~~~
tertius
Groupon has revenue of at least $500 million.

~~~
lotusleaf1987
True, but shouldn't Twitter have more potential future earnings than Groupon?

~~~
ddemchuk
groupon's business revolves entirely around selling things, with limited
social aspects to make it enjoyable. Twitter is literally the exact opposite.
There's no clear way to monetization for them.

~~~
lotusleaf1987
Thanks for that answer. I understand this, but I just keep thinking why can't
Twitter just but a few display ads like Facebook to monetize?

~~~
ddemchuk
facebook has ridiculously useful demographic targeting information. Twitter is
a little bit more messy and it would be trickier to target as accurately, so
the value is less there

~~~
lotusleaf1987
That makes sense now that it's been explained, thanks!

