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Twitter Raises $200 Million at $3.7 Billion Valuation; Adds New Board Members (allthingsd.com)
74 points by mgrouchy on Dec 15, 2010 | hide | past | favorite | 71 comments

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.

Actually twitter has close to 200M uniques. Not all of those are active accounts. They are more like youtube than facebook in that respect.

I would be the first to criticize twitter for past product and performance issues. But I have to also observe that their product improvements recently have been stellar, e.g. twitter for ipad or new twitter. Also, their performance is much, much better.

You don't really tie a logical connection between twitter failing and the entire industry. I certainly don't see a connection between the performance of funds of twitter's investors and the super angels. Except for people like Chris Sacca, they aren't the same people.

I disagree with this talk of bubbles when fundamentals of most of the companies in the industry are strong.

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...

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.

The WTF here is that they have 350 employees.

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

Reminiscent of how Digg hired far too many people. When you're taking big money and the press puts you in the same sentence as Facebook there must be pressure to be like the other big companies.

I think there's also an element of betting going on - this is a venture backed startup after all - if Twitter really starts to unlock massive growth over the next year or so then having so many employees will seem a prescient move.

According to their COO as of the end of August this year they're still not profitable http://money.cnn.com/video/technology/2010/08/24/tt_twitter_...

Some companies raise money even if they don't really need it. Case in point, Evernote has over $10m/year in revenue and a lot of their venture capital still in the bank, yet they decided to go for a big round of $20mil for a total of almost $30mil. They want to expand. The same is true for Twitter.

Whether the model works out for them or not is yet to be seen, but I don't think the majority of the people care enough about the bugs and uptime problems to the extent they will leave the platform or come back less.

It sounds like they do need the money if they can't expand with $10MM/yr in revenue.

"Today Twitter burns cash at a furious rate, has only 25 million uniques on their website"

Plus most of those are minorities and foreigners, which is a problem when you're advertiser supported. There's a reason we don't have any working class newspapers anymore.

(saw you downvoted): Objection sustained! Please restate, counselor. Pretty insightful point about newspapers; I didn't realize why US newspapers are so elitist (in the right sense of the word; not the Sarah Palin sense).

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.

There are a lot of things you have to know to make sense of a deal like this.

(1) You have to know what Twitter's financials look like. You can speculate, but since they're not public, you don't know. It may be the case that based on the financials, the growth, and a few simple spreadsheets, KPCB figured out a valuation that makes them comfortable buying at $3.7b.

(2) You have to know what the investor's goal is. Different VCs have different funds with different models. Funds that invest in late stage companies don't expect to make huge returns. They might see a path to a risk-free exit at $5 billion in two years. Investing at $3.7b for an exit in two years at $5b is a great investment for certain types of investors. Other types of investors are investing earlier stage and need 10x or 20x returns to make up for the complete failures in their portfolio.

(3) When talking about large companies with user bases the size of Twitter or Facebook, the very size of the user base can make the common stock much more valuable in a public offering. Think about how many dentists and lawyers are going to invest in Facebook on the day of its IPO because "everybody they know uses Facebook." Meanwhile, another, much more profitable B2B company that only has 1000 customers can be completely invisible to the public at large so the demand for their stock in an IPO would be weaker.

(4) $10b exits may be rare, but Twitter is a rare company. You don't see a lot of companies getting 8% of online Americans in a year or two.

(5) There is a very short list of investors with the midas touch. The very fact that they are investing in something makes it more valuable. John Doerr is certainly in this category. He can invest in Brown Paper Bags and make money simply because so many other investors trust him and will buy anything he buys.

(6) It might not be a sensible deal. The people investing in it might be idiots.

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.

I'm sure they aren't either, but every bubble in history wasn't caused by people being sensible.

Both Facebook and Twitter are in serious bubble positions, just like MySpace and Friendster and pets.com.

The odds are very high that the money will go the same place Murdoch's billions went - down the closest toilet. Let's keep in mind that people thought Rupert got a sweet hart - even criminal - deal with MySpace at the time. In hindsight he looks like an idiot.

When the company in question has no reasonably identifiable income stream and stratospheric valuations, it's best to stay far, far away.

Murdoch paid around $330million for MySpace, MySpace is doing annual revenues of 400m+ with a staff of around 1000. General estimate of MySpace's current market value tend to be around the $5 billion point.

Murdoch did get an amazing deal.

The purchase of MySpace's parent company was $580 million. Apparently $327 million of that was "attributed" to MySpace itself.

Revenues are meaningless. MySpace last reported a profit in 2007, of $10 mil on $550 mil in revenue.


Facebook then proceeded to eat MySpace's lunch.

August 2010 article about how News Corp. may never profit from MySpace:


MySpace's current market value is nowhere close to the $5 billion you claim. It has been hemorrhaging market share to Facebook for years.

Just check out the graphs.


Steady drop toward zero.

Yes. Because clearly being the 25th most popular site in the US has no value.

No-one's disputing that Facebook are beating MySpace, but saying they're worthless is like saying Pepsi are worthless because they're not Coke.

At the revenue levels they're at and at the size of their employee base, they could easily cut costs and make back that 327 million in a single year (at the cost of long term growth). Regardless if you think they're worth 1 billion or 5 billion, they're clearly worth more than worth Murdoch paid for it.

He could sell tomorrow for the price he paid for it and have private equity buyers bite his hand off.


In order for something to be worth anything at all, it needs a buyer willing to agree to that number.

I'm not sure MySpace has such an optimist.

I don't believe KPCB's investment is driven by ROI as much as it is driven by its need to have blockbusters like Twitter on its portfolio just so it continues to be seen as a bluechip VC firm.

Basically you are correct, although the existence of secondary markets and the greater-fool theory means that investors will probably be able to hedge their bets prior to IPO. OTOH, for a service whose growth is stalling this is a pretty bold bet for participants in this round.

As a matter of math, if the pre-money valuation is $3.7B, and the investors put in $200M (for 5.1% of the company at a $3.9B post-money valuation), then any subsequent sales (in secondary markets or IPO or as an eventual public company) at any valuation higher than $3.9B would be a gain.

With liquidation preferences, it's possible that even an immediate sale to an acquirer for $3.9B might give these latest investors some guaranteed return.

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.

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.

"25% chance of nothing, and 75% chance of, say, a 3x exit. I dunno, that seems crazy risky to me"

If these are the odds, the expected outcome would be that you more then double your money. 25%0+75%3=2.25

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.

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

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.

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!

Still somewhere greater then $0, probably still several million from contracts and traffic alone

It's about as popular as ICQ in terms of volume of communication.

Do you think ICQ is worth $10B?

Are you measuring "volume of communication" in messages, despite the fact that ICQ messages are one-to-one and private, whereas Twitter messages are one-to-many and (for the most part) public??

Is it obvious that one (public) is more monetizable than the other (private)?

Facebook is hugely profitable, but its messages are private...

Well, Twitter's actually bringing in decent revenue thanks to search deals. There's a general agreement that realtime search of tweets is useful, whether or not it's particularly monetizable.

And calling Facebook "hugely profitable" is a stretch.

Twitter has like 2 strategic 'customers' hasn't it? That seems like a really risky revenue stream to me, if you can even call it that.

You could argue that Mozilla has one.

Totally agree. And similarly (especially with the rapid growth of chrome) I think mozilla is pretty vulnerable.

One thing I hope we've learned is that popularity does not necessarily equal profitability.

That's absolutely right. Generally speaking though, you need to be popular (a lot of customers) in order to generate significant profits.

Since "making something people want" is generally considered a harder problem than monetizing that service when you have something people want, it's not entirely irrational to focus on the former before the latter, even if it doesn't always pan out.

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!



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.

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.

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.

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' :)

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

I imagine its a raise the money while people are offering it kind of thing. With twitter(as with facebook), its been a race to a business model and profitability, you have some money if you want to keep the lights on.

... also a race against time. You can only capture and hold people's attention by doing the same thing for so long. They will need to continuously evolve their product to attract new users and also keep existing ones. Twitter's valuation is based on their unrealized potential, not because they're a cash cow. Without funds to ensure continued, rapid growth, they'll never realize it.

Seems to me Twitter's shareholders are doing the smart thing - converting transient hype for lasting cash.

Probably some cash out for the founders and very early investors. And some more dev. Maybe a lot more. Nothing to get upset about.

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?

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.

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

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

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.

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.

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?

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.

"Sure, it's not apples for apples identical"

It's not even apples for oranges, it's apples for penises. Volume is hardly a good metric for valuation.

> "Volume is hardly a good metric for valuation."

Right. Fashion is. This is a 'twitter is fashionable' valuation.

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

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

Each employee represents $10 million in valuation.

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

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

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.

Groupon has revenue of at least $500 million.

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

How do you figure? Twitter seems like a pretty typical example of a tough-to-monetize service, whereas Groupon is already outrageously profitable.

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.

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?

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

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

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