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.
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 saying they are worth 3.5B but it looks like Twitter is setting themselves up for a really long runway before they would crash
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.
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.
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.
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.
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.
(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 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 did get an amazing deal.
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.
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.
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.
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.
If these are the odds, the expected outcome would be that you more then double your money. 25%0+75%3=2.25
So 25% chance of nothing is almost certainly wrong.
Twitter can just as easily be great for it's stakeholders and fizzle out as a service.
Do you think ICQ is worth $10B?
Facebook is hugely profitable, but its messages are private...
And calling Facebook "hugely profitable" is a stretch.
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.
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. 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). 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!
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.
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.
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.
Nobody is directly competing with you @Twitter.
What the hell is the rush that you need $200mm for??
This is a goddamn #bubblebath
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?
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.
The ICQ equivalent would be to have someone like starbucks open up a chat with users and still manage to somehow retain the users.
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.
It's not even apples for oranges, it's apples for penises. Volume is hardly a good metric for valuation.
Right. Fashion is. This is a 'twitter is fashionable' valuation.
Each employee represents $10 million in valuation.