Two words not normally used in the same sentence: Twitter and revenue.
Twitter And The Revenue Dilemma
by Michael Arrington
TechCrunch
on September 9, 2009
One thing every venture capitalist knows but rarely talks about is the “revenue problem” with hot startups. When a startup is “growing like gangbusters” as Twitter cofounder Biz Stone told Bloomberg today, they tend to get a lot of attention from suitors.
Twitter has been growing so fast this year, they’re getting more attention than they probably know what to do with.
And that presents a problem of sorts. The company has to decide whether or not to turn revenue on. It sounds ridiculous, but it is a real decision. Once revenue is on, how the company is valued by the market can change dramatically.
Some of the biggest blockbuster acquisitions on the Internet have been pre-revenue companies. YouTube to Google for $1.65 billion in 2006 is one example. Reaching back further, Hotmail to Microsoft for $265 million in 1998 is another. Neither had any revenue to speak of, but both “owned” a new and fast growing market. And there are lots more examples.
When you don’t have revenue you can’t be valued based on a multiple of revenues. For most companies that means you probably won’t be acquired. But if you happen to have invented something new and dominate the space (Hotmail with webmail, YouTube with online video), you can let the market speculate about your potential revenues and potential profits all day long.
If you don’t believe that, see our post from 2006 with leaked Yahoo documents showing an internal valuation of Facebook of $1.62 billion based on revenue and profit figures that they pulled out of the sky. This wasn’t based on feedback from Facebook, it was based on their own assumptions on growth and monetization potential. And it turns out they only estimated about 1/10 of the actual user number Facebook would have by 2009.
That was a YouTube/Hotmail style pre-revenue deal waiting to happen at a huge valuation.
But Once You Have Revenue…
Big public companies don’t make major acquisitions without made up spreadsheet models like the one linked to above. Their boards wouldn’t be protected from lawsuits if they didn’t. But the problem is, once you have revenues it’s impossible for the other side to just make stuff up. They look at those revenues and growth rates and trend out from there. They can’t add a different long term growth rate without a solid reason to do it.
The result? Your valuation can actually go down once you turn on revenue. And if revenue isn’t as awesome as you think it might be, or you have other…cough…problems, you may be in real trouble.
So when Twitter talks about turning on revenue, it isn’t such a small decision. They have no idea how much money they can make off the service. Selling data to search engines, display ads. Search based ads. Premium/business accounts, etc. There are no comparable revenue streams at other companies that they can fully rely on.
Of course, if they get lucky and everything goes swimmingly, they can make a lot more money in the long run by not selling (see Google, which didn’t sell to Yahoo when they were pre-revenue).
That’s a big if, though. Particularly when you’re talking about a new global scale communications service that is bottlenecked at a single centralized website with an iffy API. It’s not inconceivable that Twitter actually can’t scale as a centralized service, and will stumble badly. But that’s a different topic for a different blog post.
techcrunch.com
Twitter to Generate Revenue as Site Grows Like ‘Gangbusters’
By Crayton Harrison
Sept. 9 (Bloomberg) -- Twitter Inc., the Web site that lets people post 140-character messages, plans to add services for businesses that will generate revenue in the fourth quarter, co-founder Biz Stone said.
The products might include an “analytics dashboard” to help companies monitor Tweets about their business, or verified corporate Twitter accounts, Stone told reporters yesterday at an event in Mexico City.
Twitter, based in San Francisco, is seeking ways to generate revenue after reaching 20.1 million U.S. users in June, according to researcher ComScore Inc. in Reston, Virginia. Companies using the service to communicate with customers may be willing to pay for added features, Stone said.
The paid services would probably be offered on a limited basis at first, Stone said. He didn’t say how much they will cost or how much revenue they could generate.
While Twitter is growing “like gangbusters,” there are many people who are aware of the site and aren’t yet using it, providing an opportunity for further expansion, Stone said. The company has a goal of expanding to about 100 employees this year from about 65, he said. Still, Twitter is being careful about ensuring it hires the right people, Stone said.
This month, the company hired Dick Costolo, a former Google Inc. executive, as chief operating officer.
To attract more people to Twitter, the company’s designers are also working on a project to help new users discover others who might have similar interests or who live nearby, Stone said.
To contact the reporter on this story: Crayton Harrison in Mexico City at tharrison5@bloomberg.net
Last Updated: September 9, 2009 00:01 EDT
bloomberg.com |
