Twitter's latest funding round values the microblogging site at $1 billion. Can the company become profitable enough—or profitable at all—to justify that valuation?
Twitter's home crowd can be pretty tough. When reports emerged on Sept. 24 that the microblogging service was close to securing $100 million in funding that valued the company at $1 billion, flurries of 140-character jeers flooded the service. "Nutty valuation," wrote @Nicklippis. "I've seen this movie before," twittered @ericclovesbacon. "It starred eToys.com and ended in fail."
True, a billion dollars for a company with virtually no revenue recalls the excesses of the dot-com era. The logic behind Twitter's valuation comes straight from the very same school. It views Twitter less as a single company than as the base for a whole realm of communication and data. "It is an increasingly important platform for business and consumers," says Seth Levine, managing director of Foundry Group.
The bet, quite simply, is that Twitter can become enormous—a rich new source of business intelligence, a channel to reach targeted consumers around the world, and a hothouse for marketing and news startups. The risk, of course, is that Twitter may stall along the way and be remembered in a couple of years as a quirky fad. Or it may end up in the belly of one of its neighbors, Facebook or Google (GOOG).
But for investors eager for a chunk of the next great thing, how many other possibilities are out there? "Once every five years or so, a company comes along that has nearly unlimited potential in terms of worldwide users," says Paul Holland, a general partner at Foundation Capital. "Five years ago, it was Facebook. Today, Twitter appears to be the 'next big thing' in social networking."
With the $100 million in new investments, Twitter has plenty of shopping money to extend its reach. Acquisitions, observers say, are likely to focus on two hot spots: search and marketing intelligence that companies can use to learn more about customers and potential markets. Twitter's funding was reported on Sept. 24 by The Wall Street Journal.
Harnessing the Real-Time Web
Even though Twitter has only one-tenth the population of Facebook, Twitter Search is becoming a vital source for a minute-to-minute read on what people are thinking about, and how they're responding to products and messages. As Twitter expands, it could provide increasingly detailed analytics about what different groups of people are saying and doing, industry by industry. "There's a perception that Twitter will have a grip on the real-time Web, which connects customers to brands," says Eric Porres, co-founding partner at New York's Underscore Marketing.
Speaking at a conference in Los Angeles this week, Twitter co-founder Biz Stone said plans to build up advertising in the service are on hold. Jeremiah Owyang, a partner at Altimeter Group, a California consulting firm, says that it will be difficult to make money on the service itself. Still, he says, Twitter eventually could become a communications protocol, like e-mail, and "fade into the background." In his view, the service could be linked to a series of new sites and services, with everything from travel services to music updates—each one a destination for Twitter-mediated ads. "They could do an advertising network," he says.
The tricky part for Twitter, says one venture capitalist (with no stake in the company), will be to nurture a vibrant and prosperous community linked to its system while, at the same time, making money for itself. If they misplay it, Twitter executives could find themselves competing with application makers and Twitter-based services for the same streams of revenue. "It's a delicate balance," the investor says.
As the Twitter service becomes embedded in more smartphones, the company will also get an ever more detailed look at the movements of millions of users—and what they twitter about on the go. Like New York startup Sense Networks, Twitter could divide its users into behavior tribes and begin to target them with tailored ads and services. "They could single out business travelers," says Sense CEO Greg Skibiski. "They could sell college students. And they'd have a direct channel to the customer."
For now, it's mostly froth and speculation. Facebook and Google, among others, are angling for many of the same treasures. And they've demonstrated an ability to scale their technology—a vulnerability for crash-prone Twitter. But if Twitter makes good on its promise and manages to become a leading platform of the real-time Web, a billion dollars could end up looking cheap.