According to various reports in the financial press today, there is a $100M investment in Twitter at a valuation of $1B. Over the past few months, an entertaining parlor game in certain circles has been the Twitter Valuation Game: how to value a social site that has no revenues and no business model. The beauty of this game is that anyone can play. It does not matter if you lack an MBA or other financial background, because everyone is on an equal footing in this virgin territory (at least for those who were too young to remember the dotcom bubble).
The reported valuation of $1B for Twitter is breath-taking. However, there is a certain logic to this, and it is not just froth. The starting point for any discussion of Twitter is its explosive growth rate and sheer number of users. There was a twelve month period in which Twitter grew from 3 million users to 30 million. Now it is over 40 million with a still-robust growth curve. Given the pesky lack of business model, one must acknowledge that this is still the “wishful thinking” phase. Having said that, however, the growth rate, user engagement, and the skills and background of Twitter management mean that a bet on its eventual monetization is probably not too risky. The question is how large a bet.
The high-water mark for social network valuation was Microsoft’s investment in Facebook in October 2007, which valued that company at $15B or about $250 per user. Five months later, AOL acquired second-tier site Bebo for the much lower figure of $21.50 per user. This lower figure is consistent with Twitter’s reported valuation this week, at $25 per user.
One can argue that, even at $21.50 per user, AOL overpaid for Bebo. Hindsight shows that AOL has not been able to effectively manage the potential of this property, which now has less than 1/20th the user population of Facebook. The latter has grown exponentially, which the former has dwindled, from a point in time where they were in the same ballpark.
The Facebook valuation set by Microsoft in 2007 is clearly an outlier, and Facebook’s perceived valuation has settled to the same planet as everyone else, orbiting at $30 to $35 per user. Facebook deserves a certain price premium for being cash-flow positive, for maintaining a robust growth trajectory, and for the sheer magnitude of the population number (within striking distance of 1/3 of a billion active users).
At this point in the eye-glazing discussion of per-user valuation, the impatient observer might again raise the pesky issue of Twitter’s lack of revenues. No matter what one thinks of Bebo, at least it had millions in revenue. Twitter fans will respond with the fact that it took Google several years of explosive growth before it discovered its dynamic ad-based business model.
The price premium that Bebo enjoyed, during the social-network mania of early 2008, could be termed the “I don’t know what the company I’m buying does but it sounds cool and everyone else is doing it” premium.
Twitter perhaps enjoys a bit of this premium, also some other premiums:
1. The “common parlance premium“: Twitter has become a verb (“I twittered this yesterday after I googled the info”). By contrast, a much smaller number of people say “I facebooked you, why didn’t you respond?”. Almost no one says “I yahooed yesterday” nor have I ever heard anyone say “I microsofted”.
2. The “celebrity premium“: Ashton, Kanye, Oprah, Sarah, Barack all Twitter. That is worth something to some observers, and perhaps to a star-struck investor.
3. The “real-time Web premium“: tapping into the big meme among geeks and digerati. Still somewhat niche-y, but likely has some effect.
Even when one discounts all those premiums as fashion-driven motivations that will fade, the fact remains that Twitters growth curve is remarkable and will continue, at least for the near term. (By the way, I gave a presentation last week in Madrid to a small auditorium within a large corporation, an estabished, conservative, company outside of the technology sector, and it turned out that about 60% of the audience had Twitter accounts.)
Bottom line is that a residual, premium-free valuation of $700 million is not illogical, and could go north of $1B if one layers the various price premiums noted above. What seems clear is that it would have taken a number much larger than $1B to get the Twitter founders to agree to an outright acquisition. Now that they are getting an infusion of cash, the outright-acquisition number and associated timeframe recede into the horizon but are still in the realm of possibility. We are, fortunately, still left with the remnants of the parlor-game question (“will Twitter ever be acquired, by whom and for how much?”), a distraction that will continue, at least until the day Twitter has measurable revenues, an event that will separate the MBAs from the boys.
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