If a "Tweet" Falls in the Forest....Does a VC hear?

If you have not yet heard of Twitter you are part of the blessed 99% of the population of the Western world that are not "early adapters." For professional reasons and general curiosity of the 1% (I consider myself to be a bemused observer of the early adapters) I signed up for Twitter back in January, although Twitter has been around as a public service since October 2006 (see here for more on history).

OK, so what is Twitter? Its is a messaging service limited to 140 characters...wait, all of you semi-Geeks ask, isn't that the same as SMS? Well, yes. And aren't there dozens of companies that allow you to message blast from/to mobile phones, PCs, etc.? Yes. So what is new about Twitter? Well, nothing and everything. Nothing technically new, that's for sure.

So what is/was new about Twitter? Well, they picked a funky name, that's always important (think Yahoo!, Google, Ebay...). And they specifically marketed their service to US semi-geeks (think self-important VCs and well-known bloggers). And timing was right, when [finally] the 1% crowd in the US felt comfortable messaging from their mobile devices. And of course after the first blogging wave, which already prepared us to be interested in complete nonsense(;-)).

One of the "features" that Twitter added (this feature exists in many blogging platforms) is to sign up to receive the tweets of a certain Twitter. Basically, to get their micro-blog feed. The 1% crowd loves this, all zapping messages to one other all day long.

As I said, I signed up, literally to just see what the sign-up process was like, see how it worked. Sent a few twits to test web/sms interfaces. haven't twitted in quite some time. But slowly slowly people have found me on Twitter and have signed up to "follow" me. So far only 18, but half of those people I don't even recognize their names! And there is nothing to follow.

To understand better how Twitter is being used by the 1% crowd, I popped over to Brad Feld's Twitter home page, and see that he has 1,383 people "followers" and that he is "following" 132 people. Very believable, and reasonable, given that Brad is one of the best living VCs, and prolific blogger. Persusing through his "tweets," I recommend he stick to blogging, and stop tweeting, but whatever makes you happy.

And then I looked at super-uber-blogger Robert Scoble's Twitter page, and see that he is sending tweets every few minutes (while awake, and sometimes while sleeping). He claims to be following 21,209, and to have 22,545 followers. Meaning every time he sends a tweet, goes out to 22,545 people. That's a lot of virtual ink. Does this make sense? Could he really be keeping up with 21,209 people? Doubt it, but maybe he has outsourced himself...

Bottom line: with all this tweeting, does Twitter make any money (you knew I was going to ask)????

Answer: a few weeks ago, on their Japanese version, started running some ads. Other than that, nada. no revenues.

The aptly named Peter Kafka wrote the other day on Twitter's current fundraising round, see here (asking the age old question, but this time for Twitter, How Much Is Twitter Worth?):

The bigger question: How do you put a value on Twitter, anyway? The company has only just started seeing a trickle of revenue, via advertising on its Japan version. But beyond that there's no money coming in, and it's not clear what the model will be.

While Twitter itself has great buzz, we hear the majority of the site's traffic comes from outside the site, via other apps like Twhirl, mobile access, etc. So traditional online advertising--a difficult prospect to begin with for a communications service (see the struggles of various IM, email platforms) may be even harder.

That said, based on Twitter's growth and brand dominance, $75 million post-money seems plausible. There must be a pony in there somewhere.

I am sorry, Mr. Kafka. A company that has no real technology, a usage base of uber-geeks, and no significant revenue should not be valued at $75 million. It's bad for the business of creating businesses.

Comments

[Abdur]

I did not see the value of Twitter a few months ago. But after using it for the last month my feelings have completely changed. It reduces the communication barrier because you can only say a few words. Thus, sharing things like Starbucks was slow, Iron Chef was great tonight, become easy. That in turn makes social interaction easy and very different from the current ways in a meaningful way.

Checkout how people are using it now to talk about the new "Dark Knight" trailer: http://summize.com/search?q=Dark+Knight

There is something to this Twitter...

[Brad Feld]

The good news is that I plan to keep blogging. The bad news is that I plan to keep twittering - at least for a little while longer.

[Peter Cranstone]

How do you (as a VC) put a value on Twitter?
That would be an interesting posting.

Here's my thought (I'm an entrepreneur). Twitter has a million users - of those, roughly 200,000 are active users.

Let's be reasonable and say you can convert 3% of the 200,000 to "fare paying" customers. That's 6,000 paying customers. Lets then say that number will triple in the next 3 years.

New total is now 18,000 paying customers. Next problem to figure out is "what are they paying for?"

Lets take a stab at a business model. Say those 18,000 active users want 99.999 up time from their account and that is worth $100 a year to them.

That's $600,000 per annum in revenues. Over three years that's now $1.8m

Cost of revenues now has to factored in. So far they've consumed $5.4 million and change with another $15m on the way.

Total investment is now $20.4 million with max possible revenue at $1.8m

Which then leads me to ask you (the VC) the second question. Based on either my math or your math (hopefully you will post something) what and who is your exit strategy.

You can't go public with $1.8m in revenues, so that leaves Zombie status or M&A.

Who then is the possible buyer and what's the imaginary exit price?

Cheers,

Peter
CEO
5o9 Inc.

[Gil]

Semi geek early adopters:

http://twitter.com/DowningStreet

http://twitter.com/TheWhiteHouse

http://twitter.com/god

It's a mad world

[Ross]

fantastically realistic post. twitter is very in and very unlikely to be monetized.

[David Nordell]

I completely agree with your analysis, in spite of enjoying the serice itself. I wouldn't call myself an early adopter, since I only started using Twitter a month or two ago, but it has turned out to be a very useful way of creating contacts with high-visibility bloggers (as opposed to specialised low-visibility ones like myself) who will be useful in the future. It's also given me a chance to see how inane the 10 Downing Street tweets are, which is entertaining in itself. But as you say between the lines, Scoble and other users who follow thousands of other users can't possibly keep up with the traffic: their brains don't have enough bandwidth.
More to the point, I can't begin to see the long-term business model, unless they manage to convert enough users to paying real money, at a minimum of $50/year. This probably demands some kind of premium service, such as being able to segment your outgoing tweets to specific groups of other users in order to push premium content, at which point it would become a glorified group MMS-over-internet. Let's wait and see if it's still alive in another year.