Twitter & Facebook – A good decision?

The big news this week in the Web 2.0 World is the admission that Facebook was in talks to buy Twitter. Despite the complete absence of a revenue model and the ever-expanding meltdown of the financial markets, Twitter’s investors walked away from a deal that values Twitter somewhere between $150M and $500M. What I’m trying to figure out is whether Twitter was crazy or brilliant in walking away from this offer.

There’s no question, that Twitter is taking off. In April, Techcrunch reported that Twitter had around 1M members. Just seven months later, we hear they have 6M members. That is phenomenal growth. Within tech circles, Twitter is ubiquitous. However, 6M people is still far from mainstream. I think those of us who work in tech and tweet more than we should forget that the average person doesn’t yet use the service.

To get its 6M users, Twitter has raised $22M. It will need to raise a lot more capital in order to get to the mainstream market and get to profitability. Facebook, for example, with its 120M members has raised over$500M in capital – and apparently its running out of money! Will capital be available when Twitter needs it?

Twitter already has a $120M valuation after this latest financing. That’s $20 for every user. Pretty rich given that a user brings in zero revenue. Let’s assume they could monetize their user base at $5/ month and that 3% of the base goes for it. That’s 180,000 paying members and $10M in revenue. In this example, we’re talking a valuation of12x trailing (or current) revenues. In this environment, that is rich to say the least. I see a lot of pressure on the valuation and hence their ability to raise more $ since going from $0 – $10M+ in revenue before raising more capital will not be trivial.

On the flip side, Facebook was not offering cash. The value of their own stock is unknown (Microsoft invested at a $15B value, but Facebook has been buying back employee stock at 1/3 of that price ). And the time frame till that stock can be converted to cash is a big unknown. They’re too big to buy for all but a handful of acquirers and the IPO window is slammed shut. So, the value of Facebook’s offer was questionable. Also, Twitter’s investors probably realize they’re onto something big here.

Twitter touches on a basic human need – to share and communicate – and it plays on our vanity (let’s face it, the World doesn’t really need to know everything we do, but we love telling everyone anyway). That need does translate to mainstream and the user experience is certainly simple enough that anyone can get it.

So, what’s the deal? Should Twitter have taken the offer or are they right to roll the dice and go for it? From the end user point of view, I think keeping Twitter separate from Facebook is a way better experience. However, from a shareholder point of view, getting immediate access to Facebook’s 120M users and existing revenue streams is pretty interesting.

Only time will tell whether Twitter will look back with happiness or regret at their decision to walk away from this deal. They are clearly betting that they can raise the capital to fund growth and that they can monetize their growing user base. I sincerely hope they will break into the mainstream and build a viable – and BIG business.

  • Mark MacLeod

    Very interesting thoughts Ian. It's true that when your whole user experience is limited to 140 characters, you're not in a strong position. And yes, Pointcast is certainly a precedent to be very wary off. I do think within the early adopter circles, twitter is a phenomenon, but overall there is vulnerability. If it were me, and I was offered cash along the levels published, I'd probably have sold.

  • Ian Barker

    Well, I'll go out on a limb and argue that there considerable overlap between Twitter and FB. Further, the user bases are highly likely to be one and the same, i.e., Twitter's user base is a subset of FB's with very little incremental to be had. Twitter's service is easily replicated. It amounts to a very interesting feature – 140 character updates from millions of people – that FB can already sort of offer with its 'what are you doing right now' update. Yes, there are some integration issues but these are operational and manageable, and not strategic. And I'll bet that nearly 100% of Twitter's user base is already on FB. The upside to FB in buying Twitter is, I think, about defending value. That is to say, losing Twitter to another player brings a competitor into FB's space. Rather than allow that to happen, FB wants to buy Twitter and have done with it. Bottom line: I think Twitter should sell — fast — before the new flavour of the week knocks them down a peg or three. Remember PointCast!

  • Mark MacLeod

    Hey Chris, from an end user perspective I couldn't agree more. Shareholders can be greedy though. The VCs job is to deliver the maximum return to their investors. If Facebook's offer had been in cash, they would have had a tougher time resisting. Also, for the VC's themselves, they get to keep 20% of the proceeds. That can motivate you to sell. Also, from a seller's perspective you can have a successful investment even if the M & A transaction doesn't work out. At Terrascale, we raised $4M and sold for $47M. The buyer has since shut the unit down. Still, from our perspective the deal was a success. We hate that our hard work is collecting dust, but as an investment it was great. Twitter is on a different scale altogether and I would hate to see it in the wrong hands.So, I do agree with you. Just want to point out that money (especially when it comes in large sums) can motivate us to do things we would not otherwise do.

  • Chris Ballance

    Twitter was right on in turning down Facebook's offer. The two services are fundamentally different and a merging of the two would require significant concessions on one side or both. Facebook is about keeping in touch with people, sending email-like messages, amassing as many friends as you can and throwing sheep at each other. Twitter by contrast is terse(by design), whitty, informative and much more techie oriented (at least for now). Jeff Atwood points out a more fundamental difference with Facebook and other social networks, calling it a "walled garden". Try it for yourself, google for something in Facebook and you'll quickly realize that there is almost nothing available in such a search except for small general blurbs about users that you must log in to see more about. Facebook has a marketing campaign based on surgically precise marketing, built from the plethora of personal information volunteered up by each user who signs up. Giving this up and adopting a more free and open model as Twitter has would rapidly kill this niche and more or less invalidate the viability of their business plan. Twitter, by contrast, is openly searchable by the entire world. Understandably, you need to sign up for each respective service in order to fully benefit from what it offers. However if you signup with Facebook, you can only communicate with the other citizens of your "walled garden," and the rest of the world might never know you even exist. How could you merge the two without making one or both suck significantly much more? You can't, and shouldn't try.