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.