Before we begin this post, I want to make it plain: I love Twitter. But, even with that, the madness has to be slowed. Everyone is having their own cow over Twitter being valued at around a billion dollars in their last round, when they sold around 10% of the company at that valuation. Who am I to stay above the fray? Twitter is here to stay, and will change our lives, but we need to get our hats on straight. Let’s talk math, valuations, revenue, and the future.
I have already tangled with Scoble and Fred Wilson to a lesser extent about all of this once. The Week summarized it well. At the very end of my post on the subject I took the position that Twitter was “worth” probably something around two billion dollars. That number was what someone would have to pay to purchase Twitter outright. Now with Twitter being valued at one billion, they have moved that number up. No VC is going to be happy with Twitter being purchased for my paltry two billion; they need a multiple of return much higher than that to stay in business. Now that the “buy Twitter” price has gone up, to at least four billion dollars, and much closer to Robert’s initial number that so churned the Valley, we need to take a second look at what Twitter is up to. [Side Note: I did have the good fortune of spending a few minutes with Scoble recently, and he is even nicer than they say.]
Fortunately, content scraping gods Silicon Alley Insider have recently pushed out a piece from an investment group that was involved in the last round. For reference, here is the important quote from Jeff Horing, of Insight Venture Partners:
“When we modeled it, we were looking at revenue somewhere between Google and Facebook. Google monetizes at $30 a user and Facebook is about $2 a user. If you look at Twitter’s user community and make some fairly conservative assumptions about revenue, we thought you could make a healthy exit at a multiple of a $1 billion.”
There is so much going on here, we have to break it down. First, we all need to be thankful for the view into the dusty cobwebbed mind of a major VC. Fifth, Twitter is, as usual, being placed on the same plan as Google and Facebook. Of course, they are wildly different products, but you do not see Twitter being compared to Cliqset, or any other smaller pre-revenue startup. Twitter is firmly cemented into the big leagues in the minds of the VC’s, and the technorati. Just read what Silicon Alley Insider said about the last round of Twitter financing, and what Jeff Horing would have said in response to the one billion dollar valuation:
Because Jeff couldn’t say “Are you kidding me? We agreed to whatever would get us in the round,”…
Very illuminating. What SIA is saying, is that indeed any smart VC would pay any price to get in on a Twitter financing round. Feels to me like a sentiment found in the first web bubble. It is nice indeed that this insanity is pointed at a single company, but one feels nauseous whenever you hear any mention of the first bubble mentality. But, the real craziness hits when we begin to wander over to the basis for the valuations that Twitter is being hit with.
Before we can begin to dissect that, A Google user is worth $30, and a Facebook user $2? What does that mean? Is that over a year? We know nothing. The datums that we are given have no intrinsic meaning. But, let’s take them as SIA does, and say that they are yearly. They astutely multiply, and get that 300 million Facebook users at $2 per year works out to 600 million dollars a year in revenue. Big number, well done Facebook. But, the investor claims indeed that Twitter will monetize in between Google and Facebook. In between 30 and 2 dollars per user, per year. Insanity, if I may. The only way for Twitter to start making that kind of money is to charge users. Be it for increased API access or whatever, Twitter would have to go freemium for its mass market users.
Not going to happen.
Now, if you aggregate the revenues that Twitter will garner from corporations, I can see Twitter monetizing at 50 cents per user per year, placing their revenue at most $15 million yearly at the end of this year, assuming they grow to thirty million users. Assuming a very, very healthy 50% profit margin, Twitter would clear 7.5 million dollars. A great sum, but you need a P/E ratio of infinity to reach a one billion dollar valuation. It gets even worse when you factor in an exit price of three or four billion. Twitter needs to grow faster, it sold its future traffic today. This is not necessarily a bad thing, take the money while you can. But, we cannot let these numbers slide without mild ridicule.
Twitter is not worth one billion dollars. Yet. It may be in the future, but when you price a company you do not pay for the price that you think the company might exit with. If you pay the exit price when you invest of you have a negative return, when compared to the money market. Get it? Buy at the sell price you break dead even, but you could have made 3% a year just sitting on the cash. You want to get in on a deal, and profit. From the numbers I have been crunching, I feel that when Twitter turns on the revenue tap, it will quickly catch up to its previous rounds valuation, 250 million dollars.
Twitter will be worth more eventually, probably. But for now one billion is ludicrous, and the investors that paid 1% of a revenue free enterprise for $10 million dollars are losing here. Alright, I could go on, but I need to go tweet.
