One thing every venture capitalist knows but rarely talks about is the “revenue problem” with hot startups. When a startup is “growing like gangbusters” as Twitter cofounder Biz Stone told Bloomberg today, they tend to get a lot of attention from suitors.
Twitter has been growing so fast this year, they’re getting more attention than they probably know what to do with.
And that presents a problem of sorts. The company has to decide whether or not to turn revenue on. It sounds ridiculous, but it is a real decision. Once revenue is on, how the company is valued by the market can change dramatically.
Some of the biggest blockbuster acquisitions on the Internet have been pre-revenue companies. YouTube to Google for $1.65 billion in 2006 is one example. Reaching back further, Hotmail to Microsoft for $265 million in 1998 is another. Neither had any revenue to speak of, but both “owned” a new and fast growing market. And there are lots more examples.
When you don’t have revenue you can’t be valued based on a multiple of revenues. For most companies that means you probably won’t be acquired. But if you happen to have invented something new and dominate the space (Hotmail with webmail, YouTube with online video), you can let the market speculate about your potential revenues and potential profits all day long.
If you don’t believe that, see our post from 2006 with leaked Yahoo documents showing an internal valuation of Facebook of $1.62 billion based on revenue and profit figures that they pulled out of the sky. This wasn’t based on feedback from Facebook, it was based on their own assumptions on growth and monetization potential. And it turns out they only estimated about 1/10 of the actual user number Facebook would have by 2009.
That was a YouTube/Hotmail style pre-revenue deal waiting to happen at a huge valuation.
But Once You Have Revenue…
Big public companies don’t make major acquisitions without made up spreadsheet models like the one linked to above. Their boards wouldn’t be protected from lawsuits if they didn’t. But the problem is, once you have revenues it’s impossible for the other side to just make stuff up. They look at those revenues and growth rates and trend out from there. They can’t add a different long term growth rate without a solid reason to do it.
The result? Your valuation can actually go down once you turn on revenue. And if revenue isn’t as awesome as you think it might be, or you have other…cough…problems, you may be in real trouble.
So when Twitter talks about turning on revenue, it isn’t such a small decision. They have no idea how much money they can make off the service. Selling data to search engines, display ads. Search based ads. Premium/business accounts, etc. There are no comparable revenue streams at other companies that they can fully rely on.
Of course, if they get lucky and everything goes swimmingly, they can make a lot more money in the long run by not selling (see Google, which didn’t sell to Yahoo when they were pre-revenue).
That’s a big if, though. Particularly when you’re talking about a new global scale communications service that is bottlenecked at a single centralized website with an iffy API. It’s not inconceivable that Twitter actually can’t scale as a centralized service, and will stumble badly. But that’s a different topic for a different blog post.
Image Credit: Million Clues
Big difference vs. Youtube, Twitter doesnt seem to be costing much, they have plenty of time to learn what users will pay for
twitter costs plenty.
Comparably to Youtube, though? I would think that the costs, especially bandwidth, for Twitter would be much lower than those of similar-sized websites, and lower than most other top 1000 websites.
Did you count the millions of SMSes sent? That costs money..a lot..
True, but I would guess that the videos that every Youtube user inherently watches would dwarf the SMS costs that some people use for Twitter. Where I am, Twitter’s SMS service isn’t present at all. This is something I know little about; this is just my speculation.
true story.
The dilemma itself proves that Twitter now started thinking about its path of making Revenue. Fine. This is a good start.
Sure Twitter has to decide and make charges. But Twitter is still in initial stage, even Twitter does not expect its hybrid growth. Still there are things to learn.
Twitter has had plenty of time to figure out how to make money, but until they do, there are lots of us making money off twitter…
Mr. Arrington, were you lacking for news today? An obvious problem and since they’re a bit quiet, one that I would anticipate them announcing soon. I believe they’re experiencing a waining romance with the faithful and that if they don’t do something soon, people will get tired of waiting in the face of declining traffic.
wtf. seek help.
Honestly, this isn’t up to your usual standard.
As for a revenue model, like I said, I think they need to hurry.
I sighed in relief when I tread this post. Great insight and useful information for every entrepreneur out there. Not up to his usual standards? No, he outdid himself.
Thanks Michael, now give me some more.
+1
+2
+3
TC needs more articles like this one.
You’re in a great mood today Mike…
Stay beautiful!
Agreed – i actually thought this presented a great perspective on why startups in general should not ALWAYS necessarily be in a rush to generate revs right away. Obviously, the examples cited above – Twitter, YouTube, Hotmail – were game-changers that don’t come around too often, so most startups should be trying to make sales, but those select few, it may be a detriment to valuation. Great post!
They were supposed to be coming out with tools for businesses right? When is that happening?
And also, Mike, can you please get insider info about how much of that $55 million funding is still left?
I wonder how long before they plunge into the dreaded pool..
yep. I’ll ask them for an update on those leaked docs from June.
Come on Mike, do not tell us that all the advertising you did for them was just a free ride… everything has a price, you know that better than we do.
No doubt to generate revenue you need bigger scale and reach. Youtube is generating revenue as it got Google’s Team which is best in generating revenue out of the mass. Twitter has to improve a lot to be actually be able to generate revenue as big as its popularity. It need to provide EXTRA features to those who pay and if they go by search money …mind it lot of people might discard it.
conclusion is that if they do move to the revenue path, they must offer something relevant to most of their users, and not a picky niche.
Writing an ad-sense like system for twitter does not seem too risky, isn’t it?
Well Said Michael. This is a tremendous decision that needs to be well thought out with little room for error. While its easy for many of us on the sidelines to give our opinions and say ” just do it already” its incredibly risky for them to throw something together. Imagine if they did come out with a revenue generating model, it sounded decent, and they couldnt execute on it. This can potentially de-valuate the company. Yet, on the other hand, they hit homeruns on a revenue plan…. @biz and @ev will be going to sizzler
Sales based on revenue expectations are always cheaper, as risk is higher. That’s why FB and Twitter’s founders don’t want to sell, because the price is not good enough.
errrr.
+1; like webmail and IM, twitter is monetizable. best to sell on promise as did Hotmail and ICQ.
yeah IM, Youtube and alladvantage
False Jose, False. The risk factor is far less when you have actual revenue numbers to extrapolate. Yes, that valuation will be less than what it may have been without actual revenue numbers, as it gives the acquiring company free reign to project without solid data (like Yahoo did in 06), but numbers reduce risk.
As for the Twitter and Facebook comment, completely irrelevant.
TC, would you please make outside links open in new window?
really? we’ve thought about that and it certainly is better for us, but I always thought it was considered kind of lame.
wait, new window or new tab? new window is…yuck. a mess.
target=”_blank”
2001 called, they want their code back.
You made my day
lol
he’s on IE6. so he doesnt understand wat tabs mean.
your in a charming mood this morning… there is a morning sex group in facebook. I think you need to join that… and the new tab is a good idea.
new window, not new tabs, for the outside links within the articles.
Dude, click a link with your scoll wheel and it’ll open in a new tab
.
that’s what i do.
never knew that..wow..seriously.. :-S
Pretty common that people don’t know that trick, found it out myself only half a year ago. After 2 year or working with tabbed browsing -_-
just found out today, while reading comments on a techcrunch post that wasnt saying anything about browsers, tabbed browsing, or the mouse.
wow.. I didn’t know that either. it always pays to read the comments, even when they’re completely off subject!
exactly
Or you can right click and choose to open in a new tab. Seriously? lol
Ctrl+click on any link and it will open in a new tab. May differ depending on your browser/os version. Mac is Apple Key + Click (I think, my Mac’s at home)
If you want a new window or not should be determined by the user – not by our markup (html)
Agreed.
That’s the (new) conventional thinking in web design circles, but I disagree. Most people* don’t know shift-click / scroll wheel-to-open-new-tab exists, so they end up clicking on a terms and conditions link that destroys their completed form details on a site (can happen). If everybody knew about scroll wheel/shift/control to open a new tab, sure, but they don’t.
*Most people = NOT tech-savvy people i.e. 90% of the web.
/agree with Nik
It’s annoying(to me) when I’m in the middle of reading something..there’s a reference link and it loads in window(as opposed to new tab or window).
There’s a term called “user friendly”..most folks haven’t a clue about ctrl-click(an extra finger function…hhmm, sounds dirty-ish)..wheel scroll click..(clumsy-ish).
it defies “logic” that i would be in the middle of reading an article and expect that clicking on a link will wipe the article clean..essentially.
my two clicks.
Links in the middle of an article are a broken UI to begin with, since no reader willingly interrupts herself mid-sentence. If you do research I bet you’ll find that your users do one of two things. Some will right-click, scroll-click, ctrl-click or whatever to open the link in a new tab or window, which they disregard until they finish reading the article. Others will finish the article and then go back and try the links.
Either way the best UI improvement would be to cluster the links below the text with short phrases to provide context. This could be in replacement or in addition to links embedded in the article text.
Right click and open in new tab: easy.
Revenue for Twitter is simple – charge for using API
Agree. How to start? 1) Splitting their expenses plus profit assumption by the API traffic, and transfer costs to sub-services. 2) build from that point on
The problem with that idea is it is not nearly enough revenue to justify their valuation (which what I think is Michael’s point).
Getting revenue out of twitter is not hard. But twitter’s valuation is based on monetizing all 30 million (or whatever) people who have signed up. Just monetizing the API will certainly generate cash, but not proportional to the size of the audience. The same for selling “premium accounts, and charging for companies or celebrities.
Monetizing 1% of the audience doesn’t get a good multiple on the last valuation of $250M.
Good point, Erik. My thoughts exactly. The API will not generate enough revenue.
Twitter is certainly in an exciting, yet scary place. Mr. Arrington has documented the Company’s growing pains well. Personally, I think that the Twitter brand is enough to carry them through this uncertain phase. Nobody wants to jump ship to a something else and probably wouldn’t want to for some time in the near future.
How much traffic is comming trough the API vs their site? In my perspective Twitter is a platform and a communication enabler on such a low level as phones and phone lines were. Twitter doesn’t want to start playing the good old incumbent telco model because they may kill their momento: their technology is great because of the environment around it. If they jump into the app’s revenue they can kill 80% of them…
Charging for API usage is like charging a tool fee for using an highway or basically be a comission-based model.
(by the way, is this what iTunes is doing, a commission-based model?)
hey mike!whats up? your mood seems awafly off today….did momy take ya candy……………
Twitter either has to advertise or (to coin a bill gates phrase) productise. They’re a wonderfully simple platform, but until they sell ad space, or sell a service like tweetups, sms replacement or payments… they are very naked. It’s admirable though.
You know, this is spot on Michael.
It’s a real strategy to begin with no revenue because a.) you’ll make $30 a month and b.) you put a quantitative number on your business.
At some point you have to turn a corner and turn revenue on and that’s scary, not least because other sites are doing the Twitter thing and it could alienate users from the service if too aggresive or OTT.
I’ll be interested to see what happens but one during this transistion.
I think they should turn it on.
I think is hard to get to billions in revenue from charging from APIs or business accounts ($100 to $1000 each ?). But you can get to low 100s of millions if twitter becomes THE short message broadcast medium. My feeling is that to get to billions you need a scalable, distributed, ad based service that is effective.
that’s a good post
That’s @arrington / Techcrunch material.
Good one.
Well…
They don’t want to get too attached to M$ or big G (their clearest and biggest-pocketed potential clients/allies), so that won’t push them in the revenue-seeking path, at least with outsider help.
On the other hand without one of them, the amounts of cash they might get would be smaller, which is a problem as they need the money to remain independent as an entity in the long term.
They’re in a tough spot.
Besides: They know stuff about people, their likes and what their doing. Lots and lots of info willingly submitted… And there are crows flying around hoping to get a piece of that to use it against us (in the form of clever targeted ads, at least).
So, if they seek revenue, they might not be as valuable as we can guess or dream of now. Which is a problem, because somebody will be able to buy them cheaper than with the alternative. And, if they don’t seek revenue, they’ll be increasing the chances to be bought cheaper than with the alternative, as they will need the cash to continue growing or as you said, even working (Investment rounds can only help you ). Cool, huh?
Anyway, I wish I had their problem.
Monitizing Twitter I really believe is easy,
Set up “paid subscription Tweets” so people can follow their favorite public figure on Twitter.
Let the public figures set their own price for subscription and split this revenue with them 50/50.
On paid subscribed tweets allow embedded videos, pictures and digital data attachments.
Cha-Ching.
Or, just throw some google adsense in one obscure part in the sidebar and be done with it.
No one is going to pay to follow “celebs”.
Your model is simply “people will pay for exclusive content”. It doesn’t work with websites, why would it work with twitter?
Turning on advertising with an open API is a waste of time – somebody will create an app that spots and deletes the ads from the stream, and people will use that instead of the native interface.
Kind of a blunder there at the end, with the whole “centrelized” thing. Twitter and its API can appear to be behind a single URI, but they can have whatever infrastructure they want behind it – from several heavy machines to dozens of distributed servers.
Twitter can scale (and should’ve already). They have the resources, just not the know-how
Techcrunch should say their revenue with twitter since they have made lots of money on their content and success story.
test test test, what is FB connect
Twitter is too hot on the Internet, it is more popular than other the other micro blog I think. But how much does Twitter worth? I have no idea. I don’t how Twitter make money, but I think if Twitter doesn’t find ways to make money, someday it will shut down or be bought by Google or other big companies.
Twitter will make a ton of money.
Billion dollars question why twitter don’t want revenue.
Once revenue is turned on most sites like this have to face user backlash. Most people resist advertising, especially the scammy ads that have made their way to facebook promoting weight loss blogs and acai berry snake oil.
I can’t help but wonder if the free model needs to be re examined.
While the post makes sense from a valleyinsider stand point, it is ridiculous…. traffic isn’t some giant mystery if you give something away for free you will attract users: (e-mail, tons’o bandwidth etc.) …
Hotmail and youtube were successes in their scale and adoption, not their idea both had been done before; hotmail and youtube had substantial amounts of money to burn, where their competitors did not.
Twitter’s problem is that the NEXT services are standing at the ready waiting to trumpet the fact that they are ad-free (foursquare, brightkite, loopt etc…)
In addition, facebook also would like to encroach on twitter’s area.
Twitter is a bad buy revenue or not.
Nice post Mike.
This is why I love TechCrunch.
Twitter must have some numbers on revenue streams they can enable from day 1. For example ads within the Tweets (kinda like SMS ads). Based on their current traffic they can estimate how much that will bring in. Maybe this is something you can also dig up.
I agree that other revenue sources are quite unpredictable and do change the game.
Didn’t Twitter hire a business manager a few months ago whose aim was may be to develop a revenue stream model? What has he been working on? I don’t foresee any other revenue model for Twitter other than placing paid ads within the tweets.
I don’t think there is a single user who would want to pay a subscription fee to follow some celebrities, no matter who may that be, unless a few fanatical users. Also, charging a fee for business accounts as was reported may not even work since differentiating between a business and a non business account may be a daunting task.
Thus, the only option I see for Twitter’s revenue stream model is to place paid ads within the tweets or on the right side bar within the trend topics.
Re: bottlenecked at a single centralized website
+100. Twitter’s basic broadcast capability will grow fine, but scaling some other features is hard, eg search.
I think selling twitter before they actually starts making money makes much more sense and will earn much more money and respect for the founders.
They can go on and create another valuable service like twitter or enjoy rest of their life preaching other startups and in their yacht.
They will waste their time in maintaining routine day to day development work of twitter and worrying about its revenue stream everyday. Let the big guys who acquires twitter worry about revenue generation.
I think youtube founders are the smartest in doing that so far!
Selling Twitter would be a huge mistake.
Also, 2+2=4.
Seems logical… My prediction is that Twitter will sell before it truly makes an effort to generate revenue.
Startups everywhere are now thanking Mike for giving them another reason they can use when explaining to their investors why they’re waiting to turn revenue on.
Michael,
They should hold out. I don’t see twitter faltering any time soon.
For all the reasoning behind each side of the argument everyone seems to be forgetting the one court which matters most: the court of public opinion.
Richness is found in popular ideas. Naysayers were speaking of twitter’s doom months ago but it’s bigger than ever and still growing. As long as it grows it has unlimited potential.
RB
I’m pretty sure that Biz is a boxers kind of guy… but I’m waiting for confirmation on that.
Could be briefs.
More to follow.
well i really agree about stay without revenue for sure, but what i would love to know, is how much money the new buyers will invest in twitter, unless big smart wireless company gets it… i do not know who is the idiot going to invest 1 – 2 billions these days.
Their other problem is that wild pre-revenue buys are less likely thanks to the struggle for revenue at former ones (like YouTube) and the greater demand for ‘actual’ revenues by investors post-crash…
Guess they turn revenue ‘on’ when what’s left of the $55m meets their costs meets their ‘on’ revenues forecasts.
Philip,
Excellent thought.
Consider eBay’s purchase of Skype as well.
There is now a deep history of “hot” properties that were raking up huge gains in users — all bought mostly pre-revenue — only to crash and burn the buyer.
No board or management team wants to be ridiculed the way Meg Whitman has been for the Skype debacle.
The difference is Skype is actually profitable.
Couple of things spring to mind that make me think they might push for a sale sooner:
1) It feels like we’re right at the top of the hype bubble – similar to facebook about… 1.5years ago. Where not everyone was on it, but everyone who was was talking about it. I suspect once we move past this peak, whilst user numbers will increase, the number of active users with flatline, making the revenue options fairly static (assuming no genius monetisation plan leaps to mind). This means, as you say, that when you can put a hard $$ figure on the valuation, it’s even less likely to be impressive either to buyers or advertisers
2) At some point, the individuals are going to want to release the capital of the company – and the pressure to do this will be increasing rapidly as there is no solid source of other income.
Feels a bit like the stars might align on this one – unless another “MEGA USE OF TWITTER” story a la Iran Election breaks. I suspect they’ll see pre-revenue, with some form of business model handed over during Due Diligence to inform (but not quite prove) the valuation.
stop kissing mikes butt. who didn’t know this already? twitter is a great utility but unmonetizable like email, IM, & RSS. twitter either sells itself to microsoft or google for a ton of money now. or for peanuts later.
Twitter needs to swallow / extend into a proven profitable area …
1.) Take over comments / forum space and become the real-time “glue” service on the web and scale a search engine / log-in id service.
2.) Add pure business services like yammer, and add twitter servers for other namespaces (mytweet@ibm.com etc.) — but this means they will have to give up the protocol at some point …
Twitter.ORG
And survive on donations.
lmao
So in this case, a bird in the hand is worth less than two in the bush. I have long believed you figure out where and what your risks are, then fight to eliminate/mitigate the ones you can in order to remove uncertainty for investors. Experimenting early and often with revenue opportunities in search of the the income maximizing mix seemed to me to be a great way to do so. Now, I have a coherent counter argument to use against my own orthodoxy. Thanks.
Are you sure YouTube was pre-revenue on acquisition?
http://plentyof...dly-profitable/
“”"
Youtube is already wildly profitable.
By Markus
Youtube has been running adsense on nearly every single page of its site for a while now. I was able to do a test campaign that ran on Youtube and was displayed at the rate of 500,000 pageviews an hour for the average price of 30 cents a cpm.
This article says youtubes pageviews are around 250 million a day. If that is even remotely accurate youtube is making a LOT of money. Lets say only 200 million pageviews a day can have ads. That gives you $300/million * 200 = $60,000/day or $1.8 million a month in revenues from adsense.
I guess everyone at youtube wants the world to think they aren’t making any money so that all the people whose content they are stealing won’t come asking for money.
“”"
Only one problem with the figures there. youtube is costing $1M a DAY in costs, so that $1.8M per month doesn’t add up to much.
Yes but 12*1.8M is still significant *revenue* (not profit).
Still, that’s not *profitable*
BW costs > revenues… though I guess Google’s huge server farm(s) should help them lower the bill at some point.
No-one mentioned costs or profitability – the article above says YouTube didn’t have revenue, the article I linked to (which I can’t verify) says it did.
If you’re saying YouTube made 1.6 billion valuation because they didn’t have any revenue, but they actually did have significant revenue, the analogy with Twitter falls down.
Arrington says it’s good to wait, but waiting fosters a feeling that Twitter owners have no confidence that they can turn a profit. If they had the confidence they would have turned on revenue AGES ago. Instead they’re playing a poker game, which just means they’re hoping to con investers into over-paying. If I was a potential invester I’d be saying to Twitter : switch on revenue already. If you believe in your site, do it.
+1
I sent Twitter a check for $89.50 back in June . . . they have yet to cash it. More on that here http://tinyurl.com/lfcpyn
Also, look at all the advice TechCrunch readers have provided for Twitter to consider . . . maybe that was the intent of this post (initiated by a phone call, lunch or tweet) . . . get a read on current sentiment, just in case the Twitter team missed something . . . final check before they make a decision to monetize or take an offer that is on the table.
what?!
So what about 3rd application what they Revenue Dilemma?
Sure, Twitter costs plenty (lots of money) to run. It’s a money pit, actually. And it appears that they don’t have a revenue stream (yet).
When are the VCs going to realize that they need to dump money into startups that are actually profitable?
In 1999 unlimited text messaging came with my ‘$40 a month for 1000 minutes’ cell phone service from VoiceStream (now T-Mobile). Look how much the carriers charge for SMS today.
Twitters revenue model: Get to 1 Billion users, charge every user .99 cents a year or .99 cents a month. That wouldn’t be so bad. The spammers would definitely pay
This analysis would be hilarious outside the echo chamber. Will we devalue our “business” by increasing revenue? It is a symptom of an economy aimed at selling fantasies to investors rather than goods and services to customers, a natural outcome when too much wealth is concentrated in the hands of too few. I wonder if it will read as a satire one day?
Yeah I said much the same — tulip sales.
The fact that people are applauding this…
@Jeremy, great comment and the SEO´s too
Twitter is a bubble waiting to explode!
Everyone is after the real time conversations occurring on twitter. why not charge for premium API access that gives them a firehose of all the tweets that are occurring? Simple twitter clients that use the API are restricted to x number of API calls per hour, and they cant retrieve ALL the twitter activity…charge the big engines (and the smaller ones chasing the real time web [OneRiot and their competitors]) a decent amount for full access. Other than those engines, who needs to engulf all the twitter messages?
To not kill off startups that want access to all that twitter data, charge on a per usage sliding scale based on demand from the respective startups clients/users that fosters new entrants but significantly charges once those startups start scaling up their usage.
the only possible revenue it seems to me is advertising. why not blast sponsored tweets inside the stream, like reddit. coke would love to blast 30 million “coke” messages every hour.