Twitter is about to raise a boatload of cash. Last week we broke the news that Twitter is raising another round of funding at a $1 billion valuation and that one of the new investors in that round is Insight Venture Partners. Initially, Twitter was trying to raise $50 million, but demand for its shares is so great that it is raising even more.
The WSJ is reporting that the round may close as early as later today, and that Twitter may end up raising close to $100 million. In addition to Insight Venture Partners, another new investor is T. Rowe Price. In February, 2009, Twitter raised $35 million at a $250 million valuation.
Raising that much cash at a $1 billion valuation should hold it over until it decides to go public or is bought for a ridiculously large sum. (The price to acquire it just went way up). It also will put Twitter in the major leagues, and give it the resources to keep scaling its service. No more excuses for outages or technical hiccups.
More details as they come in.
Insane !
Wow, some folks are getting suckered
This is friggin insane! Why would Twitter need this much cash? What are they gonna do with it? Are they gonna buy any small players, if so who are they?
The ecosystem is starting to figure out ways to make money on their platform. Hopefully, at this valuation they have a plan as well. We’re doing it with Tweetiator at http://bit.ly/3QO69b
oh man, the new features are gonna be awesome, seriously, this is just getting exciting
i really hope twitter becomes old news quick so VC’s will not invest in crap in the future and help build companies that actually have a good product.
You sound butthurt. Twitter is mighty simple, sure, but it’s undeniably an amazing product.
Amazing product? How is it different from Facebook updates? And what is the great need in this world for me to know what the hell you are doing every second. Useless product. Has no redeeming value. Majority of the accounts on Twitter are spams and you know the old saying… if you say a lie 100 times eventually it becomes the truth. Same thing here… bunch of Silicone valley numbnuts keep repeating it is important and now we are also starting to tweet that. One of the most useless services that does nothing… show me Twitter in 2 years.
The nice thing about Twitter proving its own worth and legitimacy (outages notwithstanding) so many times is that avid users don’t owe the explanation to the billys and Rons anymore.
It’s just a glorified forum.
This is a common misunderstanding people have about design. They think that if product A has features X, Y and Z, and product B only has feature Z, then B is useless and everyone should use A.
The thing is, features are a dime a dozen. Anyone can build a feature. A lot of what twitter has done is to put a name to a feature, and put a face on it. And to clear away a lot of distraction so that it can easily spread more virally.
Think about this: what if you couldn’t link to individual yahoo videos… and whenever you wanted to tell someone to go look at the video of pandas sneezing, they had to sort through all 100 billion videos on YouTube?
The reason why you see separate products for all of facebook’s different features is the same reason you see different pages for all of YouTube’s videos. It allows features to spread more quickly.
And that’s what makes it valuable. I can tell someone about twitter or my twitter, and they can go and see just my updates. If I tell someone about my facebook, they go and are inundated by other people, by my blog posts and my photos and my friend acceptances and all this other stuff. That’s the feature twitter has: it lets me send people straight to my status updates.
Sorry, I meant “What if you couldn’t link to individual YouTube videos”.
amazing product…that still makes no money.
I’ve never understood the Twitter phenomena from a user’s perspective (it’s VERY similar to MySpace; nothing more than an ugly popularity contest with a bunch of people you don’t *really* know). With that said, that’s EXACTLY why investors are so interested — MySpace exited for +$500mm.
However, Twitter is not nearly as popular as MySpace was, and in it’s current form I don’t think it will ever be.
> No more excuses for outages or technical hiccups.
They already have $35Million, if they can’t do it with that 100M won’t help.
I was thinking the same thing
you seem butthurt by the outages.
I couldn’t agree more. However, it’s clear that they spent 35MM on PR…so…now you know…
this will either go down as the biggest web failure or somewhat of a success depending on how things play out.
more celebs or paid ads? like there aren’t spam acounts and paid ads on there already.
So $10,000,000 gets you a whole 1% of a company that doesn’t make any money. Thats awesome, sign me up.
Well, when you put it like that, +1.
Like that valuation
go IPO twitter
The markets are up already
Jim and the http://www.spirofrog.de team
Oh, finally Schulze’s SEO spam has made it to TC!
Taking the little medicine show one step further.
Kudos
Now I see how the first bubble burst, and I see clearly NO ONE in Silicon Valley learned from last time.
I mean this is simple, you get this much money, you should be making money already or at least a viable business model.
Silicon Valley, we pay on hype and acquisitions. If not for Oracle, Google, Apple, Microsoft, Yahoo, and Adobe, there would be no money flowing out there.
Twitter will be shoved down our throats until one of the above make a billion dollar mistake.
You can’t blame Twitter for taking so much. When it’s on the table, it’s usually best to take what you can. $100,000,000 is going to make for a looong runway!
I don’t necessarily believe that Twitter is worth their $1,000,000,000 evaluation, but it’s definitely nice to investors bullish.
Totally agree. No one can blame them!
Personally I’m not looking forward to when they start with their revenue models just in case it spoils the user-experience. Now it’s just so clean and simple… the biggest attraction of the service!
completely disagree. taking too much money can really handcuff operations.
investors getting in during this round presumably want a 10x return meaning they’ll veto any exit short of $10b. for reference, adobe’s current market cap is around $17b.
How long will these guys keep getting a pass on making money? Mind blowing that people still want to invest when they have done essentially nothing new since launch. In fact, they have taken away features!
It’s not about them making money. It’s an acquisition gamble. Acquisition = share holders ROI.
They have a better chance of being acquired before they implement their revenue models.
It is clear to me that their valuation will plummet once the implementation falls on its face.
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
Thank you, thank you..
IF this is true, which i assume it is, it should once and for all put an end to any question whether investors have any brain. There is absolutely NO chance that Twitter will make money. None. The ecosystem that has been built around Twitter, makes Twitter that much less valuable. It has siphoned off the true value here — exclusive access to the users. Today, there are a dozen or more companies that are interacting with Twitter users — making Twitter itself, less able to monetize users.
Will someone like Google or Microsoft buy Twitter. Perhaps. Will it pay $1b or more? Maybe. Will it go the way of Geocities, Broadcast.com, and many many others? Most definitely.
Give the Twitter founders credit for building a cultural phenomenon. Is it a business? I think not. These investors should have their heads examined and their limited partners who invest in them, should hold their feet to the fire.
what is motivation for taking so much money? They have 35M in the bank. Are they taking money off the table? Alot of investors will say that taking too much money is a bad thing. So either the founders are looking to cash out a bit, Twitter has some great plans no one knows about or silly VC’s are looking to jump on a wagon that currently has wheels but no real fuel. 10M, 100M or 1BN users just adds to the COGS line.
Marketing takes money. Twitter depends on keeping itself in the mindshare/radar of people while maintaining the critical mass needed while playing with the revenue model to find one that works.
As they seem to have a significant customer churn, they have to keep acquiring new customers. I expect they will start to advertise aggressively in the media to establish the brand. Expect more sponsorships, paid celebrities, etc.
As a comparison, the marketing budget for Bing is $100M+.
It takes money to make money. Especially, if the product is a nice to have, not a must have.
I guess you have read this post: http://www.tech...month-at-least/
I wouldn’t be surprised if they go on a shopping spree to save them development time.
Can somebody explain how a zero revenue company can get valued at $1 billion? I thought you at least have to show some revenue these days and a business model that scales. If you have a $1 billion valuation, doesn’t that mean you pretty much have to go public for this to be a win for investors? And if you go public, don’t you need a substantial amount of revenue to get say a $10 billion market cap???
Here is how it works.
Let us say, as a Money manager, I have $100M in assets that I am looking to put to work and want to make about 8%/year of gains and want liquidity in the next 2-3 years with minimal risk. It is actually very difficult to do this in mainstream investments because of the risk factor.
So I evaluate Twitter and make a determination that the probability of Twitter exiting (and so an investment becoming liquid) with at least $100M (not $1B) in the next 2-3 years is so high it is a virtual guarantee that I can get my money back IF I have the first dibs on any liquidation. On the other hand, there are some good chances that Twitter may hit one out of the ball park and I might get a significant return but I am not necessarily betting on that.
So I make a deal with Twitter for a new series of investment where I get liquidation preferences over existing investors for any exit below the valuation, get paid 8%/year interest on the investment for the preferred shares. The company benefits by establishing a high floor for valuations that I am not really betting on happening (but would be nice if it did).
So as an investor I lose only if the exit is less than $100M and will make money at 8%/year at any point between that and $1B sale with probably almost as much guarantee as a Treasury (if not more) but liquid possibly within 2-3 years. It is a fantastic deal for most money managers with cash sitting on the sidelines.
… if I can negotiate the right financing deal as detailed above.
How good a deal this is for Twitter and/or for the new investors is impossible to say unless one see the terms of the financing. The $1B valuation itself may be irrelevant to the new investor but helps Twitter establish a floor (which really doesn’t mean anything if it fails to raise revenue).
So the only interesting piece here is why they are doing this deal at the moment with supposedly $30M in the bank. Most likely, as people have pointed out, it is because it is better to do this when you are taking a risk with a revenue model and have as much runway as possible before coming up with a revenue model that works, otherwise, the terms for financing will become more onerous.
So I suspect that this is just a precursor to launching some revenue generation tests which may or may not work.
The valuation itself is meaningless for all practical purposes.
Thank you for an intelligent reply…a rare commodity in this post.
This has nothing to do with making money ON Twitter and everything to do with making money from Twitter….someday. If Goog/Msft etc…were to acquire this company, they would be making a data and user play….obviously not an immediate financial play.
Youtube still loses money, yet you would be hard pressed to make a case that being the king of all online video, in a world going to online video is not worth $1.65b…..same here. Can you really quantify the value of the world’s real time social heartbeat for a company that has the resources and experience to turn that data into money?
Some of you need to get out of this tech bubble you’re in….many companies, in many industries are built to be sold. Many med device companies have no intentions of ever generating a single dollar in revenue, yet the resulting device is still a win for everybody, including the much larger, acquiring company that owns the distribution channels etc…
when is enough data enough?
The people using twitter are the same people that use facebook, the same people that use google/yahoo, the same people that use msft products etc, etc.
I personally don’t see it that…I look at the brand and feel that you need to own the “worlds #1″ in a given category to really begin monetizing it (in a multi billion dollar way). Google could buy vimeo etc….but when they monetize those videos and associated data through advertising, only the Youtube name seems to spark enough interest to write a big check.
I see Twitter the same way…if MSFT wants to make billions on targeted advertising in the real time stream, they are not going to do it by owning friendfeed or the facebook real time status update feed….they would it by owning the single property that is on the lips of every cheesy local news anchor in the country. As much as I detest this entire tweeting phenom, I can’t deny that the brand has grown into a mainstream powerhouse more quickly than anything I’ve ever seen.
Comonman, that is indeed the VC approach to valuation, and the calculation many make- in essence, that they can sell later to a ‘greater fool’ while earning a nice coupon in the meantime.
Unfortunately, it is based on rosy assumptions which I think you downplayed. If the underlying business is not cashflow positive, even the 8% coupon is in danger of not being repaid- never mind the principal on the preferred stock.
And of course, if the exit valuation does not exceed the entry one, the huge potential upside on the common equity (or agreed premium on the preferred) will simply never materialise.
So it’s definitely not as risk-free as one might assume from your explanation. Ultimately, the only way to make a good investment on something like Twitter is if it actuallystarts making healthy cash profits (very unlikely), or some greater fool comes in later at an even higher valuation (and his cash pays your coupon and principal).
http://www.amusis.com
It has nothing really to do with cash flow for the risk assessment.
What is the risk that Twitter will have an exit less than $100M (not $1B) in the worst case? If the lender has a liquidation preference up to the money put in + interest, then that is a virtual guarantee. Even without a cash flow, I would expect a liquidation value for the brand name itself to be worth at least $100M. Any such liquidation will happen long before the company becomes worthless in the worst case scenario.
I am sure many will think the valuation will go to zero but that isn’t a realistic, reasonable, objective evaluation for anyone that is actually in the money management business. The “greater fool” label is a subjective one, not relevant for investment decisions.
Is it zero risk? Of course not. But it would seem like a surer bet than buying Treasuries for the risk/reward ratio. IF the new lenders have sufficient liquidation preferences.
People here are assuming that they have no liquidation preferences and need an exit north of $1B to get all the money back let alone returns. This is almost never the case in a late stage funding.
Common nailed it. This is exactly how it works. Someone like T-Rowe is essentially taking the option if the company goes public. The problem here is that the liq pref has been sold at every round. So the last schmucks who bought it, got the same pref, and now, their pref is in second position, so, each sequential round, wipes out the previous round just a little bit more.
What has to be clear is that the founders either have taken a bunch of money off the table, or they are screwed come liquidation day, because of all the prefs in front of them.
Thank you for this cristal-clear explanation. But… why 1 billion and not more or less? Any idea?
ritespot, the founders will do fine even in a liquidation as long as they are considered critical to any liquidation deal (and there is no reason why that will not be the case here). There are always carveouts etc., and payouts from the company that may acquire them, etc., even if at a liquidation price. In a liquidation scenario, no one is looking to become rich but they won’t get wiped out either but that is the worst case scenario.
The group that stands to suffer the most in these kinds of high-capital deals are non-exec employees who may not be included in any carveout later on. Their common will be worthless unless there is an exit at least above the paid-in capital + interest (assuming not more than 1x liquidation preference).
So given where Twitter is now, investors, founders, execs are pretty much in the money-back situation i.e., not much downside but a lot of potential upside.
But other employees have to hope for a very good exit, and more money the company takes in, the higher the exit bar it gets for them to make money.
So unless they do a Facebook like deal later on where some of the employees can cash out by private placement at the ‘funny money’ valuation, the employees are in more of an all-or-nothing kind of situation than the investors or founders/execs. One could say that is what motivates them to make the company a success but they are taking more risks than investors/founders at this point.
“It has nothing to do with the cash flow for the risk assessment”?
That is an extraordinary opinion.
The value of any investment is the NPV of its future cash flows. Without cash, there is nothing but vapour. You talk of the brand name being worth $100m. If that brand is not producing cash, it will soon be shown to be vapour and worth nothing.
If you think the ‘greater fool’ theory is subjective, I suggest you recall the dotcom boom. And more recently, the fate of Skype. eBay once thought as you do now.
There’s no such thing as a guaranteed investment. The reason 9 out of 10 VC investments lose money is precisely because of this kind of reasoning.
The liquidation preference is only valuable and realised if someone is ready to pay greater than the entry valuation.
There are only two possible scenarios: the company is more valuable in future due to positive cash flows, or it is less valuable due to negative cash flows. In the first scenario, the preferred return is realised precisely because cash flows are healthy. It can only be realised under the second scenario if there is a greater fool willing to pay for a company with negative and declining cash flows.
There often is- until the hype cycle plays out and the greater fool is left holding the bag.
I like CommonMan’s point that “the employees are in more of an all-or-nothing kind of situation than the investors or founders/execs.”
I’ve gotten ahold of the restated Twitter, Inc. charter, and confirmed 1x liquidation pref., non-participating preferred. Blogged a summary analysis of the preferred stock overhang at http://wac6.com. In total, it is $164 million.
It makes sense. There are only a handful of start-ups that can get huge. Twitter is one.
Huge??? How so? Because 65% of your users don’t come back after the first month. That’s a great model for success. If the internal docs from Twitter are any indication of how clueless the management team is, then this will be HUGE in only one way. A HUGE f*cking sinkhole that makes money turn into worthless pieces of sh*t.
RT @DDDBU Mackenzie Phillips is giving new meaning to the term daddy’s little girl
It could be anything sane or insane. We all love ‘em both Twitter and Facebook. Both have shown tremendous growth. More so, I will use Twitter to “retweet” this story and am using FBConnect to sign in… Tells where it would go? Umm, maybe not
Why the hell don’t they charge for the API? Everyone but them is making money.
Is this 1999? Twitter has no revenue steam at this time. Ok.
What will they do with the funds. Looks like some new technologies around the current communication set should be coming.
I’d personally like to see the term sheet.
At a $1 billion valuation, there must be a pretty good revenue model under the hood…
Either that or Silicon valley types overpay for companies that will never turn a profit based on hype. But we all know that never happens, right?
I agree with the under the hood part…I think it is safe to say that the people that are investing are MUCH more privy to what the next steps are. We will just have to wait and see.
This is ridiculous. Twitter doesn’t make anymore and probably won’t anytime soon. HOW THE HELL IS IT WORTH $1billion? give me a F*&king break!
buh……buh……buh……BUBBLE!
Comparing the roadmap of SNS vs. the history of search engine, one can find some trace there.
The current SNS lacks a business model to monetize its traffic. Another thing that’s missing is: to make it useful. Yes SNS is useful, but not as useful.
this is crazy, nuts and insane. These VC’s are betting on a Twitter exit of at least $5B otherwise it makes no sense. These are not mezzanine VC’s looking for a 2x return these are early stage VC’s that require 6x to 10x returns. Tough to see that when Twitter has ZERO revenue to date. The world has gone mad.
as @scott pointed out their must be some liquidity here for the founders. Hope they took money off the table. +1 for the real risk takers!
Can someone PLEASE explain to me how the VC’s expect to exit at this valuation???
NO EBITDA, NO REVENUE = $1B valuation? SMH
i wonder if the company caters lunch from french laundry?
“No more excuses for outages or technical hiccups.” when they only had $250 million in the bank that was fine?
i down with twitter and all but go public? how? why? not sure wall street would like a huge line of 0’s on the revenue/profit parts of thier financial statements but hey there are twitter and they are worth a cool billion on paper so anything is possible.
I guess you need more money to raise a baby cow than a baby cat.
Come on naysayers. $1 billion makes sense in this environment. The twitter birdhose will make millions!!! Because we all know how valuable “i’m picking my nose at burger king” is to the world. Burger King wants to know how many nose pickers they have so they’ll pay for this info. And the nuggets found in the nose are something users can make money from as well. It’s a win-win for everyone!!!
We’ve again found the peak of stupidity that we reached with Cosmo and Pets.com during the last bubble. The herd piles into it and ruins the environment for all of us building companies that actually provide something of value.
I’m personally going to short T. Rowe Price’s stock for this. If they run their venture arm like this, I’ll bet the rest of the company is full of idiots as well.
LOOK OUT BELOW
WOT! is twitter reaching new markets aaahw like China and India maybe Russia yep a billion will do it.
Or is it just a game who got the biggest *** fund. Larry Ellison loves it he wants to use it for Oracle product line letting users know which data post the most.
I’m betting on who gotz the BIGGEST *** fund .. Yeah
there are so many comments saying how twitter havent got any revenue, the VCs are crazy etc etc.
do we not think that the VCs might have asked to have a look at the business plan before stumping up that kind of money?
This website will calculate your website value(it has predicted Twitter value as well)
Twitter is nothing more then a glorified message board that looks cool and uses ajax for real-time updates. Certainly the technology is not worth 1,000,000,000 because they have nothing proprietary. Therefore we must assume that the valuation comes from the user base and the potential of a revenue stream.
Fact: The user base has incredible churn
Fact: Users are finicky. One day your hot, the next your not.
Fact: Twitter provides no real value to society. What did you do before you tweeted.
Exactly.
@will
clearly you don’t know how the VC game works. Let me spell it out for you.
VC’s move in a heard mentality. A VC is never willing to committ until someone else comitts first. Of course at which time they will pay a much larger premium to get into thedeal. Hence, why VC’s have pathetic investor returns over the past 10 years. In other words VC’s don’t have a clue. At least 99% of them don’t since they have never held a real operational job. You see Will, the only way T Rowe Price or Insight Venture Partners can get in the press these days is to completely throw out any level headed valuation metrics and take money that was given to them by teachers, plumbers through their retirement pensions and make a bet. Irregardless if it hits or not these two Partner from these firms will now forever be linked to Twitter. For example, in less than 48 hours time you’ll see the general partner’s bio updated on the website to reflect he is now part of the exclusive club of Twitter. Will, its all about egos at the expense of hard working people that sock away a piece of their paycheck every month for retirement. For the VC its a conversion piece for this Saturday night dinner at Sharon Heights (were all the VC’s belong).
Also, VC’s don’t ask for biz plans. Remember its all about the heard mentality.
I can’t think of anything that will destroy twitter faster, than 100 million dollar infusion of cash.
Explain to me why I should care?
If my grandfather, or any of his WWII friends, or my Dad, or any guy in my family ever, EVER, found out I went on a website called twitter, or did something called “tweeting,” I would instantly be shot.
That must have been some shitty upbringing. I bet you got your legs broken if you weren’t in bed on time.
I feel the same way towards my friends. If they tweet, they just left the Clint Eastwood club and joined Perez Hilton.
VC’s spending other huge amounts of other people’s money would never make mistakes like investing in worthless companies. I mean, what’s WebVan’s market cap right now? Like $5 gazillion?
Yes, but no one outside Twitter knows how much they have actually spent to get that much of coverage even if a lot of it is free and not directly paid for. Twitter is a better marketing story than a technology story (not necessarily that is a bad thing).
Another way to look at it, the media have given free coverage because they benefited from it without having to pay Twitter (or whatever they might have paid Google instead for equivalent access to an audience as an alternative).
So if you look at the opportunity costs, Twitter has paid for that media coverage so far by giving free service.
But going forward for a revenue model, they may have to charge for many of the services and if they charge the media for use of Twitter for commercial use, then the media will require payments for exposure via commercials or product placement.
It is easy to get free coverage when you are giving away things of value for free but the equation changes when you want to raise revenue.
Any revenue scheme they come up will have marketing costs – bigger the revenue, more they will likely need to spend. You think iPhone marketing is cheap or free even if it practically sells itself?
Sorry, meant this is a reply to @Brandon above.
Amusis, you are stuck in a narrow focus. In an M&A as a liquidation exit can result in, the valuation of the company is not necessarily the stand alone cash flow of the company being acquired. What the acquirer can realize in its own context of the acquisition is a sum of the brand that it can leverage for its own use, the technology, the team, the strategic value of the company, defensive value (of someone else acquiring it affecting the acquirer, etc). If you don’t believe in any of these, then clearly you have not been involved in much of M&A activities.
Facebook did not acquire FriendFeed for its cash flow. MySpace did not acquire iLike for its cash flow. Just calling them greater fools doesn’t make it so. Not all acquisitions happen for stand-alone cash flow reasons.
So the point is that at the current moment, the non cash flow value of Twitter is at least $100M to make the current investment virtually risk-free IF the new investors can get the liquidation preference for their investment over existing investors.
Late stage investing is not necessarily the same thing as early stage investing in goals. The reason that this is a relatively risk-free investment (with the right liquidation preferences) is because the existing valuation for Twitter has is at least $100M for even non cash-flow reasons.
You seem not to believe in that valuation and think the valuation of any company is almost entirely based on the stand-alone cash flow of that company on its own and without that cash flow it is worth nothing. If so, you are wrong about that. That does not require a greater fool theory.
In this valuation we can disagree. But if Twitter wanted to liquidate today for $100M+, there will be any number of companies bidding. You may think they are fools to do that but that seems to be based on some personal opinion of Twitter than what the reality is in these cases. And in that valuation, two people can certainly disagree.
Your evaluation provides a clear explanation of how the game works.
The challenge on looking at such deals from the outside is that the internal drivers for what makes a deal work economically are often as opaque to outsiders as the financing mechanisms and rationales which enable them.
Much of the disquiet surrounding this sort of transaction may stem from the perceived inequalities between the different players, and differing perceptions of risk and reward. Your explanation of the economics demystifies this nicely.
Once upon a time people (Dutch – the inventors of the stock market) bought tulip bulbs: The Tulip Mania.
http://en.wikip...iki/Tulip_mania
No real high value in tulip bulbs as they are just future flowers – Seeds from a tulip will form a flowering bulb after 7–12 years.
Here we have Twitter Mania: no real value in tweets – worse: a tweet will decay in interest fast.
thank you so much techcruch (who post this post) good work keep it up . ilike vary much
For Twitter (and Twitter’s investors), this makes a lot of sense if one assumes that they roll up the choicest portions of the third-party twitter ecosystem into their core (through M&A), refine their API approach to this newly aggregated/federated platform and then cultivate a deeper, richer ecosystem around same.
Then, when the tree needs a good “pruning” again, start the M&A process anew.
For more fodder on this one, check out:
Twitter Financing: Pruning the Garden with $100M Shears
http://bit.ly/1902st
Mark
Heres a video of David Menlow of IPOFinancial.com on Twitter raising money: http://equedia....ise-100-Million
Twitter’s aggregate preferred overhang (Series A through E) is $164 million. I analyzed this last night on my blog; posted at http://bit.ly/XNbEE.
I like CommonMan’s comments, esp. his point that “the employees are in more of an all-or-nothing kind of situation than the investors or founders/execs.”