5 ms·

I'm probably just ignorant, so I'd really be interested in hearing what those with expertise have to say. At a $3.7 billion valuation doesn't that mean that tw

by axiom 16y ago

I'm probably just ignorant, so I'd really be interested in hearing what those with expertise have to say. At a $3.7 billion valuation doesn't that mean that twitter has to IPO or be bought for at least $10 billion to make it worth it? and aren't those exits exceedingly rare? I'm sure people investing $200million aren't idiots, so it's not like this logic is lost on them, so I'd be really interested in what the investment terms are to make this a sensible deal.

evgen 16y ago
Basically you are correct, although the existence of secondary markets and the greater-fool theory means that investors will probably be able to hedge their bets prior to IPO. OTOH, for a service whose growth is stalling this is a pretty bold bet for participants in this round.
jackowayed 16y ago
Given its popularity, do you really think Twitter is going to exit for less than $10B? Those exits are rare, but so is the position that Twitter is in.
- axiom 16y ago
  Well, couldn't that same argument have been made about Friendster, or MySpace, or Digg etc.? I don't know what the odds are, but surely there's at least a 25% chance that twitter will fizzle out. So it's 25% chance of nothing, and 75% chance of, say, a 3x exit. I dunno, that seems crazy risky to me. Someone commented below about the secondary market - that actually makes a lot of sense I think. I guess when you're investing in twitter there's enough liquidity in the secondary market that you can probably get out if you need to.
  - Complete 16y ago
    "25% chance of nothing, and 75% chance of, say, a 3x exit. I dunno, that seems crazy risky to me" If these are the odds, the expected outcome would be that you more then double your money. 25%0+75%3=2.25
  - harryh 16y ago
    1) Even if twitter fizzles it won't be worth $0. 2) It's possible that the investors in this round have a preference to get their money out first. So 25% chance of nothing is almost certainly wrong.
    - dotcoma 16y ago
      are you sure? How much is MySpace worth, given that they probably are losing money? (not to mention, members)
      - ry0ohki 16y ago
        Still somewhere greater then $0, probably still several million from contracts and traffic alone
      - elbrodeur 16y ago
        MySpace's exit was $580MM. They had an estimated revenue of $300-$400MM in 2009. They might not be Facebook, and may never have a very high valuation, but the exit was very profitable for those involved. Twitter can just as easily be great for it's stakeholders and fizzle out as a service.
        dotcoma 16y ago
        yeah, but their 'exit' is similar to twitter's current round: it's a measure of how much somebody thought they could/would be worth. I'm asking how much they are worth now!
- axod 16y ago
  It's about as popular as ICQ in terms of volume of communication. Do you think ICQ is worth $10B?
  - jackowayed 16y ago
    Are you measuring "volume of communication" in messages, despite the fact that ICQ messages are one-to-one and private, whereas Twitter messages are one-to-many and (for the most part) public??
    - axod 16y ago
      Is it obvious that one (public) is more monetizable than the other (private)? Facebook is hugely profitable, but its messages are private...
      - jackowayed 16y ago
        Well, Twitter's actually bringing in decent revenue thanks to search deals. There's a general agreement that realtime search of tweets is useful, whether or not it's particularly monetizable. And calling Facebook "hugely profitable" is a stretch.
        axod 16y ago
        Twitter has like 2 strategic 'customers' hasn't it? That seems like a really risky revenue stream to me, if you can even call it that.
        steveklabnik 16y ago
        You could argue that Mozilla has one.
        axod 16y ago
        Totally agree. And similarly (especially with the rapid growth of chrome) I think mozilla is pretty vulnerable.
- bcrescimanno 16y ago
  One thing I hope we've learned is that popularity does not necessarily equal profitability.
  - drusenko 16y ago
    That's absolutely right. Generally speaking though, you need to be popular (a lot of customers) in order to generate significant profits. Since "making something people want" is generally considered a harder problem than monetizing that service when you have something people want, it's not entirely irrational to focus on the former before the latter, even if it doesn't always pan out.
spolsky 16y ago
There are a lot of things you have to know to make sense of a deal like this. (1) You have to know what Twitter's financials look like. You can speculate, but since they're not public, you don't know. It may be the case that based on the financials, the growth, and a few simple spreadsheets, KPCB figured out a valuation that makes them comfortable buying at $3.7b. (2) You have to know what the investor's goal is. Different VCs have different funds with different models. Funds that invest in late stage companies don't expect to make huge returns. They might see a path to a risk-free exit at $5 billion in two years. Investing at $3.7b for an exit in two years at $5b is a great investment for certain types of investors. Other types of investors are investing earlier stage and need 10x or 20x returns to make up for the complete failures in their portfolio. (3) When talking about large companies with user bases the size of Twitter or Facebook, the very size of the user base can make the common stock much more valuable in a public offering. Think about how many dentists and lawyers are going to invest in Facebook on the day of its IPO because "everybody they know uses Facebook." Meanwhile, another, much more profitable B2B company that only has 1000 customers can be completely invisible to the public at large so the demand for their stock in an IPO would be weaker. (4) $10b exits may be rare, but Twitter is a rare company. You don't see a lot of companies getting 8% of online Americans in a year or two. (5) There is a very short list of investors with the midas touch. The very fact that they are investing in something makes it more valuable. John Doerr is certainly in this category. He can invest in Brown Paper Bags and make money simply because so many other investors trust him and will buy anything he buys. (6) It might not be a sensible deal. The people investing in it might be idiots.
gojomo 16y ago
As a matter of math, if the pre-money valuation is $3.7B, and the investors put in $200M (for 5.1% of the company at a $3.9B post-money valuation), then any subsequent sales (in secondary markets or IPO or as an eventual public company) at any valuation higher than $3.9B would be a gain. With liquidation preferences, it's possible that even an immediate sale to an acquirer for $3.9B might give these latest investors some guaranteed return.
rahooligan 16y ago
I don't believe KPCB's investment is driven by ROI as much as it is driven by its need to have blockbusters like Twitter on its portfolio just so it continues to be seen as a bluechip VC firm.
run4yourlives 16y ago
I'm sure people investing $200million aren't idiots, so it's not like this logic is lost on them, so I'd be really interested in what the investment terms are to make this a sensible deal. I'm sure they aren't either, but every bubble in history wasn't caused by people being sensible. Both Facebook and Twitter are in serious bubble positions, just like MySpace and Friendster and pets.com. The odds are very high that the money will go the same place Murdoch's billions went - down the closest toilet. Let's keep in mind that people thought Rupert got a sweet hart - even criminal - deal with MySpace at the time. In hindsight he looks like an idiot. When the company in question has no reasonably identifiable income stream and stratospheric valuations, it's best to stay far, far away.
- ig1 16y ago
  Murdoch paid around $330million for MySpace, MySpace is doing annual revenues of 400m+ with a staff of around 1000. General estimate of MySpace's current market value tend to be around the $5 billion point. Murdoch did get an amazing deal.
  - run4yourlives 16y ago
    http://www.businessinsider.com/henry-blodget-myspace-worth-zero-2010-2 http://www.businessinsider.com/henry-blodget-myspace-worth-z... In order for something to be worth anything at all, it needs a buyer willing to agree to that number. I'm not sure MySpace has such an optimist.
  - dufuu 16y ago
    The purchase of MySpace's parent company was $580 million. Apparently $327 million of that was "attributed" to MySpace itself. Revenues are meaningless. MySpace last reported a profit in 2007, of $10 mil on $550 mil in revenue. http://www.zdnet.com/blog/btl/fox-interactive-turns-annual-profit-myspace-revenue-to-top-800-million-in-fiscal-2008/5899 http://www.zdnet.com/blog/btl/fox-interactive-turns-annual-p... Facebook then proceeded to eat MySpace's lunch. August 2010 article about how News Corp. may never profit from MySpace: http://www.bnet.com/blog/advertising-business/news-corp-may-never-profit-from-myspace/5493 http://www.bnet.com/blog/advertising-business/news-corp-may-... MySpace's current market value is nowhere close to the $5 billion you claim. It has been hemorrhaging market share to Facebook for years. Just check out the graphs. http://www.alexa.com/siteinfo/myspace.com http://www.alexa.com/siteinfo/myspace.com Steady drop toward zero.

by axiom 16y ago

evgen 16y ago

Basically you are correct, although the existence of secondary markets and the greater-fool theory means that investors will probably be able to hedge their bets prior to IPO. OTOH, for a service whose growth is stalling this is a pretty bold bet for participants in this round.

jackowayed 16y ago

Given its popularity, do you really think Twitter is going to exit for less than $10B? Those exits are rare, but so is the position that Twitter is in.

axiom 16y ago
Well, couldn't that same argument have been made about Friendster, or MySpace, or Digg etc.? I don't know what the odds are, but surely there's at least a 25% chance that twitter will fizzle out. So it's 25% chance of nothing, and 75% chance of, say, a 3x exit. I dunno, that seems crazy risky to me. Someone commented below about the secondary market - that actually makes a lot of sense I think. I guess when you're investing in twitter there's enough liquidity in the secondary market that you can probably get out if you need to.
- Complete 16y ago
  "25% chance of nothing, and 75% chance of, say, a 3x exit. I dunno, that seems crazy risky to me" If these are the odds, the expected outcome would be that you more then double your money. 25%0+75%3=2.25
- harryh 16y ago
  1) Even if twitter fizzles it won't be worth $0. 2) It's possible that the investors in this round have a preference to get their money out first. So 25% chance of nothing is almost certainly wrong.
  - dotcoma 16y ago
    are you sure? How much is MySpace worth, given that they probably are losing money? (not to mention, members)
    - ry0ohki 16y ago
      Still somewhere greater then $0, probably still several million from contracts and traffic alone
    - elbrodeur 16y ago
      MySpace's exit was $580MM. They had an estimated revenue of $300-$400MM in 2009. They might not be Facebook, and may never have a very high valuation, but the exit was very profitable for those involved. Twitter can just as easily be great for it's stakeholders and fizzle out as a service.
      - dotcoma 16y ago
        yeah, but their 'exit' is similar to twitter's current round: it's a measure of how much somebody thought they could/would be worth. I'm asking how much they are worth now!
axod 16y ago
It's about as popular as ICQ in terms of volume of communication. Do you think ICQ is worth $10B?
- jackowayed 16y ago
  Are you measuring "volume of communication" in messages, despite the fact that ICQ messages are one-to-one and private, whereas Twitter messages are one-to-many and (for the most part) public??
  - axod 16y ago
    Is it obvious that one (public) is more monetizable than the other (private)? Facebook is hugely profitable, but its messages are private...
    - jackowayed 16y ago
      Well, Twitter's actually bringing in decent revenue thanks to search deals. There's a general agreement that realtime search of tweets is useful, whether or not it's particularly monetizable. And calling Facebook "hugely profitable" is a stretch.
      - axod 16y ago
        Twitter has like 2 strategic 'customers' hasn't it? That seems like a really risky revenue stream to me, if you can even call it that.
        steveklabnik 16y ago
        You could argue that Mozilla has one.
        axod 16y ago
        Totally agree. And similarly (especially with the rapid growth of chrome) I think mozilla is pretty vulnerable.
bcrescimanno 16y ago
One thing I hope we've learned is that popularity does not necessarily equal profitability.
- drusenko 16y ago
  That's absolutely right. Generally speaking though, you need to be popular (a lot of customers) in order to generate significant profits. Since "making something people want" is generally considered a harder problem than monetizing that service when you have something people want, it's not entirely irrational to focus on the former before the latter, even if it doesn't always pan out.

spolsky 16y ago

There are a lot of things you have to know to make sense of a deal like this. (1) You have to know what Twitter's financials look like. You can speculate, but since they're not public, you don't know. It may be the case that based on the financials, the growth, and a few simple spreadsheets, KPCB figured out a valuation that makes them comfortable buying at $3.7b. (2) You have to know what the investor's goal is. Different VCs have different funds with different models. Funds that invest in late stage companies don't expect to make huge returns. They might see a path to a risk-free exit at $5 billion in two years. Investing at $3.7b for an exit in two years at $5b is a great investment for certain types of investors. Other types of investors are investing earlier stage and need 10x or 20x returns to make up for the complete failures in their portfolio. (3) When talking about large companies with user bases the size of Twitter or Facebook, the very size of the user base can make the common stock much more valuable in a public offering. Think about how many dentists and lawyers are going to invest in Facebook on the day of its IPO because "everybody they know uses Facebook." Meanwhile, another, much more profitable B2B company that only has 1000 customers can be completely invisible to the public at large so the demand for their stock in an IPO would be weaker. (4) $10b exits may be rare, but Twitter is a rare company. You don't see a lot of companies getting 8% of online Americans in a year or two. (5) There is a very short list of investors with the midas touch. The very fact that they are investing in something makes it more valuable. John Doerr is certainly in this category. He can invest in Brown Paper Bags and make money simply because so many other investors trust him and will buy anything he buys. (6) It might not be a sensible deal. The people investing in it might be idiots.

gojomo 16y ago

As a matter of math, if the pre-money valuation is $3.7B, and the investors put in $200M (for 5.1% of the company at a $3.9B post-money valuation), then any subsequent sales (in secondary markets or IPO or as an eventual public company) at any valuation higher than $3.9B would be a gain. With liquidation preferences, it's possible that even an immediate sale to an acquirer for $3.9B might give these latest investors some guaranteed return.

rahooligan 16y ago

I don't believe KPCB's investment is driven by ROI as much as it is driven by its need to have blockbusters like Twitter on its portfolio just so it continues to be seen as a bluechip VC firm.

run4yourlives 16y ago

I'm sure people investing $200million aren't idiots, so it's not like this logic is lost on them, so I'd be really interested in what the investment terms are to make this a sensible deal. I'm sure they aren't either, but every bubble in history wasn't caused by people being sensible. Both Facebook and Twitter are in serious bubble positions, just like MySpace and Friendster and pets.com. The odds are very high that the money will go the same place Murdoch's billions went - down the closest toilet. Let's keep in mind that people thought Rupert got a sweet hart - even criminal - deal with MySpace at the time. In hindsight he looks like an idiot. When the company in question has no reasonably identifiable income stream and stratospheric valuations, it's best to stay far, far away.

ig1 16y ago
Murdoch paid around $330million for MySpace, MySpace is doing annual revenues of 400m+ with a staff of around 1000. General estimate of MySpace's current market value tend to be around the $5 billion point. Murdoch did get an amazing deal.
- run4yourlives 16y ago
  http://www.businessinsider.com/henry-blodget-myspace-worth-zero-2010-2 http://www.businessinsider.com/henry-blodget-myspace-worth-z... In order for something to be worth anything at all, it needs a buyer willing to agree to that number. I'm not sure MySpace has such an optimist.
- dufuu 16y ago
  The purchase of MySpace's parent company was $580 million. Apparently $327 million of that was "attributed" to MySpace itself. Revenues are meaningless. MySpace last reported a profit in 2007, of $10 mil on $550 mil in revenue. http://www.zdnet.com/blog/btl/fox-interactive-turns-annual-profit-myspace-revenue-to-top-800-million-in-fiscal-2008/5899 http://www.zdnet.com/blog/btl/fox-interactive-turns-annual-p... Facebook then proceeded to eat MySpace's lunch. August 2010 article about how News Corp. may never profit from MySpace: http://www.bnet.com/blog/advertising-business/news-corp-may-never-profit-from-myspace/5493 http://www.bnet.com/blog/advertising-business/news-corp-may-... MySpace's current market value is nowhere close to the $5 billion you claim. It has been hemorrhaging market share to Facebook for years. Just check out the graphs. http://www.alexa.com/siteinfo/myspace.com http://www.alexa.com/siteinfo/myspace.com Steady drop toward zero.