In the Facebook post, I analyzed Facebook’s business model, using my background in search & online marketing, to justify why as a business, the valuation made sense.

Now, 2 years later, a new player has arrived in the online world, Twitter. The valuation of $1bn on Twitter as a business is potentially not as strong as the rationale behind the investment at that price. In order to explain briefly – I’m going to go light on the business model and heavy on the investment rationale.

As a business, Twitter has about 50m users and is becoming a major player in the Real Time search market. I use it more often than Google sometimes, to figure out what’s happen, in real time. Search is a $20bn market. If Microsoft (through Bing) and Google really wanted to get serious about this space, paying $1bn for Twitter would be a paltry sum of cash or stock for either of them. Twitter’s volume easily justifies it (read the leaked Twitter docs). Facebook already made moves to acquire Twitter for $500m, earlier this year.

So, without delving into the business model behind Twitter, let’s just assume that there is acquisition value for Twitter, if it were sold tomorrow to either Google, Facebook or Microsoft. even at a 80% discount to the Facebook price, I don’t think anyone would argue that Twitter is worth at least $100m.

And that’s my point. Twitter has just raised $100m from a number of investors. What (most) journalists, don’t understand, is that the way the term sheets and documents are prepared and signed off, investors typically receive preferred stock in the company that they are investing in.

Note: I have no inside information on Twitter and this is purely speculation, based upon best practices and my experience in investing and the startup world.

Let’s assume the terms of the deal were typical:

Investors receive 10% of Twitter for a $100m investment.
This 10% constitute Series “C”? preferred stock.
The preferred stock has a liquidation preference of 1x (which means no matter what Twitter is ultimately sold for, the investors get the first $100m back + interest (2-5%?) – sometimes you can get 1.25-2x liquidation preferences, which would sweeten the deal even more for investors (e.g. 2x their money back upon exit/sale before anyone else gets anything).

So, for a mere $100m, these savvy investors realized that investing in Twitter to receive a 10% share in the upside (above $1bn – which is very possible), with limited downside (they always get their money out first + interest), it was better than leaving the money in the bank.

The reality of the situation right now is that money in the bank is not attracting any real interest in the developed markets (typically 1%).

So, if you could get a piece of the upside in a fast growing tech company, with very limited downside and interest in the bank – why would you not invest in Twitter on a $1bn valuation? In fact, depending on the liquidation preference, even a $5bn valuation would make sense!

From an investment point of view, this is a great investment with good upside and low risk – these investors are not crazy, they just understand time value of money. The current state of the world’s fixed interest income markets means that we’re going to see a lot more deals like this, where investors take small stakes in fast growing companies at high prices but first money out.

As long as the company is worth AT LEAST what you are putting in ($100m in this case), the downside is very limited and the upside exceeds the current cost of capital.

Great investment – win-win for everyone, and overall, well done to Evan & the guys at Twitter.

It’s great to see other young startups raising money in this tough economic environment. Cape Town based ChessCube just raised $1.25m in funding from VenFin and are looking to take the online chess market on with some really innovative products. Chess remains one of the most popular online games and ChessCube is currently working on some very interesting business models to create revenue opportunities. Cape Town, where Yola has it’s roots, really has some innovative companies and I’m hearing more and more about how VC’s are turning toward this part of the world in search of the next big opportunity. If South Africa is able to continue to churn out startups that are able to build solid technology businesses, we will soon see this region hopefully become something of a Silicon Valley (I like to call it “Silicon Cape“).

* Disclosure: I am an early investor in ChessCube

This man raised $20m in funding

We conducted a survey at Web 2.0 expo earlier this month, and here are the findings:

* 78 percent of respondents believed the freemium model will weather the economic downturn, compared to 27 percent who put their faith in subscription-based models.
* 90 percent of respondents believe partnerships will be a driving factor for Web 2.0 innovation over the next year.
* 46 percent of respondents saw strategic partnerships as the fastest route to profitability; 42 percent believe its only subscription-based services, while only 39 percent believed it was advertising.
* Only 8 percent believed online auction sites will grow this year.
* 97 percent of respondents use Web 2.0 tools (Facebook, Twitter, LinkedIn, etc.) to establish an online persona.

The survey, promoted through Twitter, was conducted both online and at the Yola booth.

Most startups are evaluating their options right now. Ad revenue has dropped – not so much in aggregate spend, but more in aggregate price – some estimates are that CPM’s are down 80%? Anyone wonder why?

Contrary to the popular belief of most startup founders, advertisers are not interested in just buying advertising because they have money to spend and you have eyeballs. Google AdSense is not just a cash printing machine. Advertising needs to translate into real ROI for the advertisers or sooner or later they will abandon you. With consumer spending down (along with conversion rates), advertisers are getting smart and pulling advertising from sites that don’t convert, and increasing it on sites that do convert. This does not bode well for websites that cannot drive value for advertisers. What most people don’t realize is that Search is not like traditional advertising – you’re BUYING customers. There are too many business models out there that rely on advertisers to support the business, but do not drive positive ROI for the advertiser. These businesses are headed for rocky times (in fact, it’s already upon them!).

So, I’m not saying that you shouldn’t build great websites that people want to use – just be prepared to start charging for it if your traffic is not targeted or qualified for advertisers. Twitter is a great example – if they decide to monetize via advertising, they need to deliver customers to advertisers; if they can’t and the traffic doesn’t convert, then their business model will be to charge users for the service. Someone needs to pay to keep the lights on.

At the end of the day, the cost of inventory is the issue – the market prices will gravitate toward real value in order to improve the ROI’s for advertisers – but that really places your business model at the mercy of your advertisers and their budgets (and their ability to convert your users into customers). I’d rather be offering additional value added services that a small % of users would pay for on a regular basis, rather than try to monetize solely via advertising – and I’d advise other startups to start looking into that too…

The online advertising goldrush is over – time to start building real business that deliver real value…

This clearly begs the questions: “Why Yola?” and “Why now?”.

Why Yola?

In a world with so many different global brands and names – it’s actually very difficult to find a unique name, especially a short one. We went through a long process and decided on Yola. It’s short, easy to say and spell in most languages, reflects the culture of our organization, and will be able to grow with the plans we have for our business. We believe that it reflects the culture of our organization and we were able to secure the .com domain name – an important part of renaming any web company.

Why now?

Given the sizeable investment we’ve just received, we obviously have big plans for the company. The rename was always going to happen, the funding is just going to enable us to achieve those goals faster.

SynthaSite is a great name for our website building product, but we don’t believe the brand transfers very well to ancillary products that we may launch in the future. I’m not a big fan of having multiple brands in any fast growing market (it’s different in mature markets – multiple brands allow for more “shelf space”), so in order to consolidate our branding across our future products and services, we had to select a brand that could transfer brand equity from one product to another, in which case “SynthaSite” doesn’t work as well as “Yola”.

For example, in the future, we may role out a mobile product, and instead of calling it SynthaSite Mobile – we felt Yola Mobile would be a better name – shorter and to the point – the “site” part gets in the way, and “Syntha” is not really a standalone word or name (Synth A Site). SynthaSite is really a single product name and not a company/global brand name and therefore this presented a challenge, and many others like this, to us – which will all considered carefully in the process of our renaming.

The rename is really about looking forward into the future about what our company is about and where we need to and want to go – SynthaSite could serve us well as a single product brand, but it really didn’t fit with our long term product & business strategy. I’m sad to see it go, but excited with the prospects of what Yola will bring – I trust that you are too! Thanks for all the great feedback and support!

Retention Marketing Manager

Company:

SynthaSite’s vision is to enable anyone, anywhere to publish their own website. We’re a venture-backed start-up who recently raised our series A funding, released a beta product into the market and are ready to take the world by storm. We’ve grown rapidly over the past 6 months and need superstars to take us to the next level.

Position:

We’re looking for a ridiculously talented Retention Marketing Manager to lead our email and website marketing efforts. In this role, you’ll be responsible for both setting the strategy and running the day-to-day execution of our email and website marketing programs. If you’re right for this job, you’ll have strong email and website marketing experience and be looking for a place where you can use those skills to build a new program from the ground up. You’ll want to make a difference. If this sounds like you, we’d love to meet you.

Location:

San Francisco, CA

Reporting:

The Retention Marketing Manager will report directly to the Vice President of Marketing.

Key responsibilities:

* Email Marketing: Define, plan and execute SynthaSite’s email marketing strategy
* Website Management: Own the SynthaSite website, optimizing it for customer retention and monetization as well as working with the Acquisition Marketing Manager to drive conversion of new visitors to the site
* SynthaSite Blog: Own the SynthaSite blog. Define the messaging and collect content that will speak to the needs of our customer base
* Creative Direction: Work closely with creative team to develop marketing materials for email newsletters and the website
* Planning: Work with the VP of Marketing on quarterly and annual plans

Qualifications:

* 3+ years of related experience with email marketing
* Experience managing a marketing budget and preparing plans and forecasts
* Experience working with Graphic Designers to produce high-performing creative assets
* Strong analytical and quantitative skills
* Entrepreneurial drive

Compensation:

SynthaSite is prepared to offer an attractive compensation package, including a competitive base salary, health and vacation benefits, and company shares.

SynthaSite is an Equal Opportunity employer. Personnel are chosen on the basis of ability without regard to race, color, religion, sex, national origin, disability, marital status, sexual orientation, or gender identity, in accordance with federal and state law.

I’ll be posting my presentation on this blog post later this weekend using SlideShare – so watch out for it.

I’ve taken one of my most popular blogs posts on web apps and turned it into a slide presentation – this should be a fun talk!

Update: 9/11/08 – Here is the presentation: