Why Twitter is worth $1bn

I tend to always be justifying valuations of companies way ahead of the market. Over 2 years ago, BEFORE Microsoft invested in Facebook, I wrote this blog post, valuing Facebook at $10bn. Shortly thereafter, I was vinnycated (pun intended!) when Microsoft subsequently invested in Facebook at a $15bn valuation.

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.

Comments

  1. Twitter is indeed now profitable, with $25m in revenues/year. Can’t seem to find any ground that states this?

  2. daoes says:

    i agree that traffic first

  3. Zack Manner says:

    Twitter worth up to $1bn?? if its so… then how musch does facebook value..?

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  5. Girokonto says:

    I see it like Lilly…first the traffic and the making the money

  6. Kevin D. says:

    Twitter is a valuable company. Google is using Twitter too!

  7. CMF says:

    Yeah I agree Vinny. but I still can’t believe twitter is worth 1 billion (with a “b”)

  8. GadgetZone says:

    is amazing in this global crisis that can tweeter worth that much money.

  9. Qoram says:

    it was amazing at this time of crisis like Twitter

  10. Mo_oNlite says:

    iya memang harusnya begitu sebagai berkicau yang terkenal hrus tahan banting zaman apapun.

  11. Very good to see Twitter is profitable. These days we even see Twitter results coming up in search engines. Never ending question is, when to sell? And how will they deal with the current economic uncertainty? Will companies stop advertising?

  12. Shane says:

    I have not long had a twitter account, but i can see why it is worth so much.

    Good post!

  13. Plasma TV says:

    I am always concerned about anything that sounds too good to be true.

  14. Leica 35mm says:

    Where can I find more information about this? I have never heard such a thing before

  15. Where is the twitter investment for tomorrow. You know the one that few people know about, but will be worth billions?

  16. Vanessa says:

    I agree, twitter will go sky high! By the time next year they will double profits. If they revise their model just a bit, they can make profits.

  17. You got it straight to the point. This is really a nice topic to discuss. ;)

  18. Twitter now gets bigger and bigger. But now the real problem started. People around the world started spamming the twitter with their adv. content and to get more followers. I hope twitter is preparing with this problem, otherwise it would be another history.

  19. Jimmy says:

    Twitter is great for finding out quickly what is happening in the World.

  20. Ryan says:

    I had no idea Twitter had a worth of $500 million!

  21. iPhone App Market is really getting popular just after the releasing of iPhone 3G and now iPad have also potential to stay in and interact with iPhone developers. Which i think is really an amazing changed. Thanks

  22. Sheryl James says:

    Is there any shares available in the market for twitter yet ?
    any info would be highly appreciated.

  23. I love twitter
    I use it every day and this helped me

  24. I think Twitter is gradually leaning towards offering the people a tool where they can promote online.

  25. sajoo says:

    I really enjoy reading your articles, Vinny !

  26. 21nova says:

    You’re sure right Vinny !

  27. I don’t totally agree, but thanks for the post anyway.

  28. Thanks for nice assessment about the twitter. We have seen liquidation & Acquisition of many big corporation. Now Its trend to happen more in the tech industry. I hope some day you will write about the risk & profit investing high tech corp.

  29. I am from different background. But wanna invest in shares. The analysis is helpful for us to understand the market.

  30. Johm says:

    I simply dont get the hype over twitter and what its use is. Its boring, and pointless

    Johm at http://funnypinoy.com

  31. Poor Student says:

    I agree with Ronald Widha.. it’s very interesting analysis!

  32. Oyun says:

    couldn’t agree with you more Vinny… traffic first and then monetizin

  33. lovegra says:

    I use Twitter every day of my life and I totally agreed – Twitter is worth 1 bn

    http://www.trustmeds.net/

  34. Biztree says:

    As a finance professor I can tell you that twitter is not “worth” 1B. It is simply an assigned value, a distinction must be made.

  35. Bollittieri says:

    It may be so professor. But the market value is what someone is willing and able to pay. If shares were sold from treasure at a 1B valuation then it is worth 1 Billion…period.

  36. Bali Metro says:

    Yes, Twitter is my live.. it’s very interesting analysis!

  37. Laura says:

    I have many friends using Twitter including me. Besides, business people also benefit from Twitter. I think Twitter worth 1bn because of its influence on our daily and business life. Argue with me if you don’t agree on that. ;)

  38. framing a basement says:

    Awesome post Vinny. I can’t imagine a world where facebook and twitter are owned by the same people. That would be scary.

  39. I disagree with above. Twitter is not worth anything close to one billion dollars. They don’t have a steady revenue flow and as soon as the next big thing comes around, Twitter will lose its popularity.

  40. Greg says:

    Twitter is definitely worth 1 billion if facebook is worth 15.

    Facebook is already losing fans because of all the recent changes they have been putting their users through.

    My friends used to all use Myspace then facebook became cool… guess what? They are all on twitter now.

  41. I think it may be time for facebook to pass on the torch to Twitter. At least in my opinion, the company has a much brighter future of the two.

  42. zulfizan says:

    1bilion? for real? =.=

  43. joine jukas says:

    i like twitter :D.I can drive traffic from twitter to my web / blog.Its easy to use :D.So i agree tht twitter worth more than 1b :D

  44. joine jukas says:

    i love twitter :D,so i agree twitter worth 1b :D

  45. dil says:

    now Twitter worth USD7bn

  46. i was reading this post and i believe that now twitter is already a 10billion company.. it even went better than you indicated or expected, but you have forseen well its dynamic and prospects. Very good article about worth estimations and e-bessiness investments. Keep the good work!