Twitter Closing $800M Funding Round at $8 Billion Valuation | Hacker News Reader

Twitter Closing $800M Funding Round at $8 Billion Valuation

mashable.com

36 pointsjamesjyu38 comments

how sick is this? A company that had already raised north of 300 million and had never even made half as much in revenue gets... another 800 million? what for? how ridiculous is this?

I think you answered your own question. Without revenue, outside capital is needed for growth. And it's tough to tell if the valuation is dumb without seeing the terms of the deal.

What's even more ridiculous is that they did it even though there is now a competitor with a better product. Yes they have a much larger installed base but I do believe G+'s non 140 char limit and other amenities will win out.

$8B is still in the acquisition range. Google was ready to pay $6B for Groupon. The next round (if ever) will make twitter un-acquirable. IPO, lower valuation or die.

well to be fair Groupon was actually generating cash...Twitter generates god knows what

They were generating losses, that's like saying at least pets.com was generating cash. Twitter does generate cash but like Groupon not enough to pay their expenses.

Don't be so harsh. Without Twitter, there'd be no http://backupmytweets.com

Why does selling a 10% chunk of a company value the remaining 90% at the same price?

layman: the 800M$ funding & 8B$ valuation numbers affect each other. It woulnd't be raising 800M$ if not valued at 8B and it wouldn't be valued at 8B$ if the funding round wasn't 800M$

It doesn't. It's just an implied valuation based upon simplistic math.

For example, suppose that $800M had a 1x liquidation preference plus a modest hurdle rate (say its 7%). That investor makes good money if Twitter gets sold for (1.07 x $800M) $856M - a far cry from $8B. The risk of such an investment going negative is quite low (relatively speaking), as would be the investor's cost of capital. I doubt the seed investors would look at such a sale positively.

That is a grossly oversimplified version of what can happen (I have no idea what the terms of the real investment are - I'm just making up a for-instance). But the larger point is that you are correct, when you are dealing with preferred stock and other complicated securities, the implied valuation is a bit of a joke. You have to look at the value of all of the various tranches of securities, each of which is impacted by the others.

This is only true if the shares sold in this round participating preferred and earlier investors were not entitled to money back in such a sale, I doubt either is the case here.

The larger point is that 4th grade percentage math is inadequate to value preferred stock. Change the example to one you like if you find mine too simplistic.

They value the entire chunk, then base the 10% on it. Your question makes it sound as if they said 10% is worth 800M, then 90% is worth 9 times as much. The logic would be 100% cost 8B, so 10% cost $800M.

Why is Twitter so slow to find a good business model, while Facebook is profitable?

Because Twitter is innovative, while Facebook is just f'in huge?

That's ridiculous. Facebook is incredibly innovative as well, even more-so than Twitter. They're solving huge scalability problems that nobody else has encountered before.

The only new scalability issue that Facebook has tackled is how to scale one enormous MySQL database. They've primarily done this by sharding it thousands upon thousands of times and putting over 10,000 memcached instances in front of it.

Most everything else they've confronted was done by Amazon and Google years before Facebook had to.

Facebook as a product to monetize is not innovative. It's a website serving targeted ads.

Twitter is a new kind of messaging service. How to monetize that is not so clear.

Why try and achieve something hard like profitability when you can easily be valued at $8b and raise $800m to keep that going?

I don't mean to be too critical but sometimes I wonder if this is better than, say, Twitter finding out that it can't make more than some small amount of money in profit.

Raising capital and valuations are just temporary measures and good faith to turn the product into a company. Having money to hire more people just exacerbates the problem. They now have higher operating costs (where this new capital goes) and now need to have the even higher revenue to create a margin that makes it all worth it in the first place. OR you just get stuck in a Groupon situation where we have big revenue off big costs (salespeople).

Facebook is profitable, yes. Most of people (edit: instead of most I said '99%' but that's not true so I updated) use FB from their browser going to facebook.com (or searching facebook on Google and clicking the first link), while Twitter is used mostly in desktop/mobile apps.

It's a bit more difficult to develop a business model for Twitter than for Facebook, which is profitable with "just put ads on the right of everypage".

But: shouldn't a company as huge as FB be many times more profitable that they are right now? (400M$ in profits in 2010: http://dealbook.nytimes.com/2011/01/06/goldman-unit-passed-o... at a 75B$ valuation if I recall correctly).

Anyway, my point is Twitter & FB business models are not & i'd guess won't even be similar, and it'd difficult to compare them.

33% of Facebook traffic comes from mobile devices - http://www.facebook.com/press/info.php?statistics

Facebook has a tremendous mobile foothold.

Ooops! Sorry, I pulled the 99% from my ass to make a point and I was not really meaning 'real 99%'. Sorry. I'll edit the post. Thanks for the correction.

Twitter's data set is incredibly valuable; Twitter won't make money from ads, they will make money from analyses of their data [1]. Developing infrastructure and software that can analyse the sheer quantity of data Twitter generates takes time — and money. But, when they finally crack it they will be extremely profitable. It's much easier for Twitter to do this opposed to Facebook (who I would say is also interested in doing this) because of Twitter's public by default culture (/policies).

[1] If evidence is needed: they just bought BackType; They're starting to lock down and sell their APIs rather than give it away for free as they realise the data's immense value.

ok, but do they really need 800 million (or 400 million) to turn backtype and other companies and/or ideas into a working business?

I think they do need this amount of money in order to stay competitive with the big guys Google and Facebook. They could be more easily outbid in acquisitions if they weren't competitive with capital.

Yes but, unlike Google and Facebook, they're not a real company. They're a start-up on VC welfare.

I'm curious to know what kind of data Twitter has that is that valuable. Just because you have a lot of data doesn't mean it's that valuable.

I used to analyze direct marketing campaigns for a major big-box retailer. They had literally billions of rows of transactional data that they could tie to specific customers, and despite attempting to harness the power of that data, most of their direct marketing campaigns didn't even move the needle.

So, whenever I hear "But, when they finally crack it they will be extremely profitable", I can't help but thinking this is nothing but a bunch of handwaving. I'm sure everybody at Twitter is real smart and they're working hard on this problem, but until they start bringing in some real money, I'll remain skeptical.

Just as an example from my own experiences: I was able to predict the winner of the XFactor within 1% of the final vote, two hours prior to the final [1]. I've also written an algorithm that can with 80% accuracy detect a news story will come out of a group of tweets. There is a lot that can be done with this data.

[1] http://www.irishtimes.com/newspaper/ireland/2010/0115/122426...

Because they don't need to?

You know, if you could get 800M$ who cares about revenue? They are getting money while they can before the bubble burst, the early investors are getting money selling to a greater fool and the greater fool are putting money over the table betting someone else will be even bigger fool.

Facebook is profitable but "not that profitable", they need to be much much more profitable at the current valuation, that means being pure evil, and I don't know if the people will stand that.

The Facebook, Zynga, Groupon burst will be something great to see, again(it seems people just can't learn from the past, "this time is different").

"This time is different" because people have learned a lot from the first bubble. For the most part, investors are people who really understand the economics of technology, the economics of the deal and the mistakes of the past. I think there is a long way to go before any major burst. Granted with the amount of hype in the market and massive over-subscriptions (i.e. greed) there's bound to be a correction at some point. But, I don't think it will be as bad as before.

The only reason it won't be as bad is because not that many people are employed by these companies this time.

Most people are already out of work or under-employed.

That's not true. My understanding was that the dot-com bubble was primarily a result of naive investment in technology. My point was that investors today are way more sophisticated when it comes to tech, therefore, they won't be blindly betting on every internet or mobile company. Venture Hack's Naval Ravikant describes the bifurcation of the funding situation in technology, where there is a long-tail of companies investors don't view as remarkable and so don't invest. Remember, those dot-bombs were pretty much worthless from the start in terms of the value they provided, and they had enormous nonsensical valuations. There was no such thing as determining product-market fit or customer development before product development, or even a blogosphere of information related to this kind of investment. Both investors and entrepreneurs are more prepared and more knowledgable today than they were in 1999. So I don't think the same kind of devastating burst is very likely.

I disagree. There were quite a few dot-coms that could have been successful had they IPO'ed before the crash, and additional dot-coms that should have never been acquired, yet because of such an acquisition, allowed the ownership of the Dallas Mavericks.

The burst will not be as devastating simply because not as many people are directly involved.

I am still using eBay and Amazon, and even Yahoo is still around (which acquired Viaweb).

Do you honestly think Twitter is worth $8 billion dollars without a business model?

Please, read this book:

http://www.amazon.com/Exit-Strategy-Douglas-Rushkoff/dp/1887...

It must at least partly be due to the fact that Twitter has been guarding the simplicity of its product. Facebook is a communications platform at its core, but it also allows third-party developers to use it just as an identity database on its own property. You can run games on Facebook.com, you can't on Twitter.com.

The simplicity of Twitter has also made them discourage third-party development off their property. If all you've got is a SMS broadcasting service and you have an open API, it's not so hard for others to clone all your features and more. It's not as easy to clone Facebook because it has a lot more functionality. So that has limited Twitter's off-site monetisation options.

Twitter is similar to Facebook in the sense that people spend a lot of time on it, but for some reason (good for users, bad for short term profitability), Twitter has not added any Facebook-style display advertising on its website.

Now, this guarded simplicity exists in another internet giant - Google search. You cannot really make any third-party products on top of it and you're unlikely to see flashing banner ads there any time soon. But, Google has intent, which means Adsense works great. While Twitter doesn't have as clear an intent signal, an Adsense-like product on it won't be a big surprise.

The simplicity of Twitter as a social network gives it a lot of pace. Stories, trends, memes move fast on Twitter. So, it's hard for advertisers to capitalise on any particular theme for long or at the right time. But, I expect they will churn out more brand management and marketing tools for big companies. That's what I guess Twitter's major source of revenue will be (big deals), rather than self-serve ad platforms for small to medium companies like Facebook and Google.

They said the valuation of Twitter doubled from last year to this.... does anyone know if the shares in SecondMarket increased by the same % as well? If not.. then why not? They don't want "normal people" to get rich? Just the insiders?

Investors pay a premium for liquidation preference.

That's roughly how it's meant to work pre-IPO. Until they're a public company they're only supposed to care about the investors they chose ("the insiders").

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