Louis Gray Is Wrong About Twitter Funding

Louis Gray is wrong in so many ways in his response to the news that Twitter is being valued at $250M in a new venture round:

Quite simply, now is a very difficult time to attain a high valuation. Venture funding is dropping dramatically, and positive exits for companies are rare. Practically nobody is talking about going public, so to make money, you would have to do it the old fashioned way, through profits.

Um, Louis, there really haven’t been any tech IPOs in years. The usual path — and the most likely path for Twitter — is to be acquired by a larger company. Recall that Twitter recently turned down Facebook acquisition for a $500M valuation, albeit one involving Facebook stock. I predicted that Twitter would be acquired in 2009 (see 10 Predictions For 2009), and a $250M valuation doesn’t make that unlikely, it just sets a floor. But let’s talk about revenue, first.

And Twitter has grown its user base rapidly, but has done so on the backs of users who are used to getting something for nothing. We’ve already seen users revolt when Magpie launched with the possibility of inserting ads in one’s tweets, and you could expect to see the user base shudder when being asked to shoulder any of the revenue themselves - so you can practically forget about monthly fees. Given that scenario, site ads and ads inserted in third party applications, like TweetDeck, would have to be one option, but an unattractive one, as the ad market itself is tailing downward.

Advertising is not the most likely path for Twitter to make revenue. On the contrary, options like corporate twitters paying for a richer set of functionality, or enterprise twitter (a la Yammer and Present.ly) could be leveraged pretty quickly. And what Magpie is trying to do stinks for many reasons, which is the primary reason for people’s outrage.

Additionally, what Twitter does is incredibly basic. It’s sole functionality is one that it is easily replicated. You can provide status updates on Facebook, on GMail, on FriendFeed, and the whole process rolls back to AOL instant Messenger, when you would set an “Away” status to say you were “At Lunch” or “In a Meeting”. So that’s not hard.

Yes, and it was offered up by Jaiku, Pownce, and a bunch of other wannabe twitters, and they failed to catch fire. They failed to attract a dynamic community of developers building things like hashtags, twitpitches, stocktwits, bit.ly, and dozens of other small innovations on top of the base offering. The fact that Twitter is small and open makes it easy to build on, and the user experience can be learned effectively in a few hours of use. Then Louis shows his hand: he’s rooting for Friendfeed. This posts is really him saying that Friendfeed should be getting all the attention, and the funding, and the $250M valuation.

A recent post by Paul Buchheit of FriendFeed, called Communicating with Code, showcased a prototype offering of FriendFeed that borrowed heavily from the look and feel of Twitter. Given FriendFeed updates include those from Twitter, and then build on with additional services, it can be considered a superset, while Twitter is simply one service of many.

So if I built a third service, and it sucked in all the Friendfeed comversations, and through that, all the Twitter conversations, then it should be worth more that Friendfeed and Twitter? No, because the value of some social tool is not based on whether it incorporates many streams, it is valuable because people are in the streams. The experience, the time spent, is the best way to establish value, not some pseudo-engineering analysis of whose plumbing has more draft.

So the barrier to entry to compete with Twitter is not that hard, leaving the company’s major assets as the community and its developers. But communities are incredibly fickle. None of Twitter’s six million users were using the service five years ago, and maybe, five years from now, they will be doing something else. If people use Twitter for conversation, they can replace that with e-mail, with IM, with FriendFeed, Facebook or other social destinations.

Yeah, and none of us was using the Internet before 1990, or blogging before 1999, so we might give all that Web stuff up and go back to TV and newspapers. Yeah, right.

Today, Twitter is among the hottest, fastest-growing brands out there. But no matter how you multiply its current revenue to try and guess at a market capitalization, the answer is still zero. At a time when real brick and mortar businesses are seeing their own valuations decimated, how can a virtual company with a free user base and a low barrier to competition expect to be valued so richly? Whoever does invest should exercise extreme caution.

Huh? It’s capitalization is what it can raise in the venture market: the price at which it can find investors willing to buy its stock. What Louis is doing is conflating revenue with capital, which are two different things. The investor community is privy to projections of future revenue that Louis and I have not seen, and I am sure that the investors are being cautious. They just are looking at the opportunity with Twitter in a completely different light than Louis “Friendfeed” Gray does.

Update 10:30pm 25 Jan 2009: Louis completely snowed me with a point/counterpoint blogging style, where he had two posts — you saying Twitter is worth way more that $250M and one saying there is no way it could be worth $250M. I only saw the latter one, which is what the post above is about. I will read the other and respond in another post, just to keep the confusion high.