Surprise! Twitter Ecosystem Attracting Less Investment

For a piece coming from an analyst firm with the work ‘insight’ in its name, you’d expect a bit more insight offered and not just numbers.

CB Insights has determined that ‘pure play’ twitter start-ups are getting less funding than formerly:

Pure-Play Twitter Startups Attract 50% Less Venture Capital and Angel Investment Than Last Year » CB Insights

As Twitter’s popularity has grown with users, we wondered if this popularity translated into more investment by venture capitalists and angel investors into pure play Twitter startups?  CB Insights’ venture capital and angel investor data suggests that venture capitalists and angels may be a bit less sanguine about the Twitter ecosystem than they were last year.  This is the opposite of what we saw in an earlier analysis for another hot ecosystem – Apple’s iPad and iPhone ecosystem – which saw a 220% increase in funding vs. last year.

First, the bad news…Last year (from June 2008 to May 2009), we’d seen $21.6M fly from venture capitalists and angel investors to pure-play Twitter startups.  In the June 2009 to May 2010 timeframe, the investment funding dropped over 50% to $10.4M.

Now, the good news…The number of investment rounds held nearly flat with 11 rounds in our analysis of last year vs. 10 rounds in the more recent timeframe.  This does, however, show that average amounts invested by investors has dipped fairly dramatically going from nearly a $2M average round last year to just over $1 million more recently.  We also saw a high degree of collaboration between angel investors and venture capital firms on these deals and that these pure-play funded Twitter startups were going to a diverse array of industries.

There are lots of theories on why the amount invested has dipped with the most popular explanation being a feeling of uncertainty by application developers and investors alike about the direction Twitter will go.  More recently, compounding the uncertainty are acquisitions by Twitter of the likes of Tweetie and Summize (filling holes on its platform)?  Time will tell if these moves will drive investors to be even more cautious about the platform?

Oh, damn: not ‘time will tell’; not that lame line.

The post links to Fred Wilson’s incediary Twitter Inflection Point post of last April, in which Wilson (an investor and board member of Twitter) throws down the gauntlet, and basically warns the Twitter ecosystem that Twitter will be filling the self-created ‘holes’ in the product, and many niches in the Twitter ecology will no longer be viable for third-party vendors.The following week was the Twitter Chirp conference, where Ev Williams announced the acquisition of Tweetie to be the Twitter client on iPhone, as well as a Twitter developed Blackbird client.

So, there is ‘no time will tell’ involved. Here’s what I wrote after Wilson’s comments and before Chirp:

Twitter Raising The Infrastructure: App Builders Better Run For The Ultrastructure

Here’s what is happening: Twitter is consolidating its position at the center of the ecosystem it has engendered, and as part of that functionality that is deemed necessary to the infrastructure is going to be built by them, or at least owned by them through acquisition.

The old model had a lot of holes, like search, clients, Url shortening, pictures, and geolocation. These niches had many players trying to establish themselves, creating a rich ultrastructure above the platform:

Twitter started to buy some companies to fill glaring holes (like Summize for search) and they have built some parts of other capabilities (like their own URL shortener for direct messages), but mostly the maps was still a mess.

Now, they have bought Tweetie, built a client for Blackberry, and they are moving toward a new theory of where the platform begins and ends:


Of course there is no saying that Twitter will leave the line there. They are going to have to make their roadmap clear at the upcoming Chirp developer conference, so that third parties can make reasonable investments in new applications without the fear that Twitter will step on their toes.

However, I am making a bet. I am sure that Twitter realizes the value of analytics: the treasure of information about the flow in Twitter can’t be treated as a side show, because it is the show. Therefore, I am predicting that Twitter will build or buy technology to capture all sorts of information — what links are streaming by, who’s using what hashtags, and sentiment about brands — this is enormously valuable. Acquisition of companies like Radian6, bit.ly and a few others would make sense, especially considering the value to large companies, media, and even political parties.


The other ultrastructure niches really make sense as independents. Consider games: they come and go, like hit music, and it requires a big sprawling community of developers. Not a good fit inside a single monolithic company. The same is true with communities, like Stocktwits. And obviously, niche apps.

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So, Wilson’s shot was heard round the world, and now Tweetie is part of the new Twitter infrastructure.

This won’t mean the end of competition by players like Tweetdeck or Seesmic. These have large and dynamic communities of users. But we have to see how Twitter plays this nesw game. Will they use the same APIs as everyone else, or will they exploit their knowledge and access to the inner workings of Twitter’s technology to make their own offerings faster and more reliable, a sort of Microsoft approach? Will Twitter transform itself into a Salesforce-like platform, with hundreds of integrated offerings, but owning the CRM heart of the platform?

So, investors are steering clear of those potholes, and maybe even areas like analytics, which Twitter will want to move into, even if they haven’t done anything yet. The future is very cloudy, and the investors are looking for lower risk bets elsewhere, which doesn’t concern Twitter’s shareholders.

It does suggest that Twitter might be served by an IPO, however, since that would be the cheapest way to attract the capital it needs to build its own ecosystem of services as a competitive strategy against Facebook and other social networking giants (like Apple and Google).

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