Twitter, the popular social networking site, which has no definable revenue stream, managed to raise $100 million in venture capital earlier this week, based on investors valuing the company at $1 billion. T Rowe Price, one of the country’s largest mutual fund companies, put in part of the new capital.
How did investors come up with the $1 billion valuation for Twitter? It’s really anybody’s guess. There is no way to place an actual market value on Twitter. There is no Twitter stock symbol to look up, because Twitter is a privately-held company.
Investors say they are using a valuation based on the valuations used for social networks Facebook and MySpace.
Should Twitter’s Value be Based on Facebook and MySpace?
It’s certainly true that Twitter is large and growing. Based on the comScore measurements of U.S. web sites for August, Twitter had over 20 million unique visitors, which put it into the Top 50 American properties based on visits.
But Facebook and MySpace are three to four times Twitter’s size. And yet, neither Facebook nor MySpace has proven to be a cash cow.
Facebook raised money earlier this year at a valuation of almost $10 billion, but that was down from its last round of fundraising in late 2007 when the company had a value of $15 billion. Since then, Facebook has indicated that it has about $500 million in revenue and a very small operating profit. But that does not include capital expenditures, which could be very large for a company with as many as 300 million members. That requires a lot of servers and bandwidth.
MySpace is owned by News Corp and was to be the flagship of Rupert Murdoch’s internet empire. It has not worked out that way. Industry experts believe that MySpace brings in about $600 million and is losing money. Earlier this year, Murdoch replaced the unit’s top management.
Still, at least Facebook and MySpace have some revenue, even if it is very modest compared to portals like AOL and Yahoo. Twitter’s sales are zero, or close to that.
Twitter Is Growing, But Is That Enough?
So, how does the company come by its valuation? The answers are size and growth. Depending on which research firm is doing the measuring, Twitter is still doubling in size each month compared to the same month last year. Its twenty million visitors should have some value, but no one is certain what it is.
Unfortunately, one of the lessons of Web 2.0 is that having a lot of subscribers or members does not mean much in terms of sales, and therefore valuation.
Skype has over 400 million subscribers, but revenue of only about $500 million. YouTube served over ten billion video views last month, but Wall Street estimates that it could loss as much as $300 million a year because of storage and bandwidth costs.
Size may be impressive, but it has almost nothing to do with value.
The problem with social networks is that they do not have discrete audiences that can be easily targeted by marketers and advertisers. MySpace does not have an investment section like MSN Money with content on the stock market and readers who are likely to trade equities and options. Facebook does not have a job site where employers can go to look for employees.
Social networks can actually be hostile environments for advertisers. Members are fierce about preserving their privacy and only too happy to attack marketers who may be trying to reach them with messages based on their web habits.
The bottom line is Twitter doesn’t have any revenue. And if Facebook and MySpace are any indications, it won’t have much, ever.
A billion is a lot to pay for a toy.
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