This Twitter valuation thing is really getting complicated.
 
Not even three months ago, the company closed a private investment round that valued the company at $3.7 billion. Only a year earlier, the company had raised money at a valuation of $1 billion, so you’d imagine that its revenue was piling up quickly to justify that nearly fourfold increase in worth.
 
But no, Twitter had no revenue in 2009, but it did have Ashton Kutcher — somehow it worked out and investors lined up. As of last December, Twitter hadn’t exactly taken great strides forward: It was not experimenting with ways of making money, like sponsoring tweets. But on the plus side, Justin Bieber was now tweeting. So there was that.
 
Then last month, reports surfaced that Google (NASDAQ:GOOG) and Facebook had talked about buying Twitter for a price between $8 billion and $10 billion. While there were strategic reasons for such deals,you had to wonder if the prices weren’t chosen at random. You could almost hear the venture capitalists laughing on their speakerphones as
they read those stories aloud to each other.
 
Stories about inflated Twitter valuations benefit two groups primarily — the news organizations who break them see a nice bump in pageviews. And the private investors who leak the stories see a nice bump in the prices people are willing to pay for Twitter.
 
Sure enough, on private exchanges like Sharespost, privately held Twitter shares were being valued at $4.3 billion, having received a lift from after that Google/Facebook story. And now, a new fund from JPMorganChase (NYSE:JPM) is reportedly buying a 10% stake in Twitter that values the company at $4.5 billion.
 
That latest piece of news is also getting a lot of play, which means JPMorgan is getting a lot of free publicity for its new Digital Growth Fund. It will have no problem raising money to invest in other Web startups.
 
See where this is going? Those investments will surely boost those startups to outrageous valuations. Those outrageous valuations will surely spawn more attention-grabbing headlines — which will encourage more investments in web startups. And so on.
 
So while there may not yet be an investment bubble in the tech-IPO market, we are starting to see irrational behavior in private investments that, once they scale up, are the stuff from which bubbles are made.
 
Some, like Reuters’ Felix Salmon, have argued that Twitter’s valuation isn’t as absurd as it seems on first glance. Salmon is right when he says Twitter is supplanting blogs and that it’s “becoming central to how people communicate with each other.” (I find it somewhat sad, and even a little unsettling, that he is learning so much about his wife from her tweets.)
 
Once Twitter figures out a solid revenue plan, it may not take long for it to really be worth $4.5 billion. On the one hand, Facebook solved this problem a couple of years ago — inviting members to “friend” brands and teaching companies how to market virally. Facebook’s revenue has been more than doubling annually, and could bring in $4 billion this year.
 
On the other hand, Facebook solved this problem a couple of years ago – and Twitter hasn’t. In that time, Twitter hasn’t been able to integrate marketing into its design. It hasn’t hired away many Facebook engineers who know the secret sauce. It’s not even clear that what works at Facebook will work at Twitter.
 
While it’s easy to imagine Twitter earning billions of dollars in a year or two, it’s just as easy to imagine this dream being derailed. Here’s another unhappy-ending scenario: Twitter is bought in a stock transaction by a media giant like Google, but after the deal whatever magic driving Twitter’s success is extinguished in the new culture.
 
None of these possibilities are mentioned in the context of Twitter’s rising valuations. When people base valuations of startups purely on the promise, while remaining willfully blind to the risks, you have classic bubble behavior. It doesn’t create much damage — as long as it’s contained within a handful of high-profile companies. But the further this attitude spreads, the more worrisome it becomes.