AdverClast

A Chronicle of Disruptive Advertising

Why Revenues Matter, Twitter

In a time when ad budgets shrink and startup revenue targets fade, much todo was made last week about Fred Wilson’s statement regarding Twitter in Wired:

“It’s like the stupidest question in the world: How’s Twitter going to make money?,” said Union Square Ventures’ Fred Wilson, another investor. “It’s like ‘How was Google going to make money?’

Broader Issue

For some, Twitter and its revenues, or lack thereof, are representative of a broader set of revenue concerns plaguing Web 2.0 and, in particular, social media companies. Hence the story quickly moved to Silicon Valley Insider and up Digg, Delicious and other barometers of online interest. So rapid was its ascent, that Fred quickly presented an explanation on his personal blog.

While comments to Fred were mostly salutary (It’s difficult to be “on” all the time), comments concerning Twitter’s need for revenue and lack of business model ran the gamut. The basic camps were:

  1. Revenues are important as the downturn will be severe and future investment is not a lock.
  2. Revenues are not important as the company should focus on “crossing the chasm” to mainstream adoption.

While one can argue about whether Twitter’s current investors or other investors will be willing to pony up more cash should the company run low (Twitter raised $15M this summer for a total of $20M), or whether generating money is a distraction (3M is able to do it and innovate quite nicely), these arguments miss the key reason early-stage businesses should put up revenues as quickly as possible.

Valuation

Revenues, net income and free cash flows enable arms-distance investors, partners, targets and acquirers to use time-honored, if not accurate, tools to ascribe a valuation to your company. No, not the kind of spongy valuation early-stage venture investors brew based on revenue hypotheticals. The kind of valuation that is based on comparable company analysis and discounted cash flows. The kind of valuation that enables active corporate development.

M&A

Twitter needs revenue so that it’s stock has currency. Companies such as Cisco, Google and Ebay figured out long ago that innovation takes place across an ecosystem of developers some inside and some outside of your company. One of the better ways to get the outside folks “onside” is to buy the company that signs their checks. You can only do that if you can persuade the managers and shareholders who control those companies that their interests are best served when joined with yours. Therefore, you need a valuation. Therefore, you need revenue and, even more importantly, an eye-popping revenue trajectory.

Twitter themselves learned the value of M&A in July, 2008 with their purchase of popular Twitter search engine Summize for a rumored $10-12M.

For those who say that Twitter should first “cross the chasm” to mainstream adoption, I would argue that:

  1. Focusing on what people are willing to pay for will help you across. Further, it’s a lot easier to implement rudimentary ad models, for example, than cross the chasm. Ads earn you money. Money buys you time. Time gives you options.
  2. With everyone from Facebook to Yammer drawing a bead on their micro-blogging niche, Twitter doesn’t actually have a lot of time - It’s time to bulk up.
  3. When it comes to valuation in a down market, user growth is no proxy for revenue - Witness FuckedCompany.com from the last down turn, but you’ll have go into the Way Back Machine because it’s gone.

Twitter should get to work on revenues, prepare a wishlist of targets and start an active corp dev outreach because they need to start building with bigger blocks. Subsequent posts will go into the revenue models available to Twitter including search, contextual links, display ads, data sales, profile sales, etc.

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