Here’s what financial reporters and bloggers do: they analyze businesses. They sift through numbers. They make predictions (sometimes well thought out, sometimes not) about what businesses are likely to succeed. They sift through government filings and financial documents to find information about how a business or an economy works that you may have missed and that might change your perspective.
Let me break through the fourth wall here for a second. I have paged through Twitter’s prospectus. I have followed the bizarre discussion of just how many times revenue Twitter can be worth. I have looked at the comparisons with Facebook ;when Facebook went public, I also looked at those kinds of metrics and wrote about them.
Here’s the thing: Twitter has basically one of the most perplexing business models I’ve ever seen, and the reason for this is that Twitter just wasn’t conceived with any plan for making money. Twitter was more or less a way to keep engineers employed building something cool when Apple effectively killed founder Evan Williams’s original podcast idea. A third of the way through Nick Bilton’s terrific book, Hatching Twitter, Williams is telling Yahoo executives looking to buy the company that eventually it’ll be funded through advertising. Or “some new kind of business model.” Four-fifths of the way into the book, the folks at Twitter start talking about profits.
Now, in the conventional business narrative this would be taken as an excuse for snide comments and insults. What were they thinking? It’s pretty clear what people at Twitter were thinking: they were thinking about building something that they would want to use. And probably sell to someone bigger, who might figure out how to (in Silicon Valley jargon) “monetize” it. Just as Evan Williams built and sold Blogger.
In building a product that a lot of people want to use, Twitter obviously succeeded. It’s hard to find a journalist who doesn’t love Twitter, and for good reason. It’s changed the way journalists communicate with their audience, and with each other. I loved Blogger, too.
It seems to me, though, that trying to figure out whether Twitter’s business is “worth” the $26 initial public offering shares were sold for, or the $45.10 a share that shares opened at or the $44.90 a share at which they ended the day is an exercise in absurdity. Everything that Twitter has done to make money so far is largely an effort to graft advertising onto a service that has attained its enormous popularity largely on the strength of its simplicity, spareness, and high ratio of good stuff to commercial spam.
The fact that Twitter didn’t start out with a business plan isn’t a bug. It’s a feature. People who write about business often imply that there’s no higher virtue than coming up with an idea that makes money. Well, no. Coming up with something that the whole world wants to use is the great achievement. Making money from it is the reward. Hopefully.
None of this is to say that I think that Twitter will fail. I think there is a high chance it will succeed. If it does, though, I predict that its ultimate success will have very little to do with the current discussion of whether it is properly valued at,say, 15x estimated 2015 revenues.
Silicon Valley venture capitalists almost invariably talk about investing in smart people, not companies. And clearly there are plenty of smart people at Twitter Inc. So if investing in people is what you want to do, this is your chance. I certainly won’t discourage you. Just take off the green eye shade and don’t pretend that deciding to invest or not invest in Twitter has anything to do with the numbers in its prospectus.