There's an assumption that people who invest $200 million have information you don't have or that they're smarter than you are. I worked for eToys and watched the company simply run out of money after raising $250 million. I worked for Jobster and watched the company become walking dead after raising $55 million.
The Madoff investors are also a prime example of what economists call "asymmetric information" at work.
There is an odd inverse correlation where the larger the deal, the less insider info the investors have.
Today Twitter burns cash at a furious rate, has only 25 million uniques on their website, has a product riddled with bugs, has a terrible uptime record and after years of trying to scale, continue to have terrible uptime and app performance.
But most important of all: Twitter do not yet have a business model, and the experiments they're doing, like the groupon twitter clone, demonstrate that they are flailing around in the dark.
It's quite possible that Twitter may go the way of eToys.com and other big busts: After raising a spectacular amount of money they will simply run out of cash and have their assets bought for a pittance.
So lets explore this scenario briefly: If twitter does simply implode, it will be catastrophic for our industry because the press will brand it as a wider systemic problem and will most likely describe it as the "second dot-com bubble bursting". The mainstream press have been particularly kind to Twitter, so expect them to be just as unkind if it dies. VC and angel money will dry up for a time and the correction that guys like Fred Wilson have been predicting (see his recent comments re an angel investment bubble) will come to pass.
Lets hope Twitter becomes profitable and sustainable or we will all be hurt badly by the shrapnel.
Actually twitter has close to 200M uniques. Not all of those are active accounts. They are more like youtube than facebook in that respect.
I would be the first to criticize twitter for past product and performance issues. But I have to also observe that their product improvements recently have been stellar, e.g. twitter for ipad or new twitter. Also, their performance is much, much better.
You don't really tie a logical connection between twitter failing and the entire industry. I certainly don't see a connection between the performance of funds of twitter's investors and the super angels. Except for people like Chris Sacca, they aren't the same people.
I disagree with this talk of bubbles when fundamentals of most of the companies in the industry are strong.
I'm not sure Twitter is burning money as furiously as you think. Last year they claimed they were cash flow positive[1] just on firehose deal worth $25M a year.
I'm not saying they are worth 3.5B but it looks like Twitter is setting themselves up for a really long runway before they would crash
Employees: 350 (Source: Forbes, Dec 15th, 2010)
Avg salary, lets assume 80K. (probably too low)
TCO per employee $110K
$110K * 350 = $38.5 Million per year on employees.
They've been paying NTT for managed hosting thus far - so much that NTT has cited it as a reason they're expanding their hosting network. They're about to open their own data center in Sacramento - probably because they're realizing how expensive NTT is. My guess is they could be spending as much as $30 million per year on hosting and infrastructure.
Add another $10 for office, admin and legal and you've got a burn rate of just under $80 million per year or $400 million over 5 years.
Reminiscent of how Digg hired far too many people. When you're taking big money and the press puts you in the same sentence as Facebook there must be pressure to be like the other big companies.
I think there's also an element of betting going on - this is a venture backed startup after all - if Twitter really starts to unlock massive growth over the next year or so then having so many employees will seem a prescient move.
Some companies raise money even if they don't really need it. Case in point, Evernote has over $10m/year in revenue and a lot of their venture capital still in the bank, yet they decided to go for a big round of $20mil for a total of almost $30mil. They want to expand. The same is true for Twitter.
Whether the model works out for them or not is yet to be seen, but I don't think the majority of the people care enough about the bugs and uptime problems to the extent they will leave the platform or come back less.
"Today Twitter burns cash at a furious rate, has only 25 million uniques on their website"
Plus most of those are minorities and foreigners, which is a problem when you're advertiser supported. There's a reason we don't have any working class newspapers anymore.
(saw you downvoted): Objection sustained! Please restate, counselor. Pretty insightful point about newspapers; I didn't realize why US newspapers are so elitist (in the right sense of the word; not the Sarah Palin sense).
Comments
There's an assumption that people who invest $200 million have information you don't have or that they're smarter than you are. I worked for eToys and watched the company simply run out of money after raising $250 million. I worked for Jobster and watched the company become walking dead after raising $55 million.
The Madoff investors are also a prime example of what economists call "asymmetric information" at work.
There is an odd inverse correlation where the larger the deal, the less insider info the investors have.
Today Twitter burns cash at a furious rate, has only 25 million uniques on their website, has a product riddled with bugs, has a terrible uptime record and after years of trying to scale, continue to have terrible uptime and app performance.
But most important of all: Twitter do not yet have a business model, and the experiments they're doing, like the groupon twitter clone, demonstrate that they are flailing around in the dark.
It's quite possible that Twitter may go the way of eToys.com and other big busts: After raising a spectacular amount of money they will simply run out of cash and have their assets bought for a pittance.
So lets explore this scenario briefly: If twitter does simply implode, it will be catastrophic for our industry because the press will brand it as a wider systemic problem and will most likely describe it as the "second dot-com bubble bursting". The mainstream press have been particularly kind to Twitter, so expect them to be just as unkind if it dies. VC and angel money will dry up for a time and the correction that guys like Fred Wilson have been predicting (see his recent comments re an angel investment bubble) will come to pass.
Lets hope Twitter becomes profitable and sustainable or we will all be hurt badly by the shrapnel.
Actually twitter has close to 200M uniques. Not all of those are active accounts. They are more like youtube than facebook in that respect.
I would be the first to criticize twitter for past product and performance issues. But I have to also observe that their product improvements recently have been stellar, e.g. twitter for ipad or new twitter. Also, their performance is much, much better.
You don't really tie a logical connection between twitter failing and the entire industry. I certainly don't see a connection between the performance of funds of twitter's investors and the super angels. Except for people like Chris Sacca, they aren't the same people.
I disagree with this talk of bubbles when fundamentals of most of the companies in the industry are strong.
I'm not sure Twitter is burning money as furiously as you think. Last year they claimed they were cash flow positive[1] just on firehose deal worth $25M a year.
I'm not saying they are worth 3.5B but it looks like Twitter is setting themselves up for a really long runway before they would crash
[1] http://www.businessweek.com/technology/content/dec2009/tc200...
I'm not sure either, but here's some data:
Employees: 350 (Source: Forbes, Dec 15th, 2010) Avg salary, lets assume 80K. (probably too low) TCO per employee $110K
$110K * 350 = $38.5 Million per year on employees.
They've been paying NTT for managed hosting thus far - so much that NTT has cited it as a reason they're expanding their hosting network. They're about to open their own data center in Sacramento - probably because they're realizing how expensive NTT is. My guess is they could be spending as much as $30 million per year on hosting and infrastructure.
Add another $10 for office, admin and legal and you've got a burn rate of just under $80 million per year or $400 million over 5 years.
The WTF here is that they have 350 employees.
I speculate that it must feel ok to keep hiring when you're using other peoples money to hire them.
Reminiscent of how Digg hired far too many people. When you're taking big money and the press puts you in the same sentence as Facebook there must be pressure to be like the other big companies.
I think there's also an element of betting going on - this is a venture backed startup after all - if Twitter really starts to unlock massive growth over the next year or so then having so many employees will seem a prescient move.
According to their COO as of the end of August this year they're still not profitable http://money.cnn.com/video/technology/2010/08/24/tt_twitter_...
Some companies raise money even if they don't really need it. Case in point, Evernote has over $10m/year in revenue and a lot of their venture capital still in the bank, yet they decided to go for a big round of $20mil for a total of almost $30mil. They want to expand. The same is true for Twitter.
Whether the model works out for them or not is yet to be seen, but I don't think the majority of the people care enough about the bugs and uptime problems to the extent they will leave the platform or come back less.
It sounds like they do need the money if they can't expand with $10MM/yr in revenue.
"Today Twitter burns cash at a furious rate, has only 25 million uniques on their website"
Plus most of those are minorities and foreigners, which is a problem when you're advertiser supported. There's a reason we don't have any working class newspapers anymore.
(saw you downvoted): Objection sustained! Please restate, counselor. Pretty insightful point about newspapers; I didn't realize why US newspapers are so elitist (in the right sense of the word; not the Sarah Palin sense).