Twitter is raising money at a $7 billion valuation.Cue the bubble-bubble talk. Cue the Twitter-doesn’t-have-a-business-model talk.
We estimate that Twitter is doing around $100 million in revenues through its emerging ad business, and selling access to its firehose.
“So freaking what?” we hear the naysayers say. “A $7 billion valuation on $100 million in revenues is insane!”
Look at it this way: in 2001, Google earned $7 million in profits on $86 million in revenue.
Anyone who had invested in Google at a $7 billion valuation in 2001 would have been called the world’s biggest moron. (Especially considering the fact that an actual bubble had recently popped.) A 1000X profit multiple!
And anyone who had invested in Google at a $7 billion valuation in 2001 would also have tripled her money in three years, when Google went public in 2004 at a valuation above $20 billion. (And if she’d held on to her stake, made a 20X return over 7 years.)
Of course, not every company making $7 million in profits is worth billions. But every once in a while, a few of them are. And it’s investors’ job to invest in several of those that might look like the next Google, be mercilessly mocked by the armchair quarterbacks, and have enough winners out of the lot that they can laugh all the way to the bank.
Here’s what Twitter has in common with 2001-era Google:
- A simple, beautiful product that users love and that’s growing like wildfire
- A professional CEO and a visionary, involved co-founder.
- Twitter also has network effects that Google doesn’t have, but these aren’t as important as most people think.
But that’s not the thing that makes Google and Twitter worth billions, as opposed to hundreds of millions.
The thing that makes you worth billions is a revenue-generating product with huge momentum.
It doesn’t matter the absolute numbers of your revenue, whether it’s $100 million or $10 billion or $10 million. What matters is the slope of the curve. Whether customers can’t get enough of your product, as was the case with Google when they launched search advertising and couldn’t believe just how many people were buying.
(The reason the absolute value of the numbers don’t matter, by the way, is that the value of an asset is the net present value of its future cash flows. In an early stage business, growth rates are more important to estimate future cash flows.)
From 2001 to 2004, Google’s revenue grew from $86 million to $1.5 billion. That’s staggering.
Is Twitter going to achieve similarly stunning revenue (and profit) growth?
Nobody knows, but stranger things have happened.
If we had to guess, we’d say Twitter insiders, including Google board member John Doerr, see Twitter’s revenue growth and it makes them think Twitter could grow revenue that fast.
We wouldn’t be surprised if it did.
Don’t Miss: The Next Twitter Trend (We Hope): #Twintros