The Twitter Endgame

I wrote this post about Twitter’s latest fund raise in July 2011 for TechCrunch. I love Twitter but feel they have a long way to go to become IPO-ready.

Reports are swirling that Twitteris in talks to raise $400 million, valuing the company close to $8 billion. It seems as if it was onlyyesterday that Twitter raised $200m from Kleiner Perkins. At the time of Kleiner’s investment, some pundits chuckled beneath their breath, claiming the old venture firm was paying up on price in order to claim a bit of equity in social networks, which they had been perceived to have missed.

Despite that laughter, it may be John Doerr, his partners, other Twitter investors, and their employees that share in the last laugh. In addition to the success of their niche funds, Doerr knew exactly the bet he was making when he hunted down this deal last December. In buying a piece of Twitter, one could connect the dots for the possibility that Doerr, with his deep knowledge of Google, knows something about a Twitter endgame that got his investment juices flowing. There have beencountless blog posts trying to show that Google should buy Twitter. At the same time, other technology giants left hanging without any social data could perceive Twitter as an attractive acquisition target also, giving them a large network and helping circumnavigate many walled-garden sites filled with social, user-generated content. Can the company’s major shareholders help create competition for a Twitter deal in a very small market?

The roll call of Twitter’s investors is impressive, littered with the names of blue chip venture firms and consumer web celebrities, many of whom built their reputations largely through this one investment—and rightly so. With around 400 employees, half of whom are focused on engineering and product, Twitter doesn’t necessarily need almost half a billion dollars of additional financing to keep going. To date, it has been able to book some revenue based largely on the promoted tweet ad unit.

However, it has also been acquiring companies to help eliminate blind spots in its technology and product offering, to date spending more than $50M on purchases like FlutherTweetDeck, and most recently, BackType. One could make the case that as the company continues to get the product back on track that a mix of housekeeping plus new acquisitions make sense to get the product to a point of stability. This seems to be what is happening especially under the product guidance of c0-founder Jack Dorsey, who came back but still is CEO of Square, and former Google AdSense guru Satya Patel.

That is, because right now, the Twitter product struggles just to be stable. For those that use Twitter’s native web site in the browser, it’s been considerably slower, possibly because the system is processing over 200m tweets per day. Sure, that’s a lot, but in those 200m items are a lot of loud, spammy, and inaudible (or inauthentic) accounts. For those trying to get a handle on direct messages (“DMs”), random old threads keep popping up when they finally load, which means they may be moving all DMs to a new server. @Replies are still not distinguishable from @Mentions, users haven’t been educated to make lists, and it’s very hard to search through favorites or old tweets. There are also more add-on options available per tweet via mobile than there is on the web, perhaps due to the fact that for those that use Twitter heavily, there are so many different clients from which to access the stream.

And therein lies the huge challenge but also Twitter’s massive opportunity. There has been muchcontroversy about Twitter’s handling of its own developer community. For some, the lack of a clear roadmap has spooked people from investing in the space with time, money, and developer resources. For others, talk is cheap, and the reality that Twitter will have to eventually own every piece of the stack is obvious, so those that enter the fray must do so willingly.

Most recently, these tensions were brought to light when Twitter was seen to attack Uber Media and then subsequently acquired TweetDeck, or when Twitter decided to launch it’s own photo-sharing service in partnership with PhotoBucket (and thereby bypassing services like Twitpic and yfrog), or when it decided to get into the URL-shortening game, going so far as to re-shorten URLs that were already shortened by other services like bit.ly. As powerful and disruptive as Twitter can be in the real world, make no mistake that in its own ecosystem, similar forces are at work.

There has now been a good year of “bubble” saber-rattling in the technology world, and combined with today’s red-hot IPO market, Twitter needs to keep advancing its chess pieces forward. While the public demand for shares in Twitter may be huge, the reality is that the five-year old company not only doesn’t have the revenue acceleration needed to make this a viable option, but it’s product isn’t entirely set either. This latest $400m fundraising round may be an attempt to help fuel more product-enhancing acquisitions and, overall, to begin a consolidation of fragmented clients and services that currently survive solely on an oxygen supply from Twitter’s API. With each round raised and as its valuation goes up and up, the possible exit outcomes dwindle and the stakes get higher. The Twitter endgame transforms from chess into a dangerous game of roulette.

From my own personal viewpoint as a Twitter user, my sincere hope is that Twitter remains an independent, standalone company that eventually is publicly-traded. I will line up to buy shares. I view the Web through Twitter and spend more time on the service than any other, by a mile. And while I hope it will IPO, I have this sinking feeling that’s not realistic. This is not to suggest that Twitter is failing at finding and tuning all the best possible business models. They are doing an incredible job with only 400 people. It’s astonishing, really. Rather, it’s that the scope of all the potential opportunities is so massive, wide, and deep—from Internet, to television, to back-end analytics, search, location—that it may take a real partnership to transform these models into real revenue engines.

Who would be interested in Twitter should they continue to remain private and closely-held? Some make the case for companies like Apple, especially after its integration of Twitter into its iOS5 software. A company like Twitter could give cash-rich Apple a huge network to deploy its iAd advertisements on multiple devices, perhaps eventually even on television. Earlier this year, there was some chatter that Facebook may be interested, but they don’t (yet) have enough cash on hand to do this (though Facebook stock could do the trick). There’s always Microsoft, which certainly has cash on hand and an appetite to buy social communication services, recently demonstrated by its $8 billion acquisition of Skype.

This leaves one company, located in Mountain View, that many believe could be the perfect acquirer for Twitter, despite the fact it just launched its own social network, Google+, which is poised to launch brand pages, too. A possible Google-Twitter acquisition has been analyzed to death, so I won’t do that here, other than to say on paper, it makes a ton of sense. Because of all the bountiful seeds Twitter has planted around the world, the company best positioned to harvest those seeds (and turn a healthy buck while doing so) is Google, bar none.

But, as Twitter raises more money at higher valuations, and if an IPO is not likely in the near future, the number of possible outcomes dwindles. While an acquisition by one of the four companies listed above could be huge, both in terms of dollars and media attention, the real game would be to create enough competition among at least two of the four possible bidders to drive up the price and maximize shareholder returns. If Twitter uses the new funding to continue to fortify the product and also continue on a hunt for the best business models, it may give the potential acquirers information that leads them to think they may not be likely to extract profits from Twitter either.

By raising a whopping round, Twitter buys itself time but also elevates the stakes. Does Twitter putter along for the next few years and stumble upon a business model, enabling it to IPO? Does a giant like Apple, Microsoft, Facebook, or Google snatch up the company, or better yet, engage in a chess match with each other for the right to buy it for close to $10b or more, minting money for the company shareholders? Or, does Twitter start to slowly fade away, unable to reel in enough cash to keep the twittering machine humming? With the first option being a longshot, we’re down to two numbers on the roulette wheel. My money and my hope is on black: an acquisition.

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