TwitterNot long ago, John Doerr -- a Kleiner Perkins partner and the so-called Michael Jordan of venture capital -- was interviewed at a tech conference and asked about his firm's choice to pass on an early investment in Twitter. Doerr's forthright assessment: "We were wrong."

At another point in that interview, when Doerr was asked if the Web industry was in a bubble, he said he prefers to think of bubbles as booms and that in general "booms are good." String both of those comments together and you have a quick explanation of why Kleiner Perkins led a $200 million venture investment in Twitter this week -- and in doing so, drove the startup's valuation to $3.7 billion.

But now that the deal is done, one has to ask: In making this late-stage, premium-padded investment in Twitter, was Doerr wrong again?

Price-to-Sales Ratio Is Stratospheric


In the new world of social media, Twitter is the name most frequently mentioned after Facebook. It has proven to be a powerful branding tool for everyone from big celebrities to obscure freelancers. As a publishing platform, it has produced breaking news faster than traditional outlets. For social causes, it has helped raise awareness about and money for those in need.

What it doesn't do, somewhat famously, is make much money -- certainly not enough to justify such a high valuation for a five-year-old company that doesn't have a viable business plan yet. Twitter doesn't disclose revenue, but the company said last year it expected to make $4.4 million in revenue in 2009. Using old-fashioned fundamental analysis, that's a historical price-to-sales ratio of 840, which is the kind of valuation you only see in bubble. (Sorry, I meant "boom.")

To be fair, Twitter got a late start in the revenue game, opting instead to first cultivate a loyal base of users -- roughly 200 million at this point -- before experimenting with how to monetize all those micro-musings. In addition, social media is still a nascent industry, with no hard-and-fast rules for making money. And Twitter projected that its revenue would soar in 2010 to $140 million (although recent independent estimates put the figure below $100 million).

Now In Different Two Different Leagues

But Facebook was founded only two years before Twitter, and it's way ahead on revenue growth. Facebook's revenue is expected to grow to $2 billion this year from $700 million last year. Based on private stock sales on secondary exchanges, Facebook is worth $52 billion, which would put its price-to-sales ratio at a still-ethereal 26, much lower than Twitter's, but significantly higher than the 8.7 ratio of publicly traded search giant Google (GOOG).

This week, Twitter also launched a series of features intended to help businesses use the service as a marketing tool, including self-serve ads and how-to tutorials. The company is using strategies that Facebook devised to make social-networking ads pay.

But at the same time, its efforts underscore how Facebook and Twitter have moved into different leagues this year. Facebook is more actively searched than Twitter, according to Google Trends. In fact, it's not even close. More important, Twitter not only lags behind Facebook in the number of unique visitors in the U.S. -- the market where it's more likely to monetize its service first -- its growth in that metric is slowing down, according to ComScore.

So even before Twitter has solved one major problem -- how to profit from its growing audience -- it may have to confront another -- how to keep its current users active while luring new people to the service. Some growth is likely to come from overseas markets like Indonesia, Brazil and Venezuela, but many expect its user base in emerging economies will be harder to monetize.

How Integral Is Twitter to Users?

If it can get past those obstacles, Twitter will have an easier time seizing its opportunity to weave its way into users' daily lives the way Facebook has for many of its half a billion users. But therein lies another challenge for Twitter: Its users are older on average than those on Facebook. Many Facebook users consider that site an integral part of their everyday lives, whereas older Web users tend to regard social networking sites more as afterthoughts.

In the end, the best defense of Twitter's $3.7 billion valuation is that it has a Plan B: Sell itself to an aging tech giant desperate for a social media star that can deliver hundreds of millions of active accounts overnight -- say, Google, Microsoft (MSFT) or Yahoo (YHOO). Remember that Google was willing to pay up to $6 billion for Groupon and reportedly offered as much as $4 billion for Twitter, so it's not hard to imagine Twitter holding out for a year to fetch a $6 billion price, which would double Kleiner's investment.
That might make Twitter a worthwhile investment for Kleiner Perkins, but it's not the spectacular slam dunk John Doerr would have made in his prime. What would Michael Jordan say?


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17 Comments

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Barack Obama

You want to know why the United States is broke from top to bottom? Because the United States puts such a high value on nonsense like Twitter and Facebook. We have nothing else to value anyhow, so they buzz about this. No buzz about schools or factories producing anything. We just buzz about nonsense and what the government owes us. The government produces nothing of value and has nothing of value. Its bad, people. Real bad.

December 18 2010 at 6:09 PM Report abuse rate up rate down Reply
jdwlor

I'm really lost, I do not use eather, Twitter or Face Book,whats the defference.

December 18 2010 at 12:11 PM Report abuse rate up rate down Reply
TomHornbuckleJr

PPPPffffttttt!!!

December 18 2010 at 10:50 AM Report abuse rate up rate down Reply
kluj1

here is how i look at it...if twitter and facebook closed tomorrow...for good....would i miss them at all and would it make one spec of a difference in my life...the answer...NO!

December 18 2010 at 9:23 AM Report abuse +1 rate up rate down Reply
itssmeeroger

Twitter is a FAD..but it's ALSO the true freedom of the Internet in action..where any fool can post his thoughts(!) to anyone who cares to listen..unfortunatly,most peoples lives are boring..even to most of their family or friends..so I predict when the new wears off..it will become passe'..and no one will EVER figure out a way to make it profitable..the surest death knell of any popular media...!

December 18 2010 at 4:31 AM Report abuse rate up rate down Reply
joejoeshmoe2

twitter is a bubble.

simple as that.

$4 frickin billion ??

it's just a damned message board for those with ADD. No message board is worth a fraction of that much.

if you had $4 billion to invest in twitter, how would you get it all back?
Even more importantly, WHEN would you get it all back? in 500 years?
Someone is gonna lose $$$$$$ big time.

December 18 2010 at 12:15 AM Report abuse rate up rate down Reply
lstnvlly

Another WSPS.
Wall Street Ponzi Scheme.
A business that does not manufacture anything, does not sell anything and whose sole purpose relys solely on those posting. Twittering!
Twittering - some people are really bird brains and too much time on their hands.

December 17 2010 at 11:34 PM Report abuse rate up rate down Reply
brandonelgato

I am a former heavy user of Twitter. It's completely gone downhill. Research has shown that about 80% of their big "user base" are abandoned accounts. People try it for 3 days and never come back, but Twitter continues to claim them as part of their allegedly growing user base. Of the remaining 20%, I would say at least 1/4 are spammers. The reality is, Twitter has about 15 million real users that use the platform, and even a large percentage of those are "real people" who are really pushing their small business. At $3.7 billion they're valuing Twitter at about $246 per REAL user. Do you really think a Twitter user is worth $246?

December 17 2010 at 11:32 PM Report abuse rate up rate down Reply
sjpxmas

WHO CARES, JUST HOW MANY PEOPLE COULD EVEN SAY 6 BILLION DOLLARS, NO ONE COULD BUY THE COMPANY, ITS JUST JUNK, TO THE COMMON FOLK, ITS LIKE TRYING TO SELL A ROLLS ROYCE TO THE COMMON PEOPLE, ITS JUST A JUNK CAR TO THEM, USELESS, PIECE OF JUNK. WORTHLESS.

December 17 2010 at 7:58 PM Report abuse +1 rate up rate down Reply
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December 17 2010 at 3:51 PM Report abuse -1 rate up rate down Reply