Twitter’s IPO and finding the right kind of crazy
By Gabey Goh November 18, 2013
- Twitter’s great IPO aside, yet to hit upon a business model for generating revenue, let alone make a profit
- Unlike the Valley, startups here cannot afford to keep throwing money at business until it’s successful
RECENTLY, I found myself tracking updates on Twitter’s initial public offering via the platform itself (yes, there’s probably a joke or pun somewhere in there) and couldn’t decide if I was amused or mildly concerned over the numbers being tossed about.
With the stock code TWTR, the first day of trading for Silicon Valley’s latest darling was a remarkable one.
The stock priced at US$26 (RM83), shot up as high as US$50.09 and closed the day at US$44.90 a share, notching a 72% first-day gain from the IPO price.
The US$26 price values the company at US$18.34 billion and according to data provider Dealogic, Twitter is now the second-largest Internet IPO by an American company, trailing only Facebook. It’s also the third-largest US IPO this year.
The generous helping of optimism among investors for the future monetary potential of this 140-character social media platform is just plain crazy in my opinion.
Despite playing a pivotal role during events such as the Arab Spring and being an effective de facto emergency communication system for breaking news such as during the Japan tsunami in 2011, there remains a rather large elephant in the room.
Twitter has yet to hit upon a solid business model for generating revenue, at least not enough to match its current valuation, let alone make a single cent of profit.
Admittedly the company does earn a nice sum from selling access to the entire fire-hose of its users’ messages to several companies that resell it or package it with other services.
In the first nine months of this year, it took in US$47.4 million from such licensing, or about 11% of its total revenue for that period.
But to justify its high valuation, it will need to reach out beyond its 218.3 million active users and become truly ‘mainstream’ – and keep in mind that Facebook already has over one billion active users.
As stated in its S-1 stock market filing: “Our success depends on our ability to provide users of our products and services with valuable content, which in turn depends on the content contributed by our users.”
In other words, the platform is nothing without its users.
The real battle begins post-IPO, with the company now tasked with navigating the delicate balancing act of trying to sell advertisers the right to slip commercial messages into peoples’ Twitter streams often enough to make the kind of money that would justify its valuation, but not to the point where it alienates users.
Twitter’s listing and the frenzy of trading it sparked feeds into the grand startup dream that every struggling entrepreneur clings to at night when trying to sleep amidst worries about getting enough money to pay bills and payrolls.
The dream that if your product is loved enough, and has managed to carve out a place of importance in the digital fabric that now so largely defines the world as we know it — that sooner or later the revenue will follow.
For budding founders in our part of the world, I would caution against thinking that one day your own story might develop much like Twitter, whose birth, rise and continued existence is very much an anomaly by any measure.
Unlike Silicon Valley, or other startup hubs in the world, we’re not flush with investment capital looking for a home.
One entrepreneur I spoke to some time back was telling me how he ran his first venture like a Silicon Valley startup to no avail.
“We burned through funds like crazy, just focused on growth, and realised that it wasn’t enough to sustain the business. We’re not overflowing with funding sources here in Malaysia with investors who can just keep throwing money at us until it clicks and everything falls into place,” he said.
Indeed, in Twitter’s case, the company raised several rounds of funding in the millions-of-dollars range before its IPO.
With my friend’s second and current venture, the decision was made to run it like a conventional business.
“We now live by the mantra ‘two dollars in, one dollar out’. Growth isn’t as fast as many would like, but at least we’re more stable and better able to account for ourselves with investors,” he added.
I remember a lament made by investor and entrepreneur Gary Vaynerchuk when I attended a startup event in New York. Vaynerchuk said that all the startups he sees are too preoccupied with pitching their grand idea or vision and can’t articulate how exactly they plan to make money from it to sustain themselves.
I remember thinking that he would enjoy himself in South-East Asia, where limited funding and the need to prove concepts and business models first and foremost have cultivated a very pragmatic community of entrepreneurs.
Jeffery Paine (pic), founding partner at seed fund Golden Gate Ventures, once attempted to answer the question of why there aren’t more crazy, big, game-changing ideas here in South-East Asia.
He noted that fear of failure is probably the main cause. There was also a lack of confidence and a low density of founders who have tried crazy things, failed, and still keep on trying.
“Having said all that, it is extremely difficult to design a product hook with global appeal. I know that, we all know that.
“That is what ultimately differentiates companies. Try not to paint yourself into a corner and stop there. Keep inventing and rounding up troops that believe in your ‘crazy’. And break out,” he said.
Is there a message to today’s column? I suppose despite the reality of the region when it comes to funding, you could consider this a call for entrepreneurs out there to let go of their fears and stretch out to the other end of the spectrum.
We may not operate in a region that is flush with funds, but if your idea is great or just the right kind of crazy, who’s to say those funds won’t find their way to where you are?
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