Is Twitter Worth $7 Billion

@pegobry of Business Insider makes a compelling case as to why Twitter is worth the $7 Billion despite having revenues of only $100 Million. You can read his article here…http://read.bi/ogz14X

For most investors the article smacks of hubris akin to the Tulip Bubble of 1637. In particular the comparison to Google’s revenue in 2001 and today’s valuation seems like a stretch because there just haven’t been many success stories on that order of magnitude. Most people feel that Twitter, Tumblr and Foursquare stand out as examples of investors gone wild – very little if any revenue coupled with massive valuations. Proponents tout ‘The Network Effect’ which justifies their value. You can read the @pegobry past article about the overblown value of the network effect here…http://read.bi/pf039E. That article contains a fascinating infographic by VC Andrew Parker on how Craigslist is being outflanked by an army of niche startups. I know it seems old fashioned but I still value companies based on their revenues and ultimately their profits. Valuing a company based on its ‘network effect’ is reminiscent of the ‘paying for eyeballs’ in the last bubble.

With the soft launch of Google+ this week, even Facebook looks nervous about the fleeting benefits of the network effect. They’ve disabled a Chrome plug-in that was enabling Facebook users to port their friends list to Google+ (although there is still a backdoor through Yahoo). Facebook is also releasing updates seemingly on a daily basis that copies the more compelling features of Google+. (note to Google: you’d better open up the invite list soon before they’ve copied the whole thing). My guess is that Facebook will release video chat this afternoon or soon thereafter. That feature alone could crush Google+ but it’s not the network effect at work – it’s great execution. So does Twitter’s execution justify a $7 Billion valuation? – probably not…at least by traditional metrics. Twitter has created something of value that goes beyond traditional metrics. They’ve built something that Google has been unsuccessfully trying to build for a while – a social media platform that creates a hyper-engaged audience. Google has created something that Twitter has yet to achieve – a real revenue model. Twitter is probably worth $7 Billion to Google today.

Tim O’Loughlin

Eastward Capital Partners

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West Newton, MA 02465

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Eastward Capital Partners – providing $1 – 10 million venture debt, growth capital and equipment financing to venture-backed, emerging growth companies since 1994. We also provide expansion capital to non venture backed companies.