Have you heard? Twitter is worth $1 billion. Right now, at least. The Web property du jour has raised more financing – $100 million, reportedly, for a valuation 10 times that amount. Twitter has yet to show any sort of profit and has no monetization path, and yet investors are stampeding to own part of the company. The flurry of activity has some wondering if we’re headed toward another tech bubble, centered on social media and cloud services.
“I honestly don’t think so.”
That’s the word from Mark Heesen, president of the National Venture Capital Association (NVCA), which, in part, tracks private investment activity in the United States.
“Twitter is a company that stands by itself,” Heesen explained. “We don’t see a huge amount of money going into the communications space as a whole. There’s more excitement and money going into life sciences and clean tech.”
The latest stats from PricewaterhouseCoopers and Thomson Reuters, compiled for the NVCA, confirm that assertion. In 2009’s second quarter, a mere 25 venture capital firms raised $1.7 billion. Never mind that the amount represents the smallest total of venture funds raised in one quarter since 1996 – none of the cash in the top 10 transactions went directly to the communications field.
Telecom Lagging In Investment
“There are always a few folks who look specifically at funding communications ... but I don’t know of a ‘hot sector’ in the communications arena right now,” Heesen said.
That sets Twitter apart as a standalone success story in the industry, for a couple of key reasons. First, the telecom and Internet businesses are still suffering a hangover from the tech bust. The pain is easing; despite that, investors remain reticent about pouring money into communications deals, Heesen said. Second, those transactions are expensive. And few people feel like risking their liquidity in this economic environment.
Nonetheless, that $1 billion estimate makes communications look like it’s on the verge of a bubble. Ed Vilandrie, director of tech consultancy Altman Vilandrie & Co., cautioned the potential is there if people overinflate Web values compared to long-established counterparts.
For example, would the market size for data storage multiply by a factor of 10 or 20 once a physical archive service goes digital? Quite possibly. But what investors often fail to acknowledge is that companies budget once for storage, whether physical or virtual. It’s all the same chunk of dough. Thus, the economics for the storage market don’t change. Sure, more records may go online, but businesses actually are not spending more on storage overall.
That’s why, if investors “don’t get back to basics” by using tried-and-true valuation methods, Vilandrie, said, inflated expectations threaten to create another bubble.
“So if you think Twitter is going to take off 10 times the size of a traditional mechanism, you could run into problems,” said Vilandrie.
