Twitter’s impending IPO has investors salivating. The company boasts as many as 400 million registered users and advertising revenue that should be close to the $1 billion mark by the end of next year. The company's IPO is expected to bring in as much as $15-$20 billion dollars.
Despite the impressive figures, Twitter hasn’t yet turned a profit. In fact, the company has racked up a reported $69 million dollars in losses in the first half of 2013 alone.
Given that fact, is buying Twitter a smart move for investors? Almost definitely.
Startups based on business models designed to globally scale are nothing new in Silicon Valley; every new entrepreneur wants to change the world. Changing the world, however, takes a lot of money on the front end, and that’s where venture capital comes in.
Venture capital backing (the money a company receives in early rounds of investing) allows a startup to focus on executing their vision without worrying as much about cost constraints or turning a profit for several years. Twitter itself has raised over a billion dollars in venture capital funding and is less than five years old, so it’s well within the norm for moving its books from red to black. The company has also been on an acquisitions binge, making its books a little more red than they otherwise would have been.
Twitter’s business model is very similar to Facebook’s. The company has created a hugely popular space on the internet and offers marketers the chance to connect with consumers and target specific groups of users based on interest or demographics.
But this wasn’t the business approach that Twitter had at the outset. In fact, Twitter had no clear business model at first.
Twitter followed the typical Silicon Valley strategy of not actually having a business strategy. Instead of worrying about business models, they worried about their product. The thinking is, if you build it — and it’s really cool — the users will come; after you attract the users you can figure out how to monetize your product, but everything hinges on building something people want to use.
Whether investors decide to throw their lot in with Twitter will depend on whether they are convinced of two things: First, that Twitter can continue to grow its user base at a rapid rate, and second, that it can accomplish the same with revenues. The two goals go hand-in-hand, but it’s important to remember they aren’t necessarily the same thing. So far, it looks like investors are biting, but we’ll see for sure on IPO day.