The emergence of Twitter was an "accident"
In 2004, former Google employee Evan Williams invested in and took over the video-sharing company Odeo, inviting his friend, another ex-Google employee Biz Stone, to join him.
Tragically, not long after Odeo launched, Apple released iTunes, which provided similar services, almost leading to Odeo's downfall. Under pressure, Williams had no choice but to hold a "brainstorming session" internally, eventually adopting the idea from then-Odeo employee Jack Dorsey: "use SMS to tell people in your social circle what you're doing." In February 2006, they launched Twttr (the precursor to Twitter), allowing users to post their messages online via text message.
By September 2006, just two months after its official launch, Twitter had only accumulated 5,000 users and frequently crashed—showing no signs of becoming a "star." At this point, the shareholders of Odeo were already restless, forcing Williams to spend $5 million to repurchase Odeo's shares. However, Williams himself did not have high hopes for Twitter; he only hoped to transform the company into a startup incubator and continue working on projects he liked.
Strange Twitter CEOs
Williams is the founder of the famous blog site blogger.com. Strangely, he didn't value Twitter highly, which led many investors at the time to miss out on opportunities. When Williams announced to the shareholders that the company would transition to focus on Twitter, he appeared "completely unconfident." In the end, all Odeo shareholders chose to sell their shares back to Williams. Today, these former Odeo shareholders call Williams a "manipulative man"—in eight years, Twitter grew from $5 million to $1 billion, and Williams let them miss out on a 200x cash-out opportunity. Additionally, after launching the Twitter project, Williams directly fired Noah Glass, one of the co-founders of Odeo and one of the original designers of Twitter.
Twitter's father Jack Dorsey is not only an engineer but also a certified masseur, studying at a sewing vocational school. If Twitter didn’t take off, he planned to make jeans. Fortunately, Twitter exploded in popularity in the following days. In 2007, during its first round of financing, Twitter split from Odeo, and Dorsey became the CEO. At the time, Twitter was valued at $20 million, and Fred Wilson, a partner at Union Square Ventures and one of the most famous angel investors in the U.S., made the first investment in Twitter, holding more than 5% of its shares.
In March 2008, Twitter's registered users reached 1.3 million, and Williams began taking over Twitter. From 2008 to 2010, Williams served as Twitter's CEO, which was also the fastest-growing phase for Twitter users. In October 2010, Dick Costolo, then Twitter's operations director, replaced Williams as CEO—he had previously been a comedian. In 2011, Williams left Twitter.
Among the three Twitter CEOs, Williams holds 12% of the shares, Dorsey holds 4.9%, and Costolo holds 1.6%. The relationship between Williams and Dorsey is very tense, and Costolo once said in 2012, "Being a CEO is a psychological injury, you have to mediate a lot of things."
Image: From left to right, the three founders of Twitter - Evan Williams, Biz Stone, Jack Dorsey
Basic information and share structure
In 2008, Twitter rejected Facebook's acquisition offer of $500 million. After seven years of development, on October 3, 2013, Twitter officially submitted its prospectus (S-1) to the U.S. Securities and Exchange Commission (SEC) to apply for an IPO, valuing it at $10 billion and planning to raise $1 billion. In the prospectus, Twitter claims to have 218 million monthly active users, with about 5% being zombie accounts, over 100 million daily active users, and an average of over 500 million tweets per day.
The most serious problem Twitter faces now is its inability to break even. Before its public IPO plan, Twitter had already raised $1.16 billion in funding but still has an accumulated deficit of $418.6 million. Such heavy spending is embarrassing, and reportedly, before going public, Twitter was seeking loans to make its financial statements look better. Currently, they are negotiating with JPMorgan Chase and Morgan Stanley, possibly securing a loan of $500 million to $1 billion.
Below are the key points extracted from Twitter's prospectus regarding basic information:
Apart from the total of 18.5% of shares held by the three founders, institutional shareholder Benchmark and its partner and board member Peter Fenton own 6.7% of the shares. Other institutional shareholders owning 5% or more shares include Rizvi Traverse, Spark Capital, Union Square Ventures, and DST, with Rizvi Traverse reportedly holding as much as 15% of the shares.
Below are the basic shareholder details from Twitter's prospectus:
Revenue
Like all social networks facing challenges when going public, everyone questions how Twitter makes money, but currently, Twitter's main business is still advertising. Twitter started selling ads in 2010, and by the first half of that year, its ad business contributed approximately 87% of its revenue, and this revenue structure hasn't changed much since.
Twitter undoubtedly faces two major challenges: 1. Mobile Internet; 2. Diversification of revenue. Given that 75% of Twitter's monthly active users are mobile users, Twitter has secured its place in the mobile internet market, but its revenue generation remains a challenge. Last year, Twitter's revenue was around $316 million, and its current valuation exceeds $10 billion. Based on this calculation, Twitter's P/E ratio is over 30 times, significantly higher than Facebook's 26 times before its IPO last year. However, Facebook, with better revenue and cash flow last year, saw its stock price plummet after its IPO, but now Facebook has successfully lifted its stock price to $50 through its success in mobile, its 1 billion users, and steady revenue growth, which is 150% higher than its lowest point.
Twitter's situation doesn't look as optimistic. Their liabilities and revenue conditions make it difficult for them to gain favor in the capital market where enthusiasm for social networks has waned, unless they prove themselves like Facebook and don't just simply showcase "I have great potential."
Key Points
The key for Twitter lies in whether it can diversify its revenue streams and increase its mobile revenue, which is why Twitter had to acquire mobile ad company MoPub for a year's worth of revenue ($350 million) shortly before its IPO, in order to demonstrate its future revenue potential in mobile to investors.
Regarding revenue potential exploration, SunTrust Robinson Humphrey, a U.S. investment bank, published a research report stating that Twitter has three significant revenue-generating businesses to explore:
1. Video distribution
One of Twitter's biggest opportunities is to use its video content promotion tool Amplify to capture a share of the $200 billion global TV market. Amplify allows broadcasters to publish video clips and ads via Twitter, synchronized with programs airing on television.
2. Search keywords
The keyword targeting feature that Twitter launched in May could also boost the company's revenue. Twitter could use its search function to introduce a product similar to Google and Baidu’s AdWords bidding system.
3. E-commerce
This is the path Weibo is taking—embedding e-commerce into Twitter.
4. Mobile app distribution channel
Twitter disclosed in its IPO filing that three-quarters of its monthly active users are mobile users.
Twitter still faces many challenges to rise. First, the over $400 million debt will put enormous pressure on its income in the coming years. Twitter has 200 million users, the same as LinkedIn, which recently went public with a market value of $24.8 billion, but Twitter has not shown greater social value than LinkedIn. Compared to Facebook's 1 billion users, over 800 million active mobile users, stable revenue, and holding $1.5 billion in cash before going public, Twitter appears somewhat impoverished. Twitter is still a company burdened with debt and searching for revenue, and unlike Facebook having Zuckerberg and LinkedIn having Hoffman, Twitter lacks an absolute leader in both spirit and equity control, which is not good for a tech company that needs to quickly advance its business.
Facebook is not Renren, and Twitter may not necessarily be better than Weibo. Do not observe the global internet with our "local network" perspective. Twitter's rise will have to wait until it truly finds a strong revenue support. In short, this is not easy.