Is Twitter Worth a $1 Billion? Can They Generate $300M in Revenue in 5 Years?

From Sep 25th 2009

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Is Twitter Worth a $1 Billion? Can They Generate $300M in Revenue in 5 Years?

Topics : Finance · Start Ups · Internet · Venture Capital · Sep 25, 2009 | 1 Comments

TechCrunch first reported about Twitter closing in on funding at a billion dollar valuation. Wall Street Journal confirmed the news that it was indeed raising $100M at a billion dollar valuation.

As is normally the case, whenever a big deal happens about an Internet Startup (see Facebook, LinkedIn, YouTube etc…), there is a huge outcry about bubble, valuations, hot air etc…

For example, one of my favorite companies, whose book really laid the foundation of my philosphy for operating an internet service, released a mock press release making fun of billion dollar valuations. While 37 Signals has been talking about real solid operating cash flow businesses for sometime, the timing of the blog post made people think it was in response to Twitter’s funding.

Anyways, enough of the background, now for the crux of the matter. Can Twitter be worth a Billion Dollars? Is it really that impossible?

My reasoning:

  1. The spreadsheets of T Rowe Price of Insight Venture Partners, will primarily be focused on checking if Twitter could be worth about $3 Billion in 5 Years. This implies a 3x return in 5 years which is a pretty damn good for a mutual fund/PE Fund. Thats a solid 25% Return.
  2. Assuming, a 20x operating cash flow multiple (since it will still be a high growth company), for Twitter to be worth $3B in 5 Years, they have to generate an operating cash flow of about $150M in 5 years
  3. Operating cash flow margins for a decently run stable operating internet business would be in the range of 50%
  4. To get a $150M in operating cash flows with 50% margins, they need $300M in revenues

So the key question, that Rowe Price & Insight Venture Partners would have tried to answer is:

Can Twitter do $300M revenue in 5 years?

I couldn’t say for sure but its definetely not out of the realm of possibility or atleast not so impossible to elict such a loud scoff from most people.

I have attached one potential scenario from ONE revenue stream (does not include passed links and other advertising related opportunities) of giving enterprises and power users more features to manage thier brands. Something like Postling which is already generating some small amount of revenue.

This took me less than 30 minutes to whip up so treat the number and analysis for the time I put in. All I am trying to point out is that the $300M in revenue in 5 years is not impossible and from a late stage VC or early stage alternative investment fund, it seems like a reasonable bet to make.

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