Friday, September 25, 2009

Tech Bubble Again? Twitter Worth $1 Billion?

Here we go again, Twitter being valued at $1Billion, they have no revenue to speak of and have never turned a profit. Are the the venture capitalists really that much smarter than we common folk...If we wanted funding we would have to show revenue and profitability!


The New York venture capital firm Insight Venture Partners, and mutual fund company T. Rowe Price could join two existing Twitter backers, Spark Capital and Institutional Venture Partners, in a deal that would value the Internet company at $1 billion, according to sources.

Some suggest Twitter is close to a deal that would zip up a round of financing at roughly $100 million. And while it would give the company more than enough cash to comfortably build out its user base to about a billion, some industry insiders are more fascinated by the valuation than the round of funding.

Venture capitalists believe it's a bit of a guessing game when it comes to establishing a value for a company that has not previously earned revenue. It harkens back to the dot-com era, when executives believed that traffic signaled value. And if there's value, they can find a way to monetize it. With this in mind, some venture capitalists take the leap of faith.

The basis of all valuation is the discounted cash-flow analysis. It has two parts: cash flow for some period of time, and terminal value, explains Jordan Rohan, founder and managing partner at Clearmeadow Partners. "To value a company at more than $1 billion, in the absence of current cash flows, one would have to think you could sell the company for much more than $1 billion someday soon," he says.

VCs don't want to miss a potential opportunity. Industry executives believe few would view venture capitalists investing in Twitter as idiots because of the noise it has managed to generate -- for example, most cable and network TV newscasts and radio shows that reference Twitter during broadcasts. That's not to mention newspapers and magazine articles that include a Twitter feed. It's similar to free advertising.

"If that noise translates into the sound of cha-ching, you want to make sure you've hedged your bet as a venture investor so you don't miss the opportunity," says Michael Kassan, chairman and CEO at Media Link LLC.



by Laurie Sullivan, Yesterday, 6:21 PM




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