Twitter Worth $8 Billion--Why Not?

In the shadow of Groupon’s IPO plans, the pubic offering of LinkedIn, and estimated valuations for Facebook that go as high as $100 billion, Twitter raised $400 million under terms that set its value at $7 billion to $8 billion. The number hardly matters. The surge of venture capital firms investments in social network sites has created a highly efficient market system, and probably not unlike the public stock markets.  One of the most astute VCs, Kleiner Perkins Caufield & Byers, put money into an earlier round of Twitter funding.

The values of privately held firms like Twitter may falter, but that is little different from a drop in the shares of Research-In-Motion (NASDAQ: RIMM), or the rise in the share price of Netflix (NASDAQ: NFLX). News and financial data drive values even if those values seem absurd.

Twitter has a case to make for its extraordinary private market capitalization. It has, by some estimates, 200 million users. It claims users send a billion Tweets a week, on average. Twitter’s revenue may reach as much as $250 million this year. That does make its valuation appear high, but venture investors are dazzled by growth. Twitter can also claim it has a nearly infinite amount of advertising inventory. Whether marketers want to use micro-blogging as a platform to sell goods and services has not been determined yet.

The debate about whether Web 2.0 businesses, particularly social network sites, are worth more than some Fortune 500 companies will continue until the stock market values them after IPOs. Alternatively, some of these companies that wish to remain private may go through series after series of investments. Those venture investments are not liquid now. That does not appear to dent VC demand.

The best way to look at value is still to see what people will pay for something. Investors who spend months combing through metrics and earnings should know as much as anyone else. Whoever said that there is a sucker born every minute has not spent much time in the conference rooms of Silicon Valley. If VCs are going to be suckers, at least they do so with open eyes.

Douglas A. McIntyre