If rumors should persist about the new Twitter equity round, this will be the third equity round for the 4-year old company in less than two years. Aggregate capital taken in will have been about $100 million in these transactions, at ever increasing valuations said now to be approaching $1 billion. This for a company that truly began to hit its stride in the past year. In a sector that evolves as rapidly as does interactive media, in which new services and applications emerge and sometimes fall annually, Twitter is already a bastion, a cornerstone, and thus a case study of investment style and structure… not in the sense of terms and conditions, but in the sense of magnitude and speed, notably low and fast, respectively.
Now, granted, $100 million in less than two years is not insubstantial. But in an environment in which the same sum could fund, say, a small part of a small broadcaster’s debt facility, $100 million (spread out over several years no less) is close to nothing. Consider this especially in the context of Twitter’s more than 50 million users by one recent count.
It is precisely this low capital intensity that allows the sector to evolve as rapidly as it has, making it possible for new entrants to succeed with limited entry obstacles. And for this selfsame reason, it is important to act fast once there. Invest small, invest fast, execute fast, expand fast, and exit fast, because in one more year or two, you could become MySpace.
That Twitter’s investors are not actually exiting at this time is really just a technicality. Capital is being raised (if rumors are true) at a valuation that is enormously accretive, and cash is thus being taken in at almost no cost. For current investors, this is an indirect liquidity event, increasing the probability of an eventual (and hugely) profitable exit, while allowing them to mark up the value of the position. (Note to LPs: “You’re welcome.”)
In the era of low entry barriers and rapid change, this would seem to be the optimal investment recipe: Seek out the low capital intensity projects, and try to exit quickly. The upcoming Twitter cash infusion, as small as (in relative terms) it appears to be, was probably not essential, or at least not urgent; the speed of the transaction was paramount.
