Now that Twitter’s $100 million financing round is official, we officially know that T. Rowe Price and Morgan Stanley are among the new cadre of investors. As one of these is a mutual fund company, more apt to risk its tail in the public than the private market, while the other is an investment bank, more typically given to underwriting and trading than to buying and holding, we have grounds to speculate that the possibility of a Twitter IPO can’t be very far on the horizon.
The notion of a Twitter IPO is most fascinating in the mystery surrounding its valuation. It’s one thing for VCs with an extended hold-period, liquidation preference, and all kinds of structural bells and whistles, to accept $100 million, $300 million, $1,000 million valuations on the basis of pretty much nothing concrete, it’s quite another for mutual fund managers and the like, accustomed to revenue-multiples, EBITDA-multiples, subscriber-multiples, to get comfortable with anything resembling valuation for a company with no revenues, EBITDA, or technically speaking, subscribers. To be sure, there are ways to value assets without revenues or even operations. For example, oil reserves or untapped mining properties are routinely valued by the market without much ado. But such assets at least have a commodity index that can be utilized to price out the economics of some reasonable engineering probability of production. There is no way to price out Twitter’s future revenue streams, because there is no standard advertising rate (CPM, CPC, what have you) that would easily translate to the Twitter product, there is no subscription fee standard that can be used as a comparable benchmark, and any probability of subscription or advertising penetration would be a complete guess.
Maybe if we dig deep into the archives of several bubbles ago, maybe then we can find IPO valuation comps from the days of slapping a dot-com suffix to the kitchen sink and watching the Bloomberg terminal flash and sparkle. But that was a while back, and investors have allegedly learned lessons since.
So how will that Morgan Stanley research analyst make his pitch? How will the Vanguard portfolio manager know the right questions to ask? There will either be a breakthrough in the Twitter business model between now and then, which will make all of the uncertainty diminish, or else there will be a new valuation standard… based on, I don’t know, monthly uniques? If such a public valuation metric can really take hold, the consequences upon the web industry as a whole could be significant.
All sorts of pre-revenue private web platforms would be assessable with relative efficiency, adjusted by some size discount or growth premium to Twitter’s public trading level. Entrepreneurs could prove their value! VC assets could be more truly marked to market! Limited partners would know exactly where they stand!
[Pause to reflect.] Are we sure the industry is mature and evolved enough to withstand daily volatility? These things, you know, also go down.
