Analyst Market Perspective - Ronald Gruia, Frost & Sulliva
Next Up Twitter Report
1. RESEARCH REPORT
Created: 3-19-10
Authored by: NeXt Up!
This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon Valley Partners under the Next Up
Research brand ("Next Up Research"), and any opinions contained herein are solely the opinions of Next Up Research.
Information contained herein, including but not limited to research, valuations, calculations, estimates and any other material or
sources, is believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past performance
is not indicative of future results. These materials are provided for informational purposes only and should not be used or
construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost, Inc. is not acting as nor is it registered as
an investment adviser.
2. Investment Highlights
In less than three years Twitter has built up a critical mass
Social of over 90M users and assumed a central role in the
instantaneous message dissemination segment – the
potential of which may not be fully realized for several
Networking: years.
Unlike many social networking sites, which require a user
Twitter to have a PC or an advanced phone, Twitter is accessible
to virtually anyone with a mobile phone – an audience that
runs into billions but also available even when it is on the
move.
The opt-in feature for messages should allow businesses
Short and Tweet to send targeted messages to users at a cost that is at a
fraction of the alternative methods, including direct email
and telemarketing. Additionally, Twitter can monetize the
ecosystem of hundreds of applications.
NeXt Up!
www.nextupresearch.com Leveraging the infrastructure of wireless carriers, the
company has grown to over 90 million users with about
March 19, 2010 150 employees and minimal capital expenditure,
underscoring Twitter‘s ability to scale with low overheads.
We used the following methods – a) Target EV based on
steady state revenues, normalized net margins, and a growth multiple, b) Multiple of EV/Revenue for
comparable companies, and c) Recent M&A transaction analysis to arrive at an enterprise valuation of
$751 - $656 million, an estimated price per share of $8.80 - $10.07.
Investment Concerns
The company‗s revenue model has yet to be tested. We believe that most revenue generation options
available to the company have the potential to alienate at least some of cult-like Twitter‗s user base. The
company‘s last funding round of $98M for preferred shares places the valuation well above that suggested
by our methodology based on estimated revenues and profitability.
In addition, the profitability levels may be adversely impacted by the charges mobile carriers may impose
on Twitter or the users. If history is any guide, there is no certainty that the wireless operators, notorious
for snatching defeat from the jaws of victory, will not be an impediment.
Several social networking sites such as Facebook and MySpace have a larger user base and offer a one-
stop service as they have added mobile alert feature for status updates.
This report has been downloaded from SharesPost, Inc., but was prepared by NeXt Up Research, and any opinions contained herein are solely
the opinions of NeXt Up Research. Information contained herein, including but not limited to research, valuations, calculations, estimates and
any other material or sources, is believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past
performance is not indicative of future results. These materials are provided for informational purposes only and should not be used or
construed as an offer to sell or a solicitation of an offer to buy any security. SharesPost, Inc. is not acting as nor is it registered as an
investment adviser.
This report issued subject to important legal disclaimers contained on last page of report.
3. INVESTMENT THESIS
Investment Highlights
Unlike many social networking sites which require a user to have a PC or an advanced phone, Twitter is
accessible to billions of users—even those with a low-end mobile phone. Such a customer base is not
only over twice as large but also accessible even when it is on the move (Exhibit 1) or in remote places.
With a critical mass of over 90 million users (in our estimate), we believe Twitter has a large lead on any
potential direct competitor.
Exhibit 1: World Internet users and Mobile Subscribers
Internet Users 25%
Mobile Subscribers 64%
World Population
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
Millions
Source: Internet World Stats; Global mobile Suppliers Association; US Census Bureau
We estimate that Twitter‘s opt-in feature allows for one of the most cost effective approaches for direct
marketers. The cost of an effective message through Twitter, in our estimate, is likely to be (depending on
how Twitter chooses to price it) less than $0.50, far lower than other approaches such as telemarketing or
direct mail, which can cost an order of magnitude more (Exhibit 21).
For instance, Dell has indicated that it generated $6.5M in revenues from June 2007 to Dec 2009, of
which $3.5M were in the last six months. The followers of Dell (who have opted in to receive messages)
soared from 11k in December 2008 to 1.5 million in December 2009. We believe there are hundreds of
businesses which have the potential to generate over $1M in revenues, allowing Twitter to claim a share
for referral.
While many in our Internet Media index invest heavily in servers and employees, Twitters stands apart by
having low over heads. The company has grown to accommodate over 90 million users with about 150
employees and minimal capital expenditure. Twitter has done this primarily by leveraging the
infrastructure of wireless carriers through bulk SMS agreements.
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4. The fact that only a small fraction of its users actively use the medium is not a negative, in our view. The
large number of passive receivers (who have opted-in) offers Twitter a cost effective target for marketing
and messaging.
Investment Concerns
The company‘s revenue model has yet to be tested. We believe that most revenue generation options
available to the company have the potential to alienate at least some of Twitter‘s user base. Twitter may
not have adequate time to revise its models before it loses its critical mass and reputation.
Our estimated valuation of $656M - $751M is below the last preferred funding round at a $1.1B valuation.
However, we note that the preferred shares benefit from liquidation preference that limits the downside.
We expect common share valuation to be driven by the company‗s revenue growth and profitability
potential over the next 3 – 5 years.
In addition, the profitability levels may be adversely impacted by the charges mobile carriers may impose
on Twitter or the users. Twitter does not charge users for its services but in most nations (especially the
US), carriers charge several cents per SMS for users without a data plan. A simple arrangement would be
for Twitter to bear the cost of promotional messages (and pass along the costs to the business that uses
them). However, the wireless operators (notorious for snatching defeat from the jaws of victory), may
prove uncooperative.
Several social networking sites such as Facebook and MySpace have a larger user base and offer a one-
stop service as they have added mobile alert feature for status updates or news feeds. Such features
directly compete with Twitter. For more than half of the users who user PCs as a medium for viewing their
tweets, Facebook already offers a more feature rich ambience compared to the text-only Twitter.
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5. MARKET OVERVIEW
Microblogging is a Convergence of News, Social Networking and Blogging
In micro-blogging, a user sends a concise text or multi-media message and publishes it on the web so
that a specific user group or an individual (based on the permissions) can view it. While blogging has
more to do with commentary on an event or description of an event at length, micro-blogging is typically
smaller in length i.e. a single sentence or an image.
Popular messaging methods such as text messaging (SMS), instant messaging (IM) and e-mail are used
primarily for one-to-one or one-to-few (groups with a handful of members) communications. Micro
blogging can be used to reach an individual, or group of people or an entire community of thousands of
users (who have opted-in) on the Internet. The short nature of messages allows for more interactive
communication unlike regular blogs, which are lengthier and take time to compose, read and respond to.
Exhibit 2: Micro-blogging Ecosystem
Content: ~<160 Char.; Twitter‘s How to Access?: SMS, Internet,
Easy to Compose Usage>95% Mobile Web & Apps
Twitter
Identi.ca
Plurk
Micro-
blogging
~ < 1 Min (Composing Tweet) ~ < 30 Sec
Information Can Flow Both Ways (Networking Use)
Source: NeXt Up Research
*Note: Ovals and Company Names are for Illustration Purpose Only. Their Size Does Not Represent the
Size of the Firm Mentioned
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6. Unlike blogs, micro-blogs allows for quick dissemination of concise information from sender to receiver.
The messages can be viewed on a mobile device (even without internet connectivity).
In 1992, Tim Berners-Lee created the first ―What‘s New‖ page, followed soon by Marc Andreessen, who
created his own view of a blog. These web pages were known as filter logs and were intended to update
users about new web pages that were being added on to the internet, along with hot links. But the
number of creators of such web pages was limited. Most internet users rarely tracked more than a
handful of web pages.
Other programmers created hand-coded pages with their recommendations on surfing the internet. Some
of the notables include those such as Justin Hall, who started his filter log in 1994. By the end of 1990‘s
these link-driven filter log sites became very popular, with millions of users. But most of weblogs had to be
personally created or coded (using HTML) by the user himself and there were no customized or easy- to-
use tools to create a web log.
In 1999, websites such as Blogger and Pitas began to offer a simpler way to create a weblog allowing
non-programmers to become bloggers. These hosted services allowed any person to easily sign up,
create a blog, and write numerous postings, all without having to know HTML. Since then millions of
weblogs have been created. These blogs evolved into personal diaries and journals, while still displaying
information about other similar sites on the internet. Many journal-blogs still include a list of other sites of
interest known as the blogroll.
Other blog software programs and services include LiveJournal, Movable Type, TypePad, TextPattern,
Radio Userland and pMachine. Such applications often included many powerful publishing tools, and are
called content management systems.
Most blogs share a common format allowing readers to quickly skim a blog. The listed features of blog
include Date header, Title, Time stamp, Post, Author nickname, Category and Comments.
Exhibit 3: Snapshot of Blog Features
Source: Blogging 101, Next Up Research
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7. Exhibit 4: Evolution of Micro-blogging Services
Pyra launches Blogger for
mainstream internet users Aug-99
Facebook launches Status Updates
Mar-06
Jaiku micro-blogging service Twitter-First major micro blogging
launched Jul-06 service launched
Jan-07 Twitterrific and Twitteroo-Twitter
Twitterfox client service
launched Apr-07 client services launched
MySpace launches Status Jul-07
Update Twitter app on iPhone launched
Seesmic launches its services Google acquires Jaiku
Oct-07
Twhirl launches service for
Nov-07 several micro blogging sites
LinkedIn launches Status Updates
Ping.fm client service launched Feb-08
Mar-08
Seesmic buys Twhirl
System Architect Blaine Cook
leaves Twitter Apr-08
Indenti.ca launches open-source
Twitter acquires "Summize" Jul-08 micro-blogging services
Mumbai Terrorist attack coverage
Twitter acquires "Values of n" Nov-08 on Twitter
Oprah joins Twitter
Iran election Apr-09
coverage on Twitter Jun-09
Partnerships With Google &
Oct-09 Microsoft
Twitter Hits 10 billion Tweets Mar-10
Source: MIT Technology Review and NeXt Up Research
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8. Twitter, launched in July 2006, took blogging to the next evolutionary stage by extending the access to
mobile phone users. In contrast, the microblogging feature of Jaiku (acquired by Google in 2007) still
required an internet connection for retrieving information.
Both services allowed the users to provide frequent and immediate status updates to their friends. In
January 2009, Google stopped the development of Jaiku – a site that languished while Twitter‘s user
base soared to over 90 million (in our estimate).
Exhibit 5: Estimated Growth in the Twitter Users
100
Number in
Iran Election
Millions
90 Coverage on Twitter
June '09
80 Oprah Joins Twitter
on April '09
70
60 US Airways 1549 Twitter Available in
Lands in the Hudson Spanish, French, Italian
50 & German (Nov-Dec '09)
40
30 Post
Election
20
10
0
Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09
Source: ComScore and NeXt Up Research Estimates
We believe micro-blogging is still in its early stages of evolution with its full potential yet to be realized.
Even the largest microblogging service, Twitter, is barely four years old. In particular, events such as
2008 Presidential Elections and a few events in 2009 have served as key inflection points for growth in
Twitter usage (Exhibit 5).
Twitter allows incoming and outgoing messages only in a few regions such as the US, UK, Ireland,
Canada, Australia, India, Indonesia, and New Zealand. Twitter users in Brazil do not have the ability to
use SMS for tweeting. In Germany, users can only send tweets over their phones but will have to use the
web to view the tweets.
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9. Exhibit 6: Distribution of Users by Country
Others
21.5%
Australia
USA
2.4%
50.9%
Indonesia
2.4%
Germany
2.5%
Canada
4.4%
UK
7.2%
Brazil
8.8%
Source: Sysomos and NeXt Up Research Estimates
Exhibit 7: Distribution of Users by Age
Age: 24 and
Under, 18%
Age: 45+,
35%
Age: 25-34,
19%
Age: 35-44,
28%
Source: Google Ad Planner
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10. We believe a key factor behind Twitter‘s success has been its early offering of an application
programming interface (API) to third-party developers. This has led to dozens of applications that allow
users to access the Twitter service and to post content, either through a mobile device or a desktop client
(Appendix C). Examples of such applications include Twirl, Twitterrific and PocketTweet (Exhibit 8).
Such third-party packages can provide offline capabilities as well as features that enhance Twitter's online
offering.
We estimate that only about 32% of the total tweets are published via the Twitter.com website. Internet
analytics researchers such as comScore, which tracks only visitors to the website, may significantly
underestimate the overall Twitter users.
Approximately 68% of the user base uses Twitter at least once a month and approximately 42% uses it at
least once a week. Also we believe Twitter is used by the general user more for receiving information
(favorable to businesses sending out messages) than for contributing information as 68% of users login at
least once a month into Twitter but only 17% of users actually tweet (Exhibit 10).
Exhibit 8: Common Methods of Sending Tweets
Twitterf eed,
TweetDeck, 11% 8%
Tweetie,
6%
HootSuite, 4%
Seesmic, 3%
Echof on, 3%
Web, 32%
Other Apps, 34%
Source: Twitstat, Sysomos and Next Up Research Estimates
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11. Exhibit 9: How frequently do users login
Every day
26%
Less Frequently
than Once a
Month
32%
Every 1 - 2 Days
6%
Once a Week
10%
Once a Month
26%
Source: Sysomos and NeXt Up Research Estimates
Exhibit 10: Users Consume more than they Tweet
% of Users Login
70%
Tweet
60%
50%
Ony Read
Tweets
40%
30%
20% Ony Read
Tweets
10%
0%
Once a Day Once a Month
Source: Sysomos, RJMetrics and NeXt Up Research Estimates
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12. Exhibit 11 shows a list of businesses that have a large following on Twitter. We believe the use of Twitter
by major news networks is an endorsement of Twitter‘s ability to disseminate information in real time.
Many airlines such as Jet Blue have started offering tweet alerts on flight schedules.
Even businesses where there is no compelling need for immediacy of information have benefitted from
Twitter usage thanks to Twitter‘s opt-in feature. Companies such as Dell, JetBlue, Starbucks, IBM and
Intel along with start-ups like Yield Software have utilized Twitter to inform potential customers about new
products and offer promotions.
About 36% of the businesses that use Twitter send at least one tweet a day (Exhibit 12)
Exhibit 11: List of Top Companies Followed on Twitter
Company User Name Followers Usage
CNN Breaking News @cnnbrk 2,952,483 Breaking news alerts; Topic specific news
NY Times @nytimes 2,367,100 Breaking news alerts; Topic specific news
TheOnion @TheOnion 2,191,249 Breaking news alerts
Google @@google 2,158,316 Product Announcements
E! Online @eonline 2,053,913 Featured stories
TIME.com @TIME 2,029,131 Breaking news alerts
People Magazine @peoplemag 1,942,394 Celebrity news and user engagement
National Public Radio @nprpolitics 1,832,831 Political coverage from NPR News
Whole Foods Market @wholefoods 1,754,556 Customer care and user engagement
Information about BBC's technology TV
BBC Click @BBCClick 1,749,243
show
Source: Twitter and Next Up Research; Followers as on March 11, 2010
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13. Exhibit 12: Businesses are More Aggressive Users of Twitter
40% Normal Users Social Media Marketing users
35%
30%
25%
% of Users
20%
15%
10%
5%
0%
Atleast One Tweet/day Two Tweets/day
Source: Sysomos and NeXt Up Research Estimates
Exhibit 13: Businesses Have More Followers
20%
Normal Users Social Media Marketing users
18%
16%
14%
12%
% of Users
10%
8%
6%
4%
2%
0%
500-999 f ollowers 1000-1499 f ollowers > 1500 f ollowers
Source: Sysomos and NeXt Up Research Estimates
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14. COMPETITIVE LANDSCAPE
Several micro-blogging services have originated since the inception of Twitter, but none of them have
managed to gain user base close to what Twitter has garnered. Twitter has total unique monthly visitors
of 80 million, whereas Plurk, the second closest competitor has total unique monthly visitors of around 2.6
million. The number of micro-blogging service sites has gone up from 111 in 2007 to more than 250 sites
in 2009. Here is a list of a few active micro-blogging sites.
Identi.ca (Private Company)
http://identi.ca/
Identi.ca is an open-source social networking and micro-blogging service. The service was launched in
July 2008 and runs on StatusNet, an open-source micro-blogging server. As of March 2010, the service
supported more than 30 languages. One can post and receive updates on SMS on carriers which accept
SMS over email . The site had approximately 430k unique visitors in the month of February 2010. We
like to note that along with Identi.ca there are approximately 95 micro-blogging services installed on
StatusNet globally (Appendix D).
Jaiku (Part of Google)
http://www.jaiku.com/
Jaiku was founded by Jyri Engenstrom and Petteri Kopponen in July 2006. It offers micro-blogging
services, which are similar to those offered by Twitter. Users can post micro blogs up to 140 characters in
length. While non-US users can post micro blogs only using the web, US users can post micro blogs
using both SMS and the web. Jaiku was acquired by Google in Oct 2007. However in January 2009
Google stopped active development of Jaiku.com and released the code in to open source communities.
According to compete.com, the site had close to 30k unique visitors in January 2010.
Plurk (Private Company)
http://www.plurk.com/
Plurk was founded in May 2008. Plurk users can post micro blogs up to 140 characters and can also
embed Flickr images and YouTube videos. As of May 2009, Plurk services about 35 languages. The most
notable shortcoming of Plurk‘s usage is the inability to post or retrieve micro-blogs using SMS. Plurk has
attracted approximately 2.6 million unique visitors in the month of February 2010.
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15. Yammer (Private Company)
http://yammer.com/
Yammer provides company specific micro blogging services similar to those offered by Twitter for the
general population. One needs a valid company email id to join it. Updates are protected within the user
group of the same company. The basic service is free. The service had approximately 290k unique
visitors in the month of February 2010.
Micro blogging vs. Social Networking Services
General purpose social networking sites compete for users with micro blogging services as Twitter. Many
of the social networking services have incorporated the status updating feature. As these services don‘t
have the 140 characters constraint and also support other features such as web albums, video upload
etc, they provide multi-feature timeline of users‘ social contacts on the websites as opposed to just 140
character text updates of the users‘ ‗Following‘ list on Twitter. But Twitter and other micro blogging
services allow one-to-many flow of information, whereas networking at social networking sites is generally
one-to-one.
Micro blogging vs. Blogging
Micro blogging is a platform to share small thoughts, whereas while blogging, a user can be as
descriptive as possible. Ease of use of micro-blogging makes it attractive. But in recent times, some
blogging platforms have come up (notably Tumblr) which emphasize ease of posting text, images, video,
links, quotes, and audio on a blog. The multimedia features as against text features on the micro-blogging
platform, could be attractive for people who post frequently.
Social Networking Sites Offer Indirect Competition
Facebook
http://www.facebook.com/
Founded in 2004 by Mark Zuckerberg, Dustin Moskovitz and Chris Hughes while they were majoring in
Computer Science at Harvard University. Its membership was initially restricted to Harvard University
students, and later opened to other select universities. In 2006, Facebook was opened to everyone. We
estimate that 490 million unique visitors used Facebook in February 2010. The site supports more than
65 languages. It is headquartered in Palo Alto, CA and has about 950 employees.
MySpace
www.myspace.com/
Launched in August 2003, MySpace the second most popular social networks in the US after Facebook.
The company is headquartered in Beverly Hills, California, and employs 1,000 professionals. In June
2005, MySpace was acquired by Rupert Murdoch‘s News Corporation for $580 million. In 2008, the
company clocked approximately $700 million revenues with more than 80% derived from advertising.
The site attracted 80 million unique visitors in February 2010. The site is available in more than 25
different languages.
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16. Hi5
http://hi5.com/
Hi5 was founded by Ramu Yalamanchi in June 2003, and currently employs 60 professionals. The site
has become extremely popular in Latin America (with the notable exception of Brazil, where Orkut is
more popular). In February 2010, the Hi5 had 35 million unique visitors. The site is available in over 40
different languages. It is headquartered in San Francisco, California.
Tumblr
www.tumblr.com/
Founded by David Karp in 2007, it emphasizes ease of posting short blogs referred as tumble logs. The
service was publically launched in February 2007. It attracted about 11 million unique visitors in
February 2010. The company‘s main office is in New York. The website currently supports English and
German.
Exhibit 14: Twitter Dominates Microblogging Sector
Unique Visitors
Service Type
(Millions)
Identi.ca 0.43 Micro blogging
Jaiku 0.03 Micro blogging
Plurk 2.60 Micro blogging
Yammer 0.29 Professional micro blogging
Twitter 80 Micro blogging
Facebook 490 General purpose SNS
MySpace 80 General purpose SNS
Hi5 35 General purpose SNS
Orkut 15 General purpose SNS
Tumblr 11 Multimedia short blogging
Source: Compete.com, Google Ad Planner & Next Up Research estimates. Note: SNS implies ‘Social
Networking Service’
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17. Exhibit 15: Comparison of Services
Twitter Facebook Plurk Identi.ca
Primary Service Microblogging SNS Microblogging Microblogging
Default Profile Public Public Public Public
Private Profile Option Yes Yes Yes No
Languages 6 65+ 35 30+
User Tagging Yes Yes Yes Yes
3rd Party 3rd Party
Audio/Video Upload Yes No
application application
3rd Party 3rd Party
Image upload Yes Yes
application application
Real-time Search Yes Yes Yes Yes
Read and Post Via
Yes Yes No No
SMS
Embed Video And Of few
No Yes No
Images Sites
Timeline View Yes Yes Yes Yes
Groups No Yes Yes Yes
Networking Either Way Both Way Both Way Both Way
Source: Company Websites; NeXt Up Research
We note that most social networking sites such as Facebook and MySpace have most of their users in
the fluid age group of younger than 25, while Twitter has the least amount of users from that age group.
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18. Exhibit 16: Demographic Distribution of Unique Visitors
100%
90% 24% 22%
30%
80% 35%
41%
70%
21% 27%
60% 16%
50% 28%
21% 12%
40% 28% 24%
30% 14%
19%
20% 42%
24% 27% 27%
10% 18%
0%
Facebook Hi5 MySpace Tumblr Twitter
Age: 24 & Under Age: 25-34 Age: 35-44 Age: 45+
Source: Google Ad Planner
There has been a flurry of mergers and acquisitions in the social networking and microblogging space
(Exhibit 17).
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19. Exhibit 17: M&A Activity in the Social Networking and Micro Blogging Space
Transacti Target's Business
Target Acquirer Comments
on Date Description
iLike helps people share
MySpace paid close to $20
Aug 09 iLike MySpace music recommendations,
million for acquisition
playlists and concert alerts
Service which creates a news
Facebook paid about $50M in
Aug 09 FriendFeed Facebook feed, incorporating other social
cash and stock
networks
Stardoll
Mar 09 Piczo Social network for teenagers
AB
Free to use micro blogging Pownce service was shut down
Dec 08 Pownce Six Apart
site, launched in June 2007 within 15 days of acquisition
A Twitter like micro blogging Google stopped development of
Oct 08 Jaiku Google
service Jaiku in March 2009
Prior to acquisition, PixVerse
Flash based live social chat
Jun 08 Pix verse hi5 was used by hi5 and other
tool
social networks
Website provides music
reviews, blogs, forums,
May 08 AbsolutePunk Buzznet
interviews, artist profiles, and
articles
Apr 08 Idolator Buzznet Music blog
Apr 08 Stereogum Buzznet Indie music blog
An enterprise-level social After acquisition Mzinga had
Prospero
Mar 08 Mzinga networking solutions provider 150 employees and $30 million
Technologies
to media companies in annual revenues
A social networking site
AOL acquired Bebo for $850
Mar 08 Bebo AOL prominent in UK, Ireland, New
million in cash
Zealand and the US
A social music service
Mar 08 Tagshine Buzznet company, providing on-
demand music to consumers
A Polish social networking Forticom bought 70% stake for
Jan 08 Nasza-klasa.pl Forticom
portal zł.200 million ($92M)
Source: NeXt Up Research
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20. MERGERS AND ACQUISITIONS
Twitter has made three acquisitions since inception – Summize, Values of n, and Mixer Labs, all of them
fairly small in transaction size (less than a few million dollars in our estimate).
Summize (July 2008):
In July 2008, Twitter acquired the tiny search tool firm Summize. Summize was a tool for searching
Twitter. On acquiring Summize, all five engineers of the firm were asked to join Twitter. After acquisition,
Twitter re-launched the Summize service as Twitter search.
Values of n (November 2008):
In Nov 2008, Twitter acquired the assets of ―Values of n‖ which included a post-it note application and a
personal productivity application which can be accessed via email, SMS, and the web. With the
acquisition, Rael Dornfest, who had earlier been part of the RSS-DEV group (creator of the RSS 1.0
standard), joined the Twitter team.
Mixer Labs (December 2009):
Twitter acquired Mixer Labs, the developer of GeoAPI service, in December 2009. Mixer Labs‘ GeoAPI
service enables developers to build geolocation apps. GeoAPI helps developers to reverse lookup to get
location of users, without developing the app themselves. At time of acquisition, San Mateo (CA) based
MixerLabs had seven employees.
Mixer Labs was founded by a couple of former Google employees – Elad Gil and Othman Laraki. Elad Gil
served as the company‘s CEO. We note that Twitter‘s Geotagging API was released in Nov 2009, using
which Twitter applications can geotag tweets (post the location from where a tweet is posted).
Facebook’s Offer to Twitter:
In Oct 2008, Facebook offered to buy Twitter. The offer comprised $100M in cash and Facebook stock,
worth $400M (in Facebook‘s estimate). The offer was turned down by Twitter. We believe the deal fell
through due to disagreement on the valuation attributed to Facebook stock.
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21. COMPANY BACKGROUND
Twitter, headquartered in San Francisco, California, started as a small project at Odeo (a podcasting
company) in March 2006. In July 2006, the service was offered to the public. The service is aimed at
those who could upload their status by answering a question ―What‘s happening‖ in 140 characters or
less via web or SMS. These micro-blogs are referred to as tweets.
In September 2006, Obvious Corp (co-founded by Evan Williams, Biz Stone, and Jack Dorsey with a few
Odeo employees) bought out the interests of VC‘s and other investors of Odeo. In April 2007, Obvious
Corp spun off Twitter, with Jack Dorsey as its CEO. The remaining portion of Odeo was sold to Sonic
Mountain in May 2007. Evan Williams took over as CEO of Twitter from Jack Dorsey in Oct 2008.
Since inception, Twitter has made three acquisitions and has raised capital through four rounds of funding
for a total of nearly $157M. The most recent funding round (in Sep 2009) had a post money valuation of a
$1.1 billion. Twitter had earlier rejected a Facebook‘s offer of acquisition in Oct 2008. The firm has
partnered with Microsoft, Google and Yahoo, giving them full access to feed of public tweets, in return for
licensing fee. During the period from November through December 2009, Twitter added support to four
European languages – Italian, French, Spanish and German. We estimate that Twitter has about 147
employees, about five times what it had a year back.
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22. PRODUCT
Twitter is a free to use micro-blogging service where users answer a question ―What‘s happening‖ in 140
characters or less. Such micro-blogs are popularly known as tweets. Followers of a user or a group
receive the micro-blogs posted in real-time either via SMS (if the service is available in that particular
country) or over the web (Exhibit 19). Currently Twitter service is available in six languages - English,
Japanese, French, Italian, German and Spanish.
Unlike most other social networking services, a follower at Twitter does not need to personally know the
sender. E.g. a user could follow Barack Obama on Twitter without Obama returning the favor.
Twitter’s Features:
Real Time Search: The Twitter search engine allows to search through the tweets being posted all
around the world, on a real time basis. A user does not need a Twitter account to use the search. Users
with a Twitter account can save ten custom searches on the website. In addition, Twitter homepage
shows the list of most mentioned words (trending topics) at that moment, during the day and during the
week.
#Tagging: Any word or phrase in a tweet can be tagged by prefixing the character #. It enables users to
easily find tweets related to the tagged subject.
@username mention: Any tweet can be directed to a user by mentioning @username in it, who sees the
tweet as mention under @username link on homepage.
Direct Message: A tweet could be send as a private message to a user‘s follower by starting the
message with ―d username‖. The receiver sees the tweet as a direct message. The direct message
doesn‘t appear in search result or users‘ public timeline.
URL Shortening: Twitter shortens the links posted in a tweet if the tweet exceeds the 140 character limit.
Twitter uses bit.ly as the default URL shortening service. Prior to May 2009, Twitter used TinyURL as the
default URL shortener. In March 2010, in a bid to curb phishing, Twitter launched its own URL shortening
service which will shorten all the URLs send via Direct Messages or email notifications. The URLs are
shortened with twt.tl as the root link.
Verified Accounts: To remove impersonation of businesses, public officials and agencies, famous
artists, athletes, and other well known individuals on Twitter, the company launched a beta version of
verified accounts in June 2009. The accounts verified by Twitter sport a special seal.
Lists: Any twitter user can create a list comprising of those (s)he wishes to follow. These lists are public
by default, but could be marked private as well. Other uses can follow the entire list (without having to
individually select names). Once created, lists are of the syntax @username/Listname.
Retweet: A user can repost other user‘s tweet by clicking on Retweet button below the tweet. The
reposted message appears in user‘s followers‘ timeline.
Geotagging: Users could add their location to tweet whenever they update the status using Twitter
website. The feature is turned off by default, and is initially available in US only.
NeXt Up! 21
23. Exhibit 18: Platforms used to interact with Twitter
Source: NeXt Up Research
NeXt Up! 22
24. Twitter Allows Communications Through Various Options
SMS
To use the SMS feature, a user needs to configure his/her mobile phone first through a Twitter account by
sending a unique code as SMS. The user can customize or shorten the list of users whose updates to
receive via SMS (as opposed to both SMS and web). Receiving updates on SMS (all or from particular
user) can be stopped and started anytime by sending a text code SMS or through the web.
Twitter does not charge users for the SMS tweet updates. However, the wireless carrier may impose a
charge depending the user‘s data subscription plan. The 140 character limit of a tweet imposed by Twitter
(vs. the maximum allowed SMS character limit of 160 characters per message) allows for the inclusion of
a user name in front of the message.
Incoming tweet feeds via SMS are available only in a few countries where Twitter has managed to secure
bulk SMS rates from the carriers (Exhibit 19). Users in most countries can only send tweets from a phone
(but may have to view the updates only on the web).
Exhibit 19: Worldwide Twitter’s Service over SMS
Short Code
Country Incoming Outgoing
/Number
Australia (Telstra) Y Y 0198089488
Canada Y Y 21212
Germany N Y +49 17 6888 50505
India (Airtel) Y Y 53000
Indonesia (Axis & 3) Y Y 89887
Ireland (O2) Y Y 51210
New Zealand (Vodafone & Telecom NZ) Y Y 8987
Rest of the world N Y +44 762 4801423
Sweden N Y +46 737 494222
UK (Vodafone, Orange, 3 & O2 ) Y Y 86444
US Y Y 40404
Source: Twitter; NeXt Up Research; Note: Shortcodes are subject to change
NeXt Up! 23
25. Online
Tweets can be posted on https://twitter.com/ or through other several online services such as Twitterfeed,
HelloTxt, Ping.fm and PingTwitter.
Desktop Clients
Although not as convenient as a mobile device, desktop clients can offer a feature rich version of
interacting with Twitter. With these applications, a user does not need to open a web browser but still can
get real-time alerts on the desktop. Desktop clients also allow file sharing (e.g. Twittastic where a user
can drag and drop a file which gets uploaded and the download link is posted on Twitter). Some clients
(e.g. TweetDeck) allow users to split the tweets into topic or group them in specific columns. Desktop
clients such as Digsby combine networking sites (such as Facebook and MySpace), Instant messengers
and email with Twitter.
Java Enabled Phone
Twitter updates can be posted and viewed at http://mobile.twitter.com/ through a web browser on a java
enabled phone.
Browser Plug-in
Multiple browser plug-ins are available for tweeting that allow tweets to be sent to the web-browser.
E-mail
TwitterMail provides updates and alerts through email. A user needs to register with this service, and can
post tweets just by sending an email. These emails can also be sent from portable devices such as
Blackberries.
Device specific applications
Many applications exist to allow for easy integration of specific devices such as Blackberry or iPhone to
Twitter. Applications such as Twitterrific, PocketTweet are available for iPhone and iPod touch. Other
popular applications include TwitterBerry for Blackberry, twidroid for Android mobile devices and Twibble
for Symbian OS devices (used in phones made by Nokia and Sony Ericsson).
Popular Uses of Twitter
To Stay Connected: Users use it to stay in touch with their friends and family. Such small groups can
use the medium to provide status updates.
As a News Source: Twitter‘s immediacy makes it particularly useful for disseminating news. The BBC
and the Guardian, for example, already offer Twitter services for breaking news. Twitter‘s real time
NeXt Up! 24
26. search can aid in tracking specific topics or events. We note that Twitter usage surged during
important events such as 2009 Presidential Inauguration, Iran protests and Michael Jackson‘s death.
Direct Marketing: Numerous businesses have found Twitter an attractive option for sending
promotional messages to users who have opted for such communication. In addition, some companies
are using Twitter to manage customer relationships by soliciting feedback and providing support.
Businesses can also perform analytical functions based on the database of tweets. Companies can
search for the mention of their product names in tweets and obtain information about problems and
other issues with their products faster than traditional means.
Exhibit 20: Top 10 Twitter Accounts Based on Number of Followers
# Twitter Name Twitter Account ID Followers
1 ashton kutcher @aplusk 4,637,628
2 Britney Spears @britneyspears 4,531,307
3 Ellen DeGeneres @TheEllenShow 4,359,058
4 Barack Obama @BarackObama 3,394,989
5 Oprah Winfrey @Oprah 3,262,534
6 Kim Kardashian @KimKardashian 3,155,884
7 John Mayer @johncmayer 3,126,522
8 Lady Gaga @ladygaga 3,070,413
9 Twitter @twitter 3,022,174
10 Ryan Seacrest @RyanSeacrest 3,005,522
Source: Twitterholic.com (as on March 11, 2010)
Following a Public Figure: Millions use Twitter‘s service to follow public figures (e.g. Barack Obama,
Oprah Winfrey, Ashton Kutcher etc.) (Exhibit 20). Fans can follow the events or thoughts of their
celebrities. We note that nine out of the top ten accounts (on the number of followers) are well known
public figures (Exhibit 20).
NeXt Up! 25
27. Technology
Twitter‘s web interface uses Ruby on Rails (RoR), an open source web application framework for Ruby
programming language. RoR needs a web server to run and emphasizes Convention over Configuration
(developer only needs to specify unconventional aspects of the application).
For back-end operations such as queuing messages, Twitter uses the Scala programming language.
Back end was also initially built in Ruby language, but Ruby‘s inability to handle the torrent of message
prompted Twitter to shift large portions of their back end to Scala.
Since Feburary 2008, Twitter has been using the Enterprise Hosting Services of NTT America for hosting
its website, previously Twitter used Joyent‘s cloud infrastructure (Exhibit 21). Despite soaring usage
levels, we note that Twitter‘s website uptime has improved over the last few quarters (Exhibit 21).
Exhibit 21: Uptime of Twitter.com Website
100%
Uptime
99%
Denial of Service
Attack
98% DNS Attack on
Twitter
97%
96%
95%
Steve Jobs' Keynote
94% at Macworld
Conference & Expo
93%
92% ` Hosting Service
South by Southwest 2007, Joyent
91% Music Festival and Conference
NTT America
90%
Feb 07 Jun 07 Oct 07 Feb 08 Jun 08 Oct 08 Feb 09 Jun 09 Oct 09 Feb 10
Source: Pingdom, NeXt Up Research
Twitter also hosts a status blog on an independent server (http://status.twitter.com/) which posts
information about the status of Twitter service in addition to information relating to any scheduled server
downtime.
In May 2009, Twitter shifted from TinyURL to Bit.ly as default URL shortener. In our view, one of the
reasons for the shift is that URLs shortened by Bit.ly require five characters fewer compared to TinyURL.
NeXt Up! 26
28. We also believe that Bit.ly website has a better user-interface. In addition, Bit.ly offers detailed statistics
(number of clicks, social media references and so on) on URLs shortened using the site.
Twitter provides API methods for all features on its website. This allows programmers to build
applications, websites, widgets and other projects to interact with Twitter. Twitter also hosts a wiki site
where programmers can share their open source work. The Wiki site has open source examples in
several programming and scripting languages (e.g. C++, C#/.NET, JAVA, Pearl, etc.). At present, there
are over thousands of applications for Twitter (Appendix F).
NeXt Up! 27
29. FINANCIALS AND VALUATION
Twitter has not publicly announced a business model yet. We have discussed a few possibilities (Exhibit
22) but each approach has its own shortcomings. All monetization approaches are likely to alienate users
to a certain extent. Some appear to strike a more favorable balance.
We believe a probable approach that Twitter may take could include making businesses pay for sending
targeted messages to users who have opted-in for such communications. The opt-in feature, with the
easy ability to switch off a message source, is likely to result in a self selecting mechanism for recipients.
Exhibit 22: Possible Avenues of Revenue
Source: NeXt Up Research
NeXt Up! 28
30. In addition to providing a directory of interested recipients for direct marketing, Twitter could also provide
some analytical tools and services to businesses which would help the latter to leverage the platform
effectively.
For Twitter the issue is one of striking the delicate balance between not alienating its users and
increasing its revenues. For businesses, we believe the advantages of using Twitter are more
straightforward (Exhibit 23) compared to the alternatives. As Twitter allows a user to follow any Twitter
account with ease, the lead to conversion ratio is expected to be much higher in our view. Exhibit 23 also
gives an indication of how much Twitter would be able to charge business users who use its service as an
advertising platform.
However, even businesses should still strike a balance between sending too many promotional messages
(prompting the users to opt-out) and keeping the brand alive.
Exhibit 23: Advertising Cost Structure of Various Marketing Media
Estimated Cost
Marketing Successful Estimated Cost
/Successful Comments
Method Sales /Lead /Message
Lead
Opt in feature ensures higher
Twitter 40%-70% $0.10-$0.20 $0.14-$0.50
likelyhood of success
Targeted email 0.5%-2% $0.0075 $0.40-$1.50 Can end up in spam folder
Do not call registry limits
Telemarketing 7%-15% $2.10 $14-$30
targeted audience
List based
1.5%-10% $0.24 $2-$16
postal mail
Spam 1/M-10/M $0.00001 $1-$10 Illegal
Bulk SMS 0.2%-1% $0.05 $6-$25
Source: Next Up Research Estimates
NeXt Up! 29
31. Exhibit 24: Projected Revenues
180
160
140
120
$ in millions
100
170
80
151
60 125
40 85
45
20
0
2010E 2011E 2012E 2013E 2014E
Source: NeXt Up Research Estimates
*Note: Red denotes base case estimates; Blue indicates upside
As explained in Appendix A, valuing private companies while they are in a rapid growth trajectory is a
difficult exercise. Minor shifts in time periods can cause dramatic shifts in valuation. We believe investors
have to look at a year when growth moderates to below 15% and discount the valuation back to present.
Based on the table in Appendix A, we are attributing a 25 market multiple
For the purpose of our report, we are basing our valuation off the year 2013. We estimate that the
company will achieve revenue levels of $151M at normalized net margins of 25% in 2013.
Target EV = Steady State Revenues * Normalized Margins* Market Multiple
Target Market Cap = Target EV + Net Cash
Target Price = Target Market Cap/Diluted Shares Outstanding
NeXt Up! 30
32. Exhibit 25: Valuations off Various Calendar Years Discounted to 2010
800
750
700
650
600
$ in Millions
550
500
450
400
350
300
2010E 2011E 2012E 2013E 2014E
Source: NeXt Up Research Estimates
Twitter‘s Target EV (Bull Case) = $151 million*25%*25 discounted back by 3 years = $620.5 million.
Adjusting for estimated net cash of $130 million, we arrive at $750.5 million. We are assuming a weighted
average cost of capital of 15%
Exhibit 26: Twitter’s Revenues
2010E 2011E 2012E 2013E 2014E
Revenue ($, M) 45 85 125 151 170
% y/y growth 89% 47% 21% 13%
Source: NeXt Up Research Estimates
NeXt Up! 31
33. Comparative Valuation
Twitter, in our view, has created a category of its own with no clear comparable company traded publicly.
We have attempted to create a list of companies in the broad category of internet media and social
networking that have similar operating margins to Twitter (Exhibit 27a, b).
Exhibit 27a: Comparables for Twitter-Internet Search and News
$, millions Revenues EV/Revenues Secular EBITDA
Enterprise
Ticker Growth Margin
Value
Company Name CY10E CY11E CY09E CY10E (Est) (Est)
Google GOOG 155,619 20,802 24,031 7.5 6.5 25% 50%
Yahoo! YHOO 19,979 4,891 5,119 4.1 3.9 20% 35%
Baidu BIDU 18,953 956 1,380 19.8 13.7 37% 46%
Sohu SOHU 1,495 592 714 2.5 2.1 25% 25%
MEAN 8.5 6.6 27%
MEDIAN 5.8 5.2 25%
Source: Yahoo Finance, NeXt Up Research Estimates
Target EV = EV/Revenue Multiple * Revenues
Target Market Cap = Target EV + Net Cash
Target Price = Target Market Cap/Diluted Shares Outstanding
Using estimated normalized EBITDA margins of 50%, and secular revenue growth potential of 15% - 20%
from 2013 (Exhibit 26a), we get the EV/Revenue multiple of 5.3x off 2013 revenues (Exhibit A3). Using
the 5.3x multiple and our 2013 estimated revenues of $151 million, we estimate EV of $800.3 million
before discounting or $526.2 million after discounting by three years (at WACC of 15%) to 2010.
The estimated market cap should then be $656.2 million.
NeXt Up! 32
34. Exhibit 27b: Comparables for Twitter-Social Networking Sites
$, millions Revenues EV/Revenues Secular EBITDA
Enterprise
Ticker Growth Margin
Value
Company Name CY10E CY11E CY09E CY10E (Est) (Est)
Xing O1BC 109 76 93 1.4 1.2 26% 20%
Facebook 6,500 725 929 9.0 7.0 35% 45%
LinkedIn 1,884 210 275 9.0 6.9 35% 45%
Mixi 2121 1,018 185 213 5.5 4.8 35% 31%
MEAN 6.2 5.0 33%
MEDIAN 7.2 5.8 35%
Source: Yahoo Finance, NeXt Up Research Estimates
Facebook offer to Twitter
In October 2008, Facebook offered Twitter approximately $500M ($100 million in cash and the rest in
Facebook‘s stock). The acquisition offer was turned down by Twitter.
We believe the offer was turned down by Twitter because stock offered valued Facebook at $15 billion, in
line with what Microsoft paid for its shares of Facebook in October 2007 but well below term sheets that
Facebook could get.
Using the valuation that DST is now offering Facebook shareholders, the valuation on Twitter would have
been a more modest $260M ($160M in stock + $100M in cash).
The company had a funding round at $1.1B (in Sep 2009) for preferred shares. We believe that the
valuation of preferred shares, which have downside protection due to liquidation preference, offer only an
approximate guide in valuation of common shares. Accordingly our valuation methodology includes that in
this case.
Exhibit 28: Summary of Valuation Methodologies
Methodology Enterprise Value Market Capitalization
Steady State Revenues $621M $751M
Comparison to Peers $526M $656M
Source: Capital IQ, NeXt Up Research Estimates
NeXt Up! 33
35. Exhibit 29: Post-Money Valuation for Twitter
Round 1 Round 2 Round 3 Round 4 Round 5 Bull Case Bear Case
Type A B C D E X X
Date Jul 07 Jul 07 May 08 Feb 09 Sep 09 NA NA
Diluted Shares
15.7 30.3 38.5 56.4 64.7 74.6 74.6
(Estimated; millions)
Preferred Shares
14.625 8.22 8.43 8.29 6.14
Issued (millions)
Liquidation
4th 3rd 3rd 2nd 1st
Preference
Conversion Rate
(Preferred to 1 to 1 1 to 1 1 to 1 1 to 1 1 to 1
Common)
Issue Price/Share $0.01 $0.67 $2.06 $4.31 $15.98 $10.07 $8.80
Amount of Funding
0.1 5.5 17.4 35.7 98.2
($, millions)
Pre- Money Estimate
0.1 20.2 79.4 243.1 1033.6
($, millions)
Post Money Estimate
0.2 25.7 96.7 278.8 1131.8 751 656
($, millions)
Insight
Benchmark
Venture
Capital,
Partners, T.
Spark Capital, Institutional
Rowe Price,
Bezos Venture
Charles River Institutional
Expeditions, Partners,
Ventures and Venture IPO or IPO
Investors Digital Union Square
Union Square Partners, Merger Merger
Garage, Union Ventures,
Ventures Spark Capital,
Square Digital Garage
Benchmark
Ventures and Spark
Capital, and
Capital
Morgan
Stanley
Source: Amendments to Incorporation of Twitter (filed Sep 22, 2009); Next Up Research Estimates; IPO
pricing assumes all preferred shares are converted to common stock
NeXt Up! 34
36. Exhibit 30: Liquidation Preference for Twitter’s Investors
Total Liquidation
Funding Shares Issue Liquidation Liquidation Dividend
Investment Value
Type (M) Price Multiple (x) Preference Rate
($, M) ($, M)
Series A
14.63 $0.01 0.1 1.0 4th NA 0.1
Preferred
Series B
8.22 $0.67 5.5 1.0 3rd NA 5.5
Preferred
Series C
8.43 $2.06 17.4 1.0 3rd NA 17.4
Preferred
Series D
8.29 $4.31 35.7 1.0 2nd NA 35.7
Preferred
Series E
6.14 $15.98 98.2 1.0 1st NA 98.2
Preferred
156.9
Source: Amendments to Incorporation of Twitter (filed Sep 22, 2009); Next Up Research Estimates
We estimate that the company now has $130M+ in cash on hand. However, cash burn in the future could
push the net cash position where the investors may have to consider lower exit valuations.
In the event of liquidation up to $98.2M, proceeds are shared pro rata among Series E preferred
shareholders. If Exit Valuation is between $98.2M and $133.9M, then Series E preferred shareholders
receive $98.2M and remaining proceeds are shared pro rata among Series D preferred shareholders.
If Exit Valuation is between $133.9M and $156.8M, then Series E preferred shareholders receive $98.2M,
Series D shareholders will receive $35.7M and remaining proceeds are shared pro rata among Series C
and Series B preferred shareholders. Similarly up to $0.1M of additional exit valuation to $156.8M, Series
A shareholders receive the proceeds on pro rata basis after paying liquidation value to all other preferred
share holders. Above $156.9 million in exit valuation (Exhibit 30), the common share holders will begin
participating based on shares held and the conversion price that kicks in.
NeXt Up! 35
37. Exhibit 31: Payoff Chart for Various Exit Scenarios
$18
Series E
@ $15.98
$16
$14
$12
Stock Price ($)
$10
Series D
$8 converts
@ $4.31
$6 Series C Bull Case
Base Case
converts Valuation @
Valuation @
@ $2.06 $751 million
$656 million
$4
Series B
converts
$2 @ $0.67
Series A
converts
@ $0.01
$0
$145 $345 $545 $745 $945 $1,145
Exit Valuation Market Cap ($, M)
Source: Amendments to Incorporation of Twitter (filed Sep 22, 2009); Next Up Research Estimates.
NeXt Up! 36
38. INVESTORS
Angel Investors
Marc Andreessen, Co-Founder of Netscape and Chairman of Ning
Dick Costolo, founded Feedburner which was acquired by Google in 2007
Naval Ravikant, Chairman of Vast
Ron Conway, made over 20 investments in Web 2.0 companies. One of the first investors in
Google
Chris Sacca, manages a portfolio of over 15 consumer web, mobile, and wireless technology
start-ups
Kevin Rose, Founder of Digg and WeFollow, Co-Founder of Revision3, and Pownce
Tim Ferriss, An author and public speaker
Private Equity Investors
Benchmark Capital
Bezos Expeditions
Charles River Ventures
Digital Garage
Insight Venture Partners
Institutional Venture Partners
Morgan Stanley
Spark Capital
T. Rowe Price
Union Square Ventures
NeXt Up! 37
39. MANAGEMENT
Evan Williams (Chief Executive Officer, Co-Founder)
Evan, one of the co-founders of Twitter, has been the CEO since October 2008. Prior to that, he was a
Marketing Coordinator for O‘Reilly Media for six months. In 1999, he co-founded Pyra Labs, a project
management software maker.
At Pyra Labs, Evan worked on the development of Blogger.com, a weblog publishing service which was
launched in August 1999. After the acquisition of Pyra Labs (including the Blogger.com service) by
Google in Feb 2003, Mr. Williams worked as program manager of the acquired Blogger group. After
leaving the firm in October 2004, Evan went on to start Odeo Inc. (a podcasting company) in January
2005, where he worked as the Chief Executive Officer. In 2006 he co-founded Obvious Corp. which
bought out the other investors‘ interests in Odeo in October 2006. Twitter.com, a project started at Odeo
Inc was also part of the acquisition. Twitter spun off from Obvious Corp. in April 2007. Evan Williams
worked as the Chief Product Officer and Chairman of the board at Twitter before taking over as CEO from
Jack Dorsey in Oct 2008.
Biz Stone (Creative Director, Co-Founder)
Biz Stone, a co-founder of Twitter, serves as the Creative Director of the firm. Previously, Biz was the
Director of Community at Odeo where Twitter originated. Prior to that, Biz worked with Google as a Senior
Specialist where he was invited to join the Blogger team after its acquisition.
Before joining Google, Mr. Stone served as a Creative Director at Xanga.com from January 1999 to April
2001. Prior to that, Biz Stone worked as a designer at Little, Brown and Co. through the years 1994 to
1997. Mr. Stone also serves as an advisor to Fluther.com (an answer community), Trazzler.com (a travel
recommendation service where he was a co-founding advisor), Plinky.com (content encouragement
service) and Justgive.org (a non-profit organization). He has authored two books about the social media:
Blogging: Genius Strategies for Instant Web Content, and Who Let the Blogs out?: A Hyperconnected
Peek at the World of Weblogs.
Dick Costolo (Chief Operating Officer)
Dick Costolo serves as Chief Operating Officer at Twitter since September 2009. Previously he served as
Group Product Manager at Google for about two years from June 2007 to June 2009. Mr. Costolo
founded Feedburner in Feburary 2004 and served as its CEO before he moved to Google with the
acquisition of FeedBurner in May 2007.
Earlier Mr. Costolo served as manager at Accenture for about seven years from March 1987 to March
1994. He holds a BS in Computer Science from University of Michigan.
NeXt Up! 38
40. Jack Dorsey (Chairmen of the Board, Co-Founder)
Jack Dorsey, along with Evan Williams and Biz Stone, co-founded Twitter. He serves as the Chairman of
the Board since Oct 2008. At the age of 18 (1997), Jack moved to New York to study at New York
University and also started working at a courier service, DMS, as a programmer to write dispatch
software. In 2000, he started a company to dispatch couriers, taxis, and emergency services from the
web. In the next few years he worked on the idea of combining instant messaging, dispatch software and
text messaging to create a real time status communication service (Appendix B).
In early 2006, Odeo Inc. found this idea interesting and a prototype was built and implemented internally
at Odeo. The service got a public launch in the July of the same year. The project was initially named as
twttr before changing it to the name Twitter. Obvious Corp. bought Odeo and all its assets (including
Twitter) and later Twitter spun out of Obvious. Jack served as CEO of Twitter until October 2008 when
Evan Williams took his place.
NeXt Up! 39
41. Appendix A: What Multiple?
It becomes very difficult to value companies while they are on a high growth trajectory. Not only do the
revenues grow rapidly but the profitability starts to expand as well. Under such a rapid growth scenario,
any valuation attempt could lead to significant errors due to timing of estimates.
A better approach is to focus on a year when growth rate is slow enough, that small shifts in time period
do not sufficiently alter the valuation and then discount the value to the present assuming a cost of capital
and risk premium that is in line with a slower growth steady state mode.
Due to law of large numbers, any growth company will moderate to a slower growth rate of 15% a year (or
less) in a finite number of years. For the purposes of our report, we are assuming that subject companies
will reach that ―steady state‖ level in 2 – 5 years.
Exhibit A1: Hypothetical Revenue Growth Pattern of a Firm Since Inception
450
400
350
300
250
Steady State Growth
200
150
100
50
0
0 2 4 6 8 10 12 14 16
Source: NeXt Up Research
At 15% or lower growth rate, the market multiple (Exhibit A2) is then determined primarily by the yield on
ten year notes. Although yield at the time of writing could be higher due to loose monetary policy, we
believe eventually ten year notes will tend to trade closer to their historical averages of about 5%.
Accordingly, we are assigning a growth multiple of 25 for most of our subject companies based off steady
state revenue numbers and normalized net margins.
Most companies tend to focus on growth at the expense of profitability during early stages of growth.
Normalized net margins are the maximum profitability that a company could potentially achieve at any
revenue level. This could vary dramatically from actual net margins.
Target EV = Steady State Revenues * Normalized Margins* Growth Multiple
NeXt Up! 40
42. Target Market Cap = Target EV + Net Cash
Target Price = Target Market Cap/Diluted Shares Outstanding
Exhibit A2: EV/Revenue Multiple as a Function of T-Bill Rate and Revenue Growth
T Bill Rate
Revenue
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
Growth
5% 34x 27x 22x 19x 17x 15x 13x 12x 11x 10x
10% 41x 32x 19x 23x 19x 17x 16x 174x 13x 12x
15% 50x 39x 32x 27x 23x 20x 18x 16x 15x 13x
20% 60x 47x 38x 32x 27x 24x 21x 19x 17x 15x
25% 72x 56x 45x 38x 32x 28x 24x 22x 19x 17x
30% 86x 66x 54x 44x 38x 32x 28x 25x 22x 19x
35% 102x 78x 63x 52x 44x 38x 33x 29x 25x 21x
40% 120x 92x 74x 61x 51x 43x 37x 33x 29x 24x
45% 141x 108x 86x 70x 59x 50x 43x 37x 32x 28x
50% 165x 125x 99x 81x 67x 57x 49x 42x 36x 31x
Formula:
P/E=(1-(g/ROEhg) x (1+g) x (1-((1+g)^n)/(1+khg)^n)/(khg-g)) + ((1-(gn/ROEst) x (1+ g)^n x (1+g)^n x (1+gn))/(kst-gn)x(1+khg)^n)
Assumptions:
Beta - 1
ROEhg – return on equity in the high growth period, made assumption that it‘s 30%
ROEst – ― ― in the stable period, made assumption that it‘s 10%
gn – growth in the stable period, made assumption that it‘s 4%
Cost of equity khg=risk free rate (T-Bill)+ B (changed to 1.5 and 1) x (equity risk premium) (assumed 4%)
(assumed
Source: Benjamin Graham, Security Analysis (1951), McGraw Hill
We are providing our methodology as a framework. Investors can change any of our variables to arrive at
their own metrics.
In our valuation methodology, we also have tried to look at comparable group of companies and estimate
their EV/Revenue multiple. We believe that adjusting for risk, the EV/Revenue multiple is a function of
NeXt Up! 41
43. growth rate (over the subsequent 2 – 3 years from our reference year) and EBITDA margins. We may
attribute a higher or lower multiple than peer group based on these two variables as outlined in Exhibit
A3.
Exhibit A3: EV/Revenue Multiple as a Function of EBITDA and Revenue Growth
Revenue Growth
EBITDA
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Margin
50% 2.5x 3.3x 4.0x 4.8x 5.6x 6.3x 7.1x 7.9x 8.7x 9.4x 10.2x
45% 2.3x 2.9x 3.6x 4.3x 5.0x 5.7x 6.4x 7.1x 7.8x 8.5x 9.0x
40% 2.0x 2.6x 3.2x 3.8x 4.5x 5.1x 5.7x 6.3x 6.9x 7.5x 8.2x
35% 1.8x 2.3x 2.8x 3.4x 3.9x 4.4x 5.0x 5.5x 6.1x 6.6x 7.1x
30% 1.5x 2.0x 2.4x 2.9x 3.3x 3.8x 4.3x 4.7x 5.2x 5.7x 6.1x
25% 1.3x 1.6x 2.0x 2.4x 2.8x 3.2x 3.6x 3.9x 4.3x 4.7x 5.1x
20% 1.0x 1.3x 1.6x 1.9x 2.2x 2.5x 2.8x 3.2x 3.5x 3.8x 3.1x
15% 0.8x 1.0x 1.2x 1.4x 1.7x 1.9x 2.1x 2.4x 2.6x 2.8x 3.1x
10% 0.5x 0.7x 0.8x 1.0x 1.1x 1.3x 1.4x 1.6x 1.7x 1.9x 2.0x
5% 0.3x 0.3x 0.4x 0.5x 0.6x 0.6x 0.7x 0.8x 0.9x 0.9x 1.0x
Source: NeXt Up Research
NeXt Up! 42
44. Appendix B: Twitter’s Sketch
Exhibit B: Sketch of Jack Dorsey’s Concept for Twitter
Source: Flickr and Jack Dorsey
NeXt Up! 43
45. Appendix C: Apps and Services
Services and Applications in use to Tweet
TweetDeck Twitter Tools twitthat twicca TweetMiner Plancast
Tweetie Power Twitter DISQUS Twaitter Tweetburner Assetize.
twitterfeed twidroid Mobile Tweete ShareThis.com humedia Tweets60
foursquare Su.pr iTweet WordTwit Tynt Insight Twittori
HootSuite Gravity Ustream Identica HelloTxt SoundCloud
TwitBin CoTweet LinkedIn formspring.me Hyves Twibbon
Echofon Brizzly PockeTwit Digg TweetPhoto foxytunes
Seesmic Flickr Delicious Nambu tr.im dlvr.it
bit.ly Seesmic Web TwitterGadget RSS2Twitter wxdata Twitoaster
TweetMeme Google2Tweet Snaptu MySpace Locale WeFollow
Google DestroyTwitter SocialOomph Socialite.app Twitpress The Twit Cleaner
UberTwitter SocialScope TweetGrid Publish2 dailymile Pikchur
FriendFeed Netvibes Brightkite Goodreads Tweetree Gwibber
TwitPic Digsby Mixero Tweed TwitIQ WordPress.com
Mobypicture feedly SimplyTweet Perl Net::Twitter EzineArticles Quoted By Me!
Ping.fm m.slandr.net a Ning Network Twittascope PeopleBrowsr TwitterRide
Twitterrific Posterous identica Dabr XboxTweet Twones
Facebook TwitterBar Amplify lastfm <3 TweTool twiggit
Posterous Chromed Bird Swift MyLikes Brightkite twittai
Blip.fm TwitBird iPhone MrTweet AudioBoo Deftones TinyTwitter
Gowalla Twitter4R Yelp GetGlue.com twitgoo twibble
Tumblr mobile web HTC Peep Grooveshark Twikini Pandora
Twitstat Mobile TimesPeople Tweekly.fm Twitfire Squidoo BeTwittered
dabr WP to Twitter TweetCaster NUjij Endless Tweets Tweetvite
Ping.fm TypePad jibjib TweetChat Social.com Drupal
Twittelator BuzzCanTweet yoono mbpidgin Twee Helios Calendar
Source: NeXt Up Research
Note: The list is just indicative, it may not be exhaustive
NeXt Up! 44
47. DISCLAIMER
This report has been downloaded from SharesPost, Inc., but was prepared by Global Silicon Valley
Partners under the Next Up Research brand ("Next Up Research"). The views expressed in this report
correspond to our subjective views on the subject securities and issuers. This report does not purport to
be a complete statement of all material facts related to any company, industry, or security mentioned. The
information provided, while not guaranteed as to accuracy or completeness, has been obtained from
sources believed to be reliable.
This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any
sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
Neither Next Up Research nor any of its employees own a direct or indirect long or short position in any of
the companies mentioned in this report.
The opinions expressed reflect our judgment at this time and are subject to change without notice and
may or may not be updated. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is made regarding future
performance.
This research report was intended to provide background information and valuation framework for
accredited or institutional investors. Recipients who are not market professionals or institutional investors
should seek the advice of their personal financial advisor before making any investment decisions based
on this report.
Email research@nextupresearch.com for further information.
NeXt Up! 46
