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  • 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! 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. NeXt Up! 2
  • 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. NeXt Up! 3
  • 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 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 NeXt Up! 4
  • 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 NeXt Up! 5
  • 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 client service launched Feb-08 Mar-08 Seesmic buys Twhirl System Architect Blaine Cook leaves Twitter Apr-08 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 NeXt Up! 6
  • 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. NeXt Up! 7
  • 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 NeXt Up! 8
  • 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 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 NeXt Up! 9
  • 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 NeXt Up! 10
  • 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 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 NeXt Up! 11
  • 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 NeXt Up! 12
  • 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. (Private Company) 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 there are approximately 95 micro-blogging services installed on StatusNet globally (Appendix D). Jaiku (Part of Google) 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 and released the code in to open source communities. According to, the site had close to 30k unique visitors in January 2010. Plurk (Private Company) 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. NeXt Up! 13
  • 15. Yammer (Private Company) 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 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 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. NeXt Up! 14
  • 16. Hi5 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 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) 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:, Google Ad Planner & Next Up Research estimates. Note: SNS implies ‘Social Networking Service’ NeXt Up! 15
  • 17. Exhibit 15: Comparison of Services Twitter Facebook Plurk 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. NeXt Up! 16
  • 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). NeXt Up! 17
  • 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 Forticom portal zł.200 million ($92M) Source: NeXt Up Research NeXt Up! 18
  • 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. NeXt Up! 19
  • 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. NeXt Up! 20
  • 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 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 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 or through other several online services such as Twitterfeed, HelloTxt, 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 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: (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 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 ( 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 as default URL shortener. In our view, one of the reasons for the shift is that URLs shortened by require five characters fewer compared to TinyURL. NeXt Up! 26
  • 28. We also believe that website has a better user-interface. In addition, 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, a weblog publishing service which was launched in August 1999. After the acquisition of Pyra Labs (including the 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., 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 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 (an answer community), (a travel recommendation service where he was a co-founding advisor), (content encouragement service) and (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 humedia Tweets60 foursquare iTweet WordTwit Tynt Insight Twittori HootSuite Gravity Ustream Identica HelloTxt SoundCloud TwitBin CoTweet LinkedIn Hyves Twibbon Echofon Brizzly PockeTwit Digg TweetPhoto foxytunes Seesmic Flickr Delicious Nambu Seesmic Web TwitterGadget RSS2Twitter wxdata Twitoaster TweetMeme Google2Tweet Snaptu MySpace Locale WeFollow Google DestroyTwitter SocialOomph Twitpress The Twit Cleaner UberTwitter SocialScope TweetGrid Publish2 dailymile Pikchur FriendFeed Netvibes Brightkite Goodreads Tweetree Gwibber TwitPic Digsby Mixero Tweed TwitIQ Mobypicture feedly SimplyTweet Perl Net::Twitter EzineArticles Quoted By Me! 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 TwitBird iPhone MrTweet AudioBoo Deftones TinyTwitter Gowalla Twitter4R Yelp twitgoo twibble Tumblr mobile web HTC Peep Grooveshark Twikini Pandora Twitstat Mobile TimesPeople Twitfire Squidoo BeTwittered dabr WP to Twitter TweetCaster NUjij Endless Tweets Tweetvite TypePad jibjib TweetChat 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
  • 46. Appendix D: Sites using StatusNet These Sites Use StatusNet Source:; (List excludes main server - NeXt Up! 45
  • 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 for further information. NeXt Up! 46