Lessons from the Twitter IPO on the cost of building an advertising funded startup


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It can cost a lot to focus on building a user base before you monetize with advertising. It’s a high stakes game and you better have deep pockets yourself or have access to other people’s money to support potentially years of losses.

This Presentation looks at some of the learning’s from details released as part of Twitter’s IPO listing

Published in: Business, Technology
  • Interesting story Remco. Look at the numbers indeed while trying to live your vision.

    Additional note: all those advertisement activities world wide like through Twitter and others scare me. I think this is a next bubble and seriously out of proportions with real sales increase potential. It overall doesn't provide any added value on a macro-scale, just increasing the costs to companies in battle for their market share.The revenue-per-incident value will could dramatically drop once this becomes apparent and will equally vaporise shareholder value. I would rather focus any way on users for my services (whatever type) with some added value - advertisement revenues should be secondary.
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Lessons from the Twitter IPO on the cost of building an advertising funded startup

  1. 1. Lessons from the Twitter IPO on   The cost of building an advertising funded startup
  2. 2. So you want to build a tech company based on an advertising model? It can cost a *lot* to focus on building users before you monetize with advertising. It’s a high stakes game and you better have deep pockets yourself or have access to other people’s money to support Building users before you monetize with advertising is a high stakes game potentially years of losses. Let’s look at some of the learning’s from details released as part of Twitter’s IPO listing. Cost  of  building  an  adver2sing  funded  startup   2  
  3. 3. Background Twitter was born on March 21, 2006 with a simple idea: Share what you’re doing, 140 characters at a time. Cost  of  building  an  adver2sing  funded  startup   3  
  4. 4. People took that idea and strengthened it by using @names to have public conversations, #hashtags to organize movements, and Retweets to spread news around the world. Cost  of  building  an  adver2sing  funded  startup   4  
  5. 5. 7 years later, Twitter defines its core value proposition’s as: Public. Users express themselves publicly to the world. Real Time. Users tweet about live events instantly. Conversational. Users communicate with friends & family, but also in conversations with other people from around the world, in ways that would not otherwise be possible. Distributed. Tweets go everywhere both online and offline. Cost  of  building  an  adver2sing  funded  startup   5  
  6. 6. Build Users, then drive Advertising Twitter was incorporated in April 2007, At around 30 million Monthly Average in time for it’s first round of external Users (MAUs) (see Metrics that Matter) investment with $5 million being Twitter introduced Promoted Tweets raised in 2007. and Promoted Trends in April 2010. Twitter’s strategy has been to build it’s user base and for the first 3 years of it’s life the company was focused on building the technology, the user experience and increasing the number of users. Cost  of  building  an  adver2sing  funded  startup   6  
  7. 7. Advertising Services, aimed at target moments Advertisers target “moments”, not just markets Twitter’s availability on a “second screen” complements traditional media, enhancing the overall experience of an event. Hashtags allows advertisers to directly target and engage with self-selecting users by interest. Integrating these hashtags allows advertisers to extend the reach of offline During Super Bowl XLVII, over 24 million Tweets regarding the Super Bowl were sent during the game advertising through continued conversation on alone and 45% of television ads shown during the Twitter. Super Bowl used a hashtag Advertisers are accessing target moments, not just addressing target markets Cost  of  building  an  adver2sing  funded  startup   7  
  8. 8. Supported by increasingly large investment rounds, Twitter has invested in further development of advertising services and now has more than 200 million MAUs and processes more than 500 million tweets per day. (see Metrics That Matter in Appendix) Cost  of  building  an  adver2sing  funded  startup   8  
  9. 9. By the Numbers Before it’s IPO Twitter had raised more than $1.1 billion but is still not profitable. So how are they doing and where is the money going? From the financials included in the SEC filing, I put together the following table for the last 3 years. Cost  of  building  an  adver2sing  funded  startup   9  
  10. 10. By the Numbers Adver2sing  kicks  in  2011   Cost  of  Revenue  +  R&D  +   SG&A  =  295%  of  revenue   $127m  loss   Source:  hBp://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm#toc564001_24%20     Cost  of  building  an  adver2sing  funded  startup   10  
  11. 11. By the Numbers Analysis •  •  •  •  •  •  In  2010  before  adver2sing  really  kicked  in,  TwiBer  was  earning  $20  million     through  selling  anonymized  data  about  its  users  -­‐  74%  of  total  revenue.    By  2012   when  adver2sing  was  well  and  truly  underway  this  has  reduced  to  15%  of  total   revenues.   In  2010,  cost  of  revenue  (running  the  data  centres  and  opera2ons  basically)  was   running  at  158%  of  revenue,  they  were  inves2ng  104%  of  revenue  in  R&D  with  a   further  82%  on  Sales,  Marke2ng  &  Adver2sing  (SG&A).    Yes,  that  add’s  up  to  295%   of  revenue  and  obviously  where  investment  was  needed.   In  2011,  R&D  was  at  75%  of  revenues  while  by  2012/13  it  was  si^ng  around  40%  -­‐   s2ll  massively  higher  than  the  tradi2onal  10%  spent  by  business  but  part  of   Twi:er’s  ongoing  R&D  commitment.   Sales  &  Marke2ng  expenses  remained  around  20-­‐30%  throughout.   G&A  was  at  a  high  60%  of  revenues  in  2010  as  backroom  systems,  processes  and   teams  were  being  established  seBled  down  to  a  more  normal  14%  by  30Jun13  as   opera2ons  became  fully  systemised.   2011  was  the  first  full  year  of  revenue  following  the  introduc2on  of  adver2sing   services  and  showed  how  successful  this  has  been  in  2012  and  2013.   11   Cost  of  building  an  adver2sing  funded  startup  
  12. 12. Investment Rounds From Crunchbase data you can see that Twitter continued to raise bigger and bigger rounds each year to support its ongoing investment in the technology and push to drive a larger user base: Yes that’s $1b+ Source:  hBp://www.crunchbase.com/company/twiBer     Cost  of  building  an  adver2sing  funded  startup   12  
  13. 13. Founders Shares It’s also worth noting in passing that in order to continue raising this level of investment the Founders, including Jack Dorsey, increasingly had to dilute their shareholding. According to the SEC Filing, Founders hold 23.6% with Jack Dorsey Jack Dorsey’s “mere” 4.9% is worth around $1 billion holding 4.9%. This is a perfectly normal part of capital raising that inexperienced entrepreneurs sometimes struggle with. With a share price around $50 per share, Jack Dorsey’s “small piece of the bigger pie” is set to be worth more than $1 billion Cost  of  building  an  adver2sing  funded  startup   13  
  14. 14. Twitter has shown that it can build a user base and then monetize it through Advertising Services. But it took $1b+ from investors willing to commit to support Twitter on this path. Building a world class product that engages users and provides advertisers access to target markets is an expensive exercise. It remains to be seen whether companies like Snapchat who are on the same path (they have raised $72m to date) will succeed but there’s no doubt it’s a high stakes game. Cost  of  building  an  adver2sing  funded  startup   14  
  15. 15. Dream the Vision, but Live the Numbers - Gaurav Tewari, Highland Capital Partners Cost  of  building  an  adver2sing  funded  startup   15  
  16. 16. www.vcfo.com.au   Remco  Marcelis +61 400 474 228 Co-Founder & Virtual CFO remco@vcfo.com.au
  17. 17. Metrics that Matter Twitter Co-Founder Jack Dorsey is also the founder of the mobile payments company, Square which is disrupting banks and credit card providers. At both Twitter and Square, Jack Dorsey is reportedly obsessed with metrics (see their full-wall dashboard in the image alongside). So what metrics do they use at Twitter that other businesses targeting advertising revenues can learn from? Cost  of  building  an  adver2sing  funded  startup   17  
  18. 18. Metrics that Matter Monthly Average Users (MAUs) MAUs are a measure of the size of the active user base. Twitter define this as Users who logged in and accessed Twitter through website, mobile website, desktop or mobile applications, SMS or registered third-party applications or websites in the month. As at 30 June 2013, Twitter reported 218 million MAUs.   Cost  of  building  an  adver2sing  funded  startup   18  
  19. 19. Metrics that Matter Timeline views Timeline views and timeline views per MAU are measures of user engagement. Defined as the number of timelines requested when registered users visit Twitter, refresh a timeline or view search results while logged in on our website, mobile website or desktop or mobile applications. In the three months ended 30 June 2013, Twitter had 110.3 billion timeline views, representing 691 timeline views per MAU.   Cost  of  building  an  adver2sing  funded  startup   19  
  20. 20. Metrics that Matter Advertising Revenue Per Timeline View As Twitter says “advertising revenue per timeline view is a measure of our ability to monetize our platform”. This is where the rubber hits the road as Twitter intersperses its advertising into the timelines shown to users In the three months ended 30 June 30 2013, Twitter’s advertising revenue per timeline view was $0.80.   Cost  of  building  an  adver2sing  funded  startup   20  
  21. 21. Metrics that Matter Do you know how many users you have, and how this is trending, how engaged your users are in the experience you are offering them and how you are monetizing this will this by interspersing advertising into their experiences … without affecting the quality of their user experience Cost  of  building  an  adver2sing  funded  startup   21