Twitter could be worth $11 billion (£6.8 billion) according to specialist financial researchers Greencrest Capital, which has predicted the social network could also be preparing for public flotation next year.
The Drum asks industry experts what the challenges are for Twitter if it does enter an IPO and how it can entice more advertisers to its platform at scale.
Twitter’s estimated value of $11 billion seems a relatively solid evaluation, having been through a funding round mid 2011 where it generated around $800 million in funding, which if you extrapolate out gave it a value of $8 billion. Since then it has undergone considerable growth. As with Facebook its value is based on the scale of people using the service and the potential monetisation of that scale over time.
Twitter is interesting for advertisers because it can see people’s interests and who and what they follow. An IPO may be a way off though because there is more it can do to help advertisers interface with the platform and scale up their use of it which is currently a challenge.
There are opportunities for it to learn from Facebook’s mistakes although I think we have not yet seen the consequences of Facebook’s IPO unravel.
If I was Twitter I wouldn’t be focused on building a company necessarily to meet a valuation but as a commercial business it must build a platform that develops in a way that is easy to interact with from an advertising perspective while maintaining the balance of the consumer experience.
Twitter needs to move away from being a nice-to-have to a must-have part of the media plan. It needs more big-spending brands to get involved and it must demonstrate to them and the rest of the market that it can drive significant revenues constantly – not just around campaigns alone.
There is still an ROI challenge around Twitter for some brands and if it could unlock some of the data it has and collaborate more closely with agencies and brands with that data we could all reap the benefits. For example there are opportunities around its ability to target geographically, and potential around cluster groups of influential people, which, if merged with iTunes data and segmentation tools of agencies could really help unlock insight. That ability to demonstrate valuable tech insight would also be of interest to investors and its value.
However, its current product suite won’t be enough, it needs to innovate more quickly. Whether the changes it has made to senior management recently are indicative of Twitter getting its house in order or whether it’s preparing for IPO, either way it definitely feels like a commercial move. The new hires indicate it is innovating and at the same time making its platform more robust, but next year could be a bit early for an IPO.
Twitter is successfully growing its revenue model – Promoted Tweets and Trends are a fantastic tool for brands, and have yet to cause any sort of public backlash.
It is also centralising its growth around its own platform, in a way that has only annoyed developers and tech journalists, not the general public. Most importantly, Twitter has kept celebs, TV and news brands on side, as they are what keeps normal people on Twitter.
It is growing faster than ever, and its valuation is [currently] low enough that institutional and individual investors scared off by the fallout of Facebook and Zynga would be interested. In short, there's no reason why Twitter's growth trajectory should slow down before May 2014.
Clearly the challenge then will be in what happens to its finely honed resonance algorithms and customisable news feeds when quarterly results are at stake after an IPO. I think any move towards an Edgerank-type approach of algorithmically selecting the content in an individual's feed would feel like a move away from its mission, as Facebook has since its own IPO.
But Facebook's IPO has generated so much fallout because it was overpriced, not because it is inherently unsuccessful – the speed with which it has changed the platform has increased because of the overpricing, and has been under greater scrutiny because of the bad PR, so there is much that Twitter will have learnt from.
Without knowing how much profit Twitter is pulling in and without seeing its commercial growth plans and potential it is very difficult to say if $11 billion is too high or not. To achieve this kind of figure Twitter will need to mature its advertising capabilities quite significantly and show that it has a sustainable business model.
In the past few years we have seen incredible growth in both users and time spent on the platform However, there seems to have been even more buzz over the last few months surrounding Twitter and it’s clearly building huge momentum.
It seems a logical step in the growth of the company [for it to float]. Its main challenges are sustaining its growth, entering new markets and maturing its ad capabilities. One problem Twitter has is the lack of data that it has on its users.
Where Facebook has really rich data on its users such as age, sex, location and interests, Twitter really can only build up a picture of an individual user via what they follow and interact with on the platform. This does present some quite significant challenges and it will need to come up with some very clever solutions to scale.
Seeing the IPO as the final goal has seen other companies set expectations far too high. By making it another significant step in the journey rather than the be all and end all, as well as having a much longer term plan should help Twitter avoid some of the problems other companies [Facebook, Zynga, Groupon] have experienced.
The $11 billion ‘headline figure’ seems high to me. It should be noted though, that the company behind the research, Greencrest Capital, said that ‘its own internal valuation model’ has Twitter closer to a lower August 2011 figure of around $8 billion.
Twitter doesn’t yet have a revenue stream to match up with this large valuation, though the promoted suite of products has greatly improved throughout 2012. The company's president of global revenue, Adam Bain, has said promoted trends and tweets yield engagement rates between 3 per cent and 10 per cent. And Twitter has been careful to limit your exposure to promoted trends and posts, unlike Facebook, where increasingly it is intruding on both desktop and mobile.
Still, it doesn’t pull in the billions of ad dollars that Facebook generated the year before its IPO. And Twitter still relies on the U.S. for 90 per cent of its revenue.
So to put it in a better position to reach a high valuation, it would likely need to show meaningful revenue and continued growth from its core advertising business.
I don’t know if it merits the high valuation just yet, but what has contributed to it certainly has been Twitter’s steady growth in users and new monetisation efforts. These are pulling in revenues and point to a good 2013 for Twitter.
It has also started firming up its management structure, announcing in December that:
Finally, Twitter has improved its usability and experience. It has refined its photo app to better compete with Instagram and although Instagram is out following their very public spat in December, the partnership with Pinterest and others are strong.
If it does float, most signs are pointing to a likely 2014 IPO, with 2013 being used to pave the way through increased revenues from its promoted products. However, we should also be on the lookout for acquisitions in 2013. There is unsubstantiated speculation about an acquisition by Apple.
One of the real challenges for Twitter if it does decide to go public will be the perception of those following its progress. What should they learn from the fallouts seen from FB, Groupon, Zynga’s own IPOs? Don’t get over-hyped.