Friday, July 27, 2007
Deal Note: Twitter's Nonexistent Business Model (Or, How to Invest in Media)
USV invests in Twitter.
I was going to write a long post about what you should take away from this investment, and what makes Fred and Brad particularly astute media investors - but Paul K already wrote pretty much hit the nail on the head :)
This approach - an almost disturbing lack of interest in the business plan/model/etc - is something all of today's great media investors have.
But I think the reasons are different than those Paul outlines (better info gives investors more ammo to reject investments with).
When an industry requires total economic reinvention - new assets, capabilities, revenue streams, market space, the whole nine yards - it's futile to stick to the sterile nostrums of a printed "business plan".
This should be intuitive. Total economic reinvention implies almost perfect uncertainty. Under conditions of perfect uncertainty, it's a suckers bet to put faith in rigid plans.
Now, this isn't to say that you should descend into irrational exuberance, and forget about value creation and value capture altogether.
Rather, what counts is the ability to tap (better yet, create) many different kinds of revenue streams, offsetting the systematic risk of investing in the space in the first place.
More simple - as I put it in my talks - at the edge, business models happen.
There are many other criteria that make a great next-gen consumer investment, to be sure. But this is one of the biggies.
Now, contrast this approach, with, for example Jeremy Liew's.
Jeremy is a very intelligent guy. He writes lucidly and eloquent analyses - all of which are built on today's assumptions.
The point is that I'm not sure most consumer investors today are making great investments, because their larger investment strategies are built on an industrial economic logic.
There's little strategic point in focusing no how, for example, to grow a next-gen media business to $50m in revenues or how much $$$ ad nets make if it's the larger economics of the industry which are in an almost total state of flux, because the new value chain hasn't yet emerged.
Put another way, too often, these kinds of elaborate analyses built on fixed assumption have a very steep opportunity cost in industries where resources, competencies, revenues streams, business models, etc are exactly what are undergoing seismic shifts - they blind us with illusions that fixed cells in spreadsheets are strategy.
Spreadsheets aren't strategy.
Rather, next-gen investors are better off understanding why and how value creation and value capture will shift over the next 2-5 years - and then invest in plays which can dominate those shifts.
Numbers are important - sure. But it's understanding the deeper economic logic which really counts.
Of course, this is exactly what makes Twitter a great bet. Kudos to Brad, Fred, Ev, and the Twitter kru - I think something very cool will happen here.
those are kind words indeed.
we agree with you of course that focusing on business model too early in a web based media business, particularly a new fangled one, is a bad idea.
Great post Umair.
To play devil's advocate, how would you differentiate investing in Twitter, with bags of potential but no obvious revenue model, with the old pre-bubble strategy in investing in "eyeballs" and traffic. At least with a company like pownce, they have a semblance of revenue in mind with their targeted ads and "pro" accounts.
The only major difference in my mind, is that pre-bubble VC's shelled out money to establish market-share, whereas now investment is flowing to companies that have, or are rapidly establishing marketshare. Though, at least we aren't seeing massive valuations on companies that ship 20 lbs bags of dog food in the post.
Back on point, I completely agree with you regarding the fluid/dynamic model. The troubling factor for me is that most of the VC's I approach still value solid plans and blind-stab financial projections (http://www.sequoiacap.com/ideas/)