Lessons from the Twitter IPO The cost of building an advertising funded startup on
Oct 21, 2014
Lessons from the Twitter IPO
The cost of building an advertising funded startup
on
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
potentially years of losses.
Let’s look at some of the learning’s from details
released as part of Twitter’s IPO listing.
Building users before you monetize with advertising is a high stakes game
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Twitter was born on March 21, 2006 with a simple idea: Share what you’re doing, 140 characters at a time.
Background
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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.
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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.
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Twitter was incorporated in April 2007,
in time for it’s first round of external
investment with $5 million being
raised in 2007.
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.
At around 30 million Monthly Average
Users (MAUs) (see Metrics that Matter)
Twitter introduced Promoted Tweets
and Promoted Trends in April 2010.
Build Users, then drive Advertising
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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
advertising through continued conversation on
Twitter.
Advertisers are accessing target moments,
not just addressing target markets
During Super Bowl XLVII, over 24 million Tweets
regarding the Super Bowl were sent during the game
alone and 45% of television ads shown during the
Super Bowl used a hashtag
Advertising Services, aimed at target moments Advertisers target “moments”, not just markets
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)
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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.
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By the Numbers
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Source: hBp://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm#toc564001_24%20
Adver2sing kicks in 2011
Cost of Revenue + R&D + SG&A = 295% of revenue $127m loss
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.
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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:
Source: hBp://www.crunchbase.com/company/twiBer
Yes that’s $1b+
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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
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
Jack Dorsey’s “mere” 4.9% is worth around $1 billion
Cost of building an adver2sing funded startup
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.
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Dream the Vision, but Live the Numbers
- Gaurav Tewari, Highland Capital Partners
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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?
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Metrics that Matter
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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.
Metrics that Matter Monthly Average Users (MAUs)
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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.
Metrics that Matter Timeline views
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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.
Metrics that Matter Advertising Revenue Per Timeline View
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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