Thursday, February 19, 2009

Did the Social Networking Bubble Pop?

Last week, Twitter raised $35 million from venture capital firms Benchmark and Institutional Venture Partners in deal that valued the micro-blogging service at what is rumored to be an impressive $250 million.  While a quarter billion dollars for a nascent firm with no revenues to speak of might seem like a staggering sum, by industry standards, it appears perfectly rational.  With 6 million users, Benchmark and IVP paid roughly $42 per Twitter user, slightly less than Murdoch’s NewsCorp paid for Facebook users back in 2005, before social networking was the buzzword du jour.  Microsoft’s $240 million infusion into Facebook, however came at an irrationally exuberant price of $85 per user.  Given Twitter’s growth in unique visitors of over 800% comparing annual figures, the Twitter valuation begins to make even more sense.  At some point these businesses will have to generate significant revenues to justify the lofty expectations investors have placed on them, but don't expect the answer to be advertising.