$1B Twitter? What Do the Investors Know that No One Else Does?

I have nothing against Twitter. I Twitter. But there’s a difference between enjoying a service and seeing it as a business. And that’s why I scratch my head every time I see more money poured into it. Given yesterday’s announcement of a $100 million round, I have to wonder whether there is something under wraps that the investors hear about, or if their brain cells simply succumbed to oxygen starvation from whatever degree of smog might exist in Silicon Valley.

Checking Twitter’s profile on CrunchBase suggests a total of $55 million invested even before this current round. Say the company gets the full amount in speculation. That’s one humming big sum considering that Twitter brings in next-to-nothing. At least from what anyone can tell from the outside.

But that’s the point, isn’t it? Because you can’t tell for sure. That’s why makes Twitter a potential danger. It seems to offer a great platform for social networking, and there are companies providing a growing list of add-on products and services. It’s an organically-growing ecosystem, and ultimately it’s the ecosystem that makes the product and not the other way around. What would the iPhone be worth if developers hadn’t created apps to go with it? Not a whole lot, I suspect.

So there’s potential. A colleague of mine, Tim Byers over at The Motley Fool, suggested in February that Twitter could be worth a billion, at least in theory:

Here, the best benchmark is a focus group — a small group of individuals whose responses inform researchers hoping to understand the opinions, intent, and purchasing habits of a market. Online sources I consulted say that marketers often spend $3,000-$6,000 to establish one, or at least $300 per participant if you assume a 10-person group.The trouble with focus groups is that they’re hypothetical. Twitter, on the other hand, is a collection of conversations — a digital “thought stream,” as TechCrunch’s Erick Schonfeld wrote on Sunday. Twitter allows marketers to divine both intent and action. Suddenly, $167 per user doesn’t sound so crazy, does it?

I actually remember discussions with friends a number of years back about how online conversations could become gold mines of research. And certainly steps like adding location metadata to tweets could help boost the value of that data to marketers.

But you always have to get back to reality. Those 140 character bursts of data largely come from a tiny portion of the users, and many of them are companies using automatic feeds. That means the value of that information might have to be in the thousands of dollars a person. And, really, have you followed many Twitter conversations? Not necessarily a whole lot of fodder for companies, though I’ll grant that there are things to be learned. However, sorting through them and gaining the insights is no small matter.

It may be that the VCs have been Told the Truth and see a phenomenal business model. But models are theory on paper. Reality is making them work. If you’ve been in business, you know that many preconceptions suddenly look far less promising when put to the test.

Maybe we’re seeing another round of dot com mania. Personally, I suspect that may be the case. So why do I bother to mention it? This isn’t an investment blog, after all. Well, when the money fever starts to rise, it has implications on how the industry works:

• Start-ups think that they are worth something, whether they’ve figured out the money issue or not.
• People running companies that do get funded think that they know something because people are handing them money, even though they also know that people handed billions to Bernie Madoff.
• Companies looking for a smart business model think that the Funded are good prospective partners because, well, they’re funded.

What is necessary, though, is some skepticism and independent thought and a chance to move in the direction yet to be discovered by everyone else.

Image via stock.xchng user nkzs, site standard license.