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

Cost  of  building  an  adver2sing  funded  startup   2  

Twitter was born on March 21, 2006 with a simple idea: Share what you’re doing, 140 characters at a time.

Background

Cost  of  building  an  adver2sing  funded  startup   3  

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.

Cost  of  building  an  adver2sing  funded  startup   4  

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.

Cost  of  building  an  adver2sing  funded  startup   5  

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

Cost  of  building  an  adver2sing  funded  startup   6  

Cost  of  building  an  adver2sing  funded  startup   7  

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)

Cost  of  building  an  adver2sing  funded  startup   8  

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.

Cost  of  building  an  adver2sing  funded  startup   9  

By the Numbers

Cost  of  building  an  adver2sing  funded  startup   10  

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.  

Cost  of  building  an  adver2sing  funded  startup   11  

12  

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+

Cost  of  building  an  adver2sing  funded  startup  

13  

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.

Cost  of  building  an  adver2sing  funded  startup   14  

Dream the Vision, but Live the Numbers

- Gaurav Tewari, Highland Capital Partners

Cost  of  building  an  adver2sing  funded  startup   15  

Remco  Marcelis Co-Founder & Virtual CFO

+61 400 474 228

remco@vcfo.com.au

www.vcfo.com.au  

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?

Cost  of  building  an  adver2sing  funded  startup   17  

Metrics that Matter

Cost  of  building  an  adver2sing  funded  startup   18  

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)

Cost  of  building  an  adver2sing  funded  startup   19  

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

Cost  of  building  an  adver2sing  funded  startup   20  

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

Cost  of  building  an  adver2sing  funded  startup   21  

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