I am not being sarcastic, but Twitter’s $100M funding round at a $900M pre-money or $1B post-money (hmm… does that detail really matter now) makes a lot of sense.

Twitter’s valuation is a perfect:

- manifestation of market supply and demand and

- reflection of the wanton destruction of old media companies and the fact that digital media has overtaken traditional media for good.

Searching for Hits

Over the past few years,

- MySpace stole Friendster’s thunder (if it could be called that) and was acquired by News Corp. for $580M

- then YouTube stole MySpace’s thunder (by piggybacking on MySpace) and it was acquired by Google for $1.65B

- then Facebook also stole MySpace’s thunder (by now a 60W lightbulb, mind you) and it turned down acquisition offers ranging from $800M to $2.3B, ultimately raising over $500M in capital and valuing itself at $15B courtesy of Bill Gates and Steve Ballmer.

While that valuation seemed crazy and Facebook might not ever sell raise money at that valuation - let alone sell for that amount - the recent crossing of 300M users, revenue figures over $500M per year for 2009 and rumored profitability (albeit brief or accounting-driven) suggests that Facebook did the right thing (yes, I admit it).  After all, despite all of the naysayers, it did raise another $200M from Digital Sky Technologies at a $10B valuation.

Yes, $10B is 33% off the $15B MSFT valued it just last year, but that was last year.  Last year, $5B was a rounding error, even for MSFT.  This year, CBS as a whole is worth $5B (ok, so right now it’s $7.5B).  While we’re at it, guess how much CBS was worth last year?  Yep, that’s right: $15B.  That has more to do with systematic factors in old media than CBS, mind you, but still.

But the main point I want to make is, in hindsight, Facebook has to its credit proved a lot of naysayers wrong - at least if we limit history to the period between 2008 and 2009.

Sure, in 2010, Facebook might hit a wall and it might never generate the kind of returns one expects a $10B-$15B valued company to generate… but that is not their main concern now.

And sure, Facebook might never IPO.  But the point is, when someone comes to you with $50M or $100M and is willing to invest at any valuation, I am not sure you can blame anyone for saying “nyet”.  Though as a fellow entrepreneur who has yet to succumb to VC money and/or crazy paper valuations, I whole heartedly agree with Bill Gates and Zoho’s Sridhar.

So back to Twitter, regardless of the lack of business model, the demand for the company’s stock far outstrips supply.  This is why the company’s raised more and more money regardless of the answer to “how will they make money”.

In fact, I can attest that the main problem I have encountered when pontificating with VCs is specifically being able to paint in very clear and candid terms how our company makes money now and how it will make more of it.  And therein lies the reason why Twitter is backing up the truck and looting the bank.  The instant Twitter dives into “monetization”, investors will have to put down their bongs and start to value the company on an accounting basis, whereas right now, it’s all finance.

In finance, the formula for Total Return is simply

Return = Income Gain + Capital Gain

Income Gain includes like dividends.  No self-respecting web company- including cash-rich Google - pays out dividends.

The Greater Fool Theory

So investors - be it private or public ones - make money on the Capital Gain, which calls for a stock to be worth more tomorrow than it is today.   Judging by the sharp rise in capital invested in Twitter in such a short time span, the investors are basically betting that traditional media will continue to shrink, new media will continue to grow… and there will be more investors looking to ride the Twitter train:

A hat tip to Crunch Base for the valuation and funding info.

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