It can cost a lot to focus on building a user base 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. This Presentation looks at some of the learning’s from details released as part of Twitter’s IPO listing

1. Lessons from the Twitter IPO
on
The cost of building an advertising funded startup

2. 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
Building users
before you
monetize with
advertising is a
high stakes
game
potentially years of losses.
Let’s look at some of the learning’s from details
released as part of Twitter’s IPO listing.
Cost
of
building
an
adver2sing
funded
startup
2

3. Background
Twitter was born on March 21, 2006 with a
simple idea:
Share what you’re doing, 140 characters at
a time.
Cost
of
building
an
adver2sing
funded
startup
3

4. 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

5. 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

6. Build Users, then drive Advertising
Twitter was incorporated in April 2007,
At around 30 million Monthly Average
in time for it’s first round of external
Users (MAUs) (see Metrics that Matter)
investment with $5 million being
Twitter introduced Promoted Tweets
raised in 2007.
and Promoted Trends in April 2010.
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.
Cost
of
building
an
adver2sing
funded
startup
6

7. Advertising Services, aimed at target moments
Advertisers target “moments”,
not just markets
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
During Super Bowl XLVII, over 24 million Tweets
regarding the Super Bowl were sent during the game
advertising through continued conversation on
alone and 45% of television ads shown during the
Twitter.
Super Bowl used a hashtag
Advertisers are accessing target moments,
not just addressing target markets
Cost
of
building
an
adver2sing
funded
startup
7

8. 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

9. 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

10. By the Numbers
Adver2sing
kicks
in
2011
Cost
of
Revenue
+
R&D
+
SG&A
=
295%
of
revenue
$127m
loss
Source:
hBp://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm#toc564001_24%20
Cost
of
building
an
adver2sing
funded
startup
10

11. 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.
11
Cost
of
building
an
adver2sing
funded
startup

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:
Yes that’s $1b+
Source:
hBp://www.crunchbase.com/company/twiBer
Cost
of
building
an
adver2sing
funded
startup
12

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
Jack Dorsey’s
“mere” 4.9% is
worth around $1
billion
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
Cost
of
building
an
adver2sing
funded
startup
13

14. 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

15. Dream the Vision, but
Live the Numbers
- Gaurav Tewari, Highland Capital Partners
Cost
of
building
an
adver2sing
funded
startup
15

16. www.vcfo.com.au
Remco
Marcelis
+61 400 474 228
Co-Founder & Virtual CFO
remco@vcfo.com.au

17. Metrics that Matter
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

18. Metrics that Matter
Monthly Average Users (MAUs)
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.
Cost
of
building
an
adver2sing
funded
startup
18

19. Metrics that Matter
Timeline views
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.
Cost
of
building
an
adver2sing
funded
startup
19

20. Metrics that Matter
Advertising Revenue Per Timeline View
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.
Cost
of
building
an
adver2sing
funded
startup
20

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
Cost
of
building
an
adver2sing
funded
startup
21