Twitter + Investors = $255M Valuation. Huh??

Twitter is all the rage, but I am confused. Not by how to use Twitter, but how theoretically intelligent people can invest a total of $55M, at a perceived valuation of $255M, in a company that has no business model, no revenue streams and that has a retention rate of close to 60% after 60 days, meaning 40% of the users do not come back. Huh? Is there fear of missing a 10X ROI or the next Google? That wouldn’t be true as Google came out of the box with a business model. I’ve read and reread recent articles in the WSJ and the NY Times. I watched an interview with Evan Williams on CNBC from the All Things Digital conference. The founders openly admit they have no business model, although they have a couple of ideas. They admit they have interviewed business oriented types but have “turned most of them down”. They offer that their plans for the future include managing growth and focusing on a new homepage. Huh? My work with Venture Capitalists, Private Investors, new ventures and corporations relied on several items to start an investment conversation. Top priorities have always been a sound business model, a proven management team and exit strategy that returned value to the investors. Most investors also look for the product or service to provide unique value to the target market, whether the service solves a problem, creates an efficiency, reduces costs of an existing operation - there has to be something truly unique that offers differentiation from an existing practice, or a disruption in an existing paradigm. Does Twitter do any of this? Can’t I broadcast via text message, email or even on Facebook what I am doing, where I am located, or what I am seeing? Where is the differentiation? Many mobile apps are available that let me do these things. The one apparent difference is that I have to sign up to follow someone on Twitter - a person, group, product, event, company - who might otherwise not know that I am interested. I could poll people and receive instant replies from my “followers”, as David Pogue has done during speaking engagements. I’m sure there are other uses, but are they clear differentiators that could drive a viable business model, the current valuation and a perception of a sale of close to $1.0B? Does anyone remember Broadcast.com? Sold for $4.0B to Yahoo! and made Mark Cuban rich. How’d that work out for Yahoo!?

My other concern is that smart people in large corporations are already figuring out ways to use this FREE tool in their marketing campaigns to drive incremental revenue, market share and to develop loyalty programs for their products and services. Is the cart before the horse? If these folks figure out how to make money off of Twitter before Twitter figures out how to charge them for use of the service, can Twitter shut off the spigot and then ask to be paid for business models created by others?

Look, I’m sure the smart folks who have invested in Twitter have more information about the company and potential business models than the general public, but it sure doesn’t appear that way from interviews. They obviously have done their due diligence and vetting before making an investment, and had their number crunchers pick apart whatever financial models they were provided by Twitter. I also suppose they are sitting in Board meetings offering guidance to the founders and direction on building the company.

Perhaps the most valuable information is what Twitter stores on its servers from the Tweets of its users that can be parsed in ways akin to what Google does to generate very targeted advertising campaigns. And therein may lie the answer to the business model conundrum. Hmmmmm.