Over the course of five years, tumblr has received over $125 million in VC funding. While the company is now talking about how it plans to generate revenue, tumblr has not released any figures, so it is safe to assume it hasn't yet generated meaningful revenue from its 142 million monthly users.
But that's nothing. Since its inception in 2007, twitter has hauled in over $1.1 billion. That's not revenue. That's VC funding. Charles River Ventures, Union Square Ventures, Benchmark Capital, T. Rowe Price, Morgan Stanley, and Kleiner Perkins Caufield & Byers (among others) have all bought into twitter. For the last two years twitter has been running an ad platform. Supposedly this year it will generate between $226 million and $400 million, but those are guesses from outside observers.
Facebook, of course, is the king. The company raised over $2.2 billion over eight years. The massive IPO generated plenty of money for the banks that set it up, but now that insiders (VCs and early employees) are exercising options, that activity and concerns about a slowdown in revenue for Facebook's advertising platform have caused the company's stock to drop to half its IPO price.
The manipulation of the Facebook IPO by banks is well-known, but as Haydn Shaughnessy points out, the unease many observers felt in the runup to it was not declared publicly. Shaughnessy points to optimism bias, but there is something else at play here.
From the heady early days of the Web, VCs have been funding The Next Big Thing. From Yahoo! to Amazon to Google to MySpace to Facebook, they've been funneling millions of dollars of other people's money into startups, some of which succeed, and most of which fail. It's a high risk game, and everyone involved knows this. But when does a pre-IPO, VC-funded company become too big to fail?
If twitter doesn't get gobbled up by Google, Apple or Microsoft, it will have to stand on its own two feet. To use a quaint term from the last century, it will have to make a profit. Thankfully it will only have to make a profit long enough for an IPO to be put together. The incestuous relationship between the tech press and VCs (well documented by the relentless Brian S. Hall) means that if VC wants a company to get talked up before an IPO, it will happen. The banks that put together the IPO will make a nice haul. The VCs will recoup their investment. Increasingly, company founders are scooping up their winnings right after the IPO, instead of waiting around like everyone else the way they did it in the old days. Who says nobody learned anything from the Dot Bomb Era?
Twitter might remain profitable after such an IPO, and it might not. That seems to be immaterial to the players who have the most money in the game. Their interests are aligned toward bringing a heavily-funded company to IPO, because that is where they generate revenue. Long term revenue and (dare I say it) profitability for the newly-public company are, in such an environment, an afterthought.
So there are two kinds of revenue in Silicon Valley these days. The first type is the kind you read about in school. It is the kind that an owner of any business anywhere on the planet knows as a law of nature. In return for your goods or services, you get revenue. You try to bring in enough revenue to cover your expenses, and when you do, you're coming out ahead.
The second type doesn't work the same way. It is the winnings from a bet. But this isn't the usual kind of bet. This is a bet held not just by one player, but by many. And the house is in on the same bet. Anyone who comes late to the table isn't in on that bet, and their odds aren't nearly so good.
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