This economy has got me scratching my head a lot lately.
There are just so many things I don't get, especially when it comes to financing. We're told constantly that banks, venture capital firms and other lending institutions are reluctant to hand out loans, and tons of small business owners I talk to tell me they're being squeezed because of the tight reins on financing right now.
So how the heck did a company that hasn't made a red cent get $35 million in venture capital money?
This week we found out Twitter, the social networking site, scored $35 million in venture capital, bringing its total financing infusion to $55 million.
The company is bringing in the gold, but doesn't have a plan yet to show how it will be turning the worldwide obsession with micro blogging that it has launched into actual revenues.
This from the Associated Press:
Twitter intends to start testing ways to make money this spring. And co-founder Evan Williams promises it won't drive away the more than 6 million people who have set up accounts on the unconventional communications network.
Twitter "intends" to test ways to make money this spring? This reminds me of companies during the dot-com boom, when just a cool idea translated into big VC dollars, but many firms didn't even make a dime.
We're in a recession, right?
Don't get me wrong. I love Twitter and use it almost every day. I think it's a great tool to network for a job, or promote your small business. But how come lenders and investors are saying "yes" to Twitter but "no way" to other firms right now?
I asked some industry experts to help explain why.
Here's a sampling of their thoughts:
"The reason a 'company' like Twitter can get financing when tangible businesses can't is the same reason Google spent $1.65 billion to acquire YouTube. It's the same reason that scores of companies with no revenues saw their stock prices skyrocket during the dot-com bubble: these guys have a big audience. For Twitter, it's the million-plus-strong user-base. Venture capital investors seem to agree that there has to be a way to monetize a service like Twitter -- after all, some of its users (including small businesses and entrepreneurs) have managed to leverage the site to grow their businesses in a big way. While a number of social sites (like Digg, which lost $4 million in the first three quarters of 2008) have floundered when it comes to bringing in a return on investment for venture capitalists, we'll see what the future holds for Twitter."
Jonas Elmerraji, portfolio manager and editor of Rhino Stock Report.
"Largely because they touch so many people. There is a standing belief that if a firm can touch a lot of people then the value of that touch can be monetized. In this instance, the most likely path is one of data mining. Applied, this would be real-time analysis on consumer interests, wants and needs, which could be translated into advertising offers, investment insight and politics."
Rob Enderle, technology analyst, Enderle Group.
"The social networking space is very hot from a Web traffic and investment standpoint, so a company that is not in this space may not be as desirable by the VC and investment community."
Scott Testa, marketing teacher at in Philadelphia.
My two favorite comments came from a few of my followers on Twitter who responded to my recent tweet: "Financing riddle: why can no-sales-generating Twitter get $35 million in VC seemingly over night?/i thought money was tight."
"it's all about potential. I'm v bullish on Twitter's ability to monetize audience. surprised if it doesn't grow to be a $1Bn biz."
"Twitter slept with someone rich?"
Now that makes sense.
What's your take? You can tweet me if you like: twitter.com/careerdiva.