Should Twitter take the cash?

Timing is everything in business and knowing when to sell is perhaps one of the greatest skills an entrepreneur should have.

If today’s reports that Twitter was valued at $8-10 billion in recent acquisition talks with Facebook and Google are correct, then co-founder Biz Stone, chief executive Dick Costolo and the management team should be seriously considering selling out.

According to the reports, the talks got nowhere – it seems Twitter’s managers feel they can add a lot more value by building up what is an early stage business before floating it or perhaps selling it.

Twitter’s founders probably feel they are really at the start of their journey. They have built a huge user base (which continues to grow rapidly) and now they are finding ways to monetise this.

However, generating revenue and then profit from the business remains a challenge. It is estimated that Twitter will generate about $100 million in revenue from allowing “promoted” tweets on its site, and by selling Twitter feeds to search engines such as Google.

But the site has yet to turn a profit and there are some question marks over what else Twitter can do to grow its earnings to the point that it justify a price tag like $10 billion – which is a staggering 100 times revenue!

Part of the problem as I see it is that unlike Facebook, many Twitter users don’t actually use the Twitter home page as their main user interface. For example, everyone in this office uses TweetDeck, which of course means we never see promoted Tweets.

If Twitter had everyone focused on its home page, it could do all sorts of things there in terms of selling advertising and creating new products such as location-based services. But with third-party clients flourishing, the effectiveness of these advertising products is probably diminished.

The massive valuations being thrown around the social media sector right now – such as Facebook’s $50 billion valuation – would be enough to make Twitter’s owners believe they can hold out for a better price sometime down the track.

But they would want to be supremely confident of their ability to create a giant, sustainable business.

To me, the $10 billion looks almost too good to refuse.