All a twitter about venture capital

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Funny how the wheel turns, isn’t it. Last year Evan Williams bought VCs Charles River Ventures out from his business Odeo, and set up Obvious.

I interviewed Ev late last year. One of his comments to my question of why Obvious was that he wanted to create an environment where wacky ideas could be tried without having to justify or explain them to a board, or investors, or anyone else.

I am sure that really gels with a lot of folks out there – in some respects Facebook has provided the ultimate such environment — it’s not a big leap to create a quick ‘n dirty Facebook app, throw it up against the F8 wall and see if it sticks, if it does keep tweaking, if not, repurpose. And it’s great to do so without having to write business plans, proposals or seek approval from on high to do so. But I digress…

In our interview, Ev went on to say:

Some of them won’t go anywhere. Once in a while, the wacky idea will be just what people didn’t know they were missing in their lives.

And so Twitter was born – a bit wacky, but boy the digerati latched onto it. I’ve certainly written enough, and so have others, about Twitter so I won’t go into it in any more detail, but what’s interesting is now that Twitter has gained traction it has matured to the point where it has attracted on board funding from the very firm Ev showed the door to last year – Charles River Ventures.

Twitter has taken in a round from CRV, Union Square Ventures and a number of angels, notably Marc Andreessen and Ron Conway. Fred Wilson from Union Square talks abut the investment here. This part of his post is what interests me most:

Twittering is an emerging new form of communication on the Internet that changes the expectations associated with other forms of communication and yet it’s fundamentally different than blogging. Twitter provides a platform for banter that blogging doesn’t and it’s available in so many places via IM, mobile text messaging, or the Web that it induces a different sort of behavior. Twitter encourages people to adapt and invent behavior to suit their needs.

This emergent behavior is particularly intriguing. Some of the most interesting platforms on the web have been extended and enhanced by users and now support all kinds of activities and behaviors that the creators of the service never intended. Twitter makes its innovative network for short, asynchronous public communications available via an API for anyone to extend.

If you think about it, Twitter extends short messaging (SMS) style communications to the web and does it in an open way that anyone can build on top of it. I think we’ve only begun to see the kinds of things that can be built on top of a messaging system like this.

I totally agree with Fred and look forward to seeing and participating in some of those interesting things.

The blogosphere has been all a twitter about this financing. Some of the posts have intimated that the team at Twitter raised this round with no business plan or profits – here’s Paul Kedrosky’s take:

Seeing that Twitter closed a funding round, and spotting the associated incredulity about Evan’s company not having a business plan, reminded me of something: Whatever your feelings about Twitter, business plans are overrated, and profits perhaps even more so.

Why? Two reasons. First, because VCs are professional nit-pickers. Give them something to find fault with, and they’ll do it with abandon. I generally tell people to come to pitch meetings with less information rather than more. Sure, you’ll get pressed for more, but finesse it. Presenting a full and detailed plan is, nine times out of ten, a path to a “No” — or at least more time-consuming than having said less.

Profits are a different issue. Being profitable too soon gives investors, rightly or wrongly, an idea of what the margins are on the business, as opposed to what they could be in some perfect world. As a result, it takes a mighty force for them to not start wading in with discounted present value worksheets, and the like, thus hammering your valuation and generally making funding much more complicated (and equity consuming) than if you were wildly unprofitable.

What do investors prefer. Certainly in my experience a great business plan per se does not guarantee closing a funding round. VCs are all about risk minimisation and the kind of traction Twitter has been able to garner will have derisked the investment sufficiently for Twitter’s investors to consider it a punt worth taking. Bear in mind also that Ev has built a strong team around Twitter, not to mention huge brand awareness (amongst the digerati).

Andrew Parker justifies what may appear to some as a ‘cart before the horse’ funding round as such:

You can have the most killer business model in the world, more genius than AdSense, but if you have no traction, it will never matter.

But, if you have traction, it’s pretty easy to back into a business model. In fact, taking this path, you’re more likely to back into a business model that endemic to your web service instead of a business model that offensive or antagonistic to your users.

It’s less about frothiness and more about priorities.

Umair Haque picks up on this and eloquently argues that when the market is rapidly shifting it doesn’t work to apply out of date investment principles when placing your bets. His post is well worth a read and his conclusion is a good segueway to sign off on:

Spreadsheets aren’t strategy.

Rather, next-gen investors are better off understanding why and how value creation and value capture will shift over the next 2-5 years – and then invest in plays which can dominate those shifts.

Numbers are important – sure. But it’s understanding the deeper economic logic which really counts.

Of course, this is exactly what makes Twitter a great bet. Kudos to Brad, Fred, Ev, and the Twitter kru – I think something very cool will happen here.

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