By Michael Woloszynowicz

By Michael Woloszynowicz

Tuesday, August 2, 2011

These Twitter Numbers Don't Stack Up

A recent report found here announces that Twitter recently raised $800M in venture capital, $400M of which goes to the company while the other $400M will be used by employees to cash out some of their shares. While the figure raised is impressive, the claim that Twitter has revenues of $200M per year raises a number of questions. These figures are either incorrect or it makes you really wonder why they need venture capital in the first place.

Let's consider that a recent report published that the average developer salary at Twitter is $125k (found here) and the report in question claiming that Twitter now has 600 employees. Based on these figures Twitter spends roughly $75M per year on salaries. That leaves nearly $125M per year to cover the costs of increasing hardware demands, rent, and miscellaneous expenses, which seems quite high for costs that are often proportionally lower than employee salaries.

The justification is that Twitter needs to expand its workforce to expand internationally, and so it needs the injection of capital to cover the associated expenses. The problem with this claim is that given Twitters lofty valuation and increasing Tweet and user figures, you would expect that the revenues will continue to increase at a rapid rate. Since revenue is increasing it should suffice to cover the costs of an expanding workforce along with the international expansion. The better question to ask is whether Twitter actually needs more than 600 employees, does it even need 600? A look at 37 Signals shows that a great company can be maintained with a 10-20 people, while most startups have only a handful of developers. Sure Twitter has scaling issues that it needs to deal with, data that it needs to comb through, multiple client versions, but it still seems excessive. My worry with excessive funding is that it takes away the need to be lean, the need to survive dwindles, and focus often gets lost.

I'm not saying Twitter is doing the wrong thing by taking the money, but at $200M in revenue I would have to have a pretty good reason to further dilute my shares. As with most companies I suspect that Twitter simply took the money because it's being offered. There's likely no solid justification for it other than to publicize how valuable the company is, and to handsomely reward its employees with cash for their shares.

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