Twitter Shuns Venture-Capital Money as Startup Values Plunge

Well I had to read that article. And it seems to hint at the piercing of the Silicon Valley Bubble -- not a floating bubble leading to a crash, but rather the isolation bubble, like Bubble Boy. What? Silicon Valley is Bubble Boy?

Evan Williams raised $22 million in funding for Twitter Inc., a Web site used by everyone from Britney Spears to Starbucks Corp. to Barack Obama. Sales? Those could come later -- that was, until the economy tanked.

Twitter may charge companies for access to its users so it doesn't have to ask venture capitalists for more cash, said Williams, the company's chief executive officer. As the value of Internet companies plunges this year, investors are asking for a bigger chunk of the startups they invest in.

"The VCs have the money, but they'll just negotiate harder," said Williams, who sold his previous venture, Blogger, to Google Inc. in 2003. "I want to manage things so I don't have to raise money in 2009."

In the rest of the tech world, and in the business world in general, making money is the first goal. No matter what else you are trying to achieve with your business, you need to make money so you can do the other things you want to do.

Which brings me to the Bubble. Silicon Valley has been this odd duck in the business world: An entire metropolitan region driven largely by R&D. In the Silicon Valley Bubble, the demands upon most businesses regarding sales revenues are largely removed from the environment. The dominant business model? Raise capital, then burn that capital in development of the FooBar Widget (as an imaginary example), hoping you get bought by Google or Microsoft before you run out of money. The real product is not the FooBar Widget, it's the company itself, and the targeted buyer is a new media or tech corporation with deep pockets and a hunger for new ideas.

It's a wonderful sub-economy, this Bubble, if you think about it. And necessary to cultivate many kinds of innovation.

Matt Marshall is blunt:

Last time, circa 2001, the entire VC industry got a “get-out-jail-free card” after the Internet bubble burst. That’s because the scores of new firms created in the late 1990s argued they should be forgiven for any poor performance — it was the bubble’s fault, and everyone was affected. Their investors — chief among them, the elite university endowments –agreed, and gave the VC firms more money to invest again. With most VC funds lasting for ten years, this ensured the VCs a very long life indeed.

He predicts that half the VCs will go under in the current economic turndown.

Barak Rabinowitz has an interesting post on how this paradigm shift is happening in the face of an un-tapped market.

There’s an elephant in the room of online advertising. An elephant in the shape of 400 million social networkers creating and consuming content, clustering around shared interests and activities — all who have yet to be tapped in any major way by web marketers.

Determining how to best reach these people is an ongoing struggle, one complicated by the soaring rate of user-generated content. For the first time, advertisers accustomed to the leading edge are now running to catch up. The conversation is no longer about display ads vs. text ads. Rather, the burning question has become: Who is going to profit from the opportunity presented by social networks, and how are they going to do it?

Some people will perhaps disagree, but my sense is that there hasn't been nearly enough thought put into this aspect as there might of been had the venture-backed Valley economy not been so comfortable in its Bubble. (Call it my reality-based bias as an entrepreneur whose company and clients always need to look to the bottom line.)

The challenge now, Barak points out, is that the end-users of these social network ventures aren't likely to take kindly to big changes to their user experiences, especially when those changes are motivated by revenue generation strategies. What's more:

The bad news for all social networking sites — video portals especially — is that users generally don’t have the mentality to view and click on ads when they are on these platforms. This is why search continues to be the most lucrative advertising strategy. Users are specifically seeking information in that arena. On social networks, people are primarily concerned with communicating with their friends, not looking to buy items or services.

Now with the Bubble deflating under the pressure of the bursting of that bubble of another kind, the investment banking bubble, maybe we'll start to see more innovation in ways to monetize social networks.

The case of Twitter is a good example of that challenge. Whither Twitter now?