Bloomberg News

Twitter Investors Williams to Branson Await IPO Windfall

September 26, 2013

Twitter Headquarter

The Twitter Inc. logo and signage is displayed on the facade of the company's headquarters in San Francisco. Photographer: David Paul Morris/Bloomberg

Twitter Inc.’s initial share sale is poised to generate riches for its founders and venture investors -- as well as celebrities from Richard Branson to Ashton Kutcher and a host of lesser-known backers who bet early on the microblogging service.

Take Jay Virdy, who left AOL in 2007 to run Summize, a search engine for real-time information. Twitter acquired Summize in July 2008, doling out close to 10 percent of its stock at the time to Virdy, his co-founders and investors, said three people with knowledge of the transaction, who asked not to be identified because the terms weren’t disclosed.

“When I told people I was selling the company to Twitter, they all said, ‘What the hell is Twitter?’” Virdy, 49, said in an interview. “I said, ‘Don’t worry, it’s going to be big.’”

Summize’s stock, which was then valued at around $10 million and would now be worth hundreds of millions based on private-market valuations, has created the type of fortune that’s made Silicon Valley famous. It also illustrates how Twitter’s plans to go public in the largest IPO for a U.S. technology company since Facebook Inc. (FB:US) won’t just reward the usual assortment of venture investors, founders and early employees. A cast of hundreds of other private shareholders -- who had the wealth and means to get access to the stock -- are also set to be enriched.

Unlike most startups, which have concentrated pools of investors, the microblogging company’s shareholder base has swelled since its 2006 founding. Along with co-founders Evan Williams and Jack Dorsey and investment firms Union Square Ventures and Benchmark, Twitter’s stock has spread to buyers ranging from large institutions like Morgan Stanley and T. Rowe Price Group Inc. to special investment funds set up for the rich and famous.

Shareholder Parameters

In total, Twitter has raised more than $700 million, with legendary venture firm Kleiner Perkins Caufield & Byers committing $200 million in 2010 when the company was already worth more than $3 billion.

More than 50 individuals and institutions now own shares through direct purchases, secondary sales and acquisitions, and hundreds more are invested through various funds. That group includes Branson, the billionaire founder of Virgin Group; actor Kutcher; and Saudi Prince Alwaleed bin Talal, said people with knowledge of the matter.

Co-founder Williams is the biggest single holder with about 15 percent of the shares, according to people familiar with the company’s ownership.

July Filing

The breadth of the shareholder base underscores the avid investor interest in the San Francisco-based company and its more than 200 million users. Twitter in July filed confidential paperwork with the U.S. Securities & Exchange Commission to hold an IPO, said a person with knowledge of the matter. Technology blog AllThingsD earlier reported on the July filing.

Twitter currently has about 620 million shares outstanding on a fully diluted basis, said two people with knowledge of the company’s finances. While the expected market capitalization hasn’t been decided, private market investors are valuing the company at $10.5 billion to $18 billion, people said.

Gabriel Stricker, a spokesman for Twitter, declined to comment.

The experience of venture capitalist Josh Felser exemplifies how Twitter shares have proliferated. Felser co-manages a $25 million fund called Earlybird set up two years ago to buy secondary shares for outside investors. His firm, Freestyle Capital, was a shareholder in startup BackType, which Twitter acquired in 2011, and Felser and his co-founder Dave Samuel individually purchased Twitter shares from an employee a year earlier when the company was valued at about $3 billion.

‘No Brainer’

“It was a no brainer for us,” said Felser, who’s based in San Francisco. “We had to do it purely on what we could see about Twitter’s increasing importance in the fabric of the Internet.”

Shareholders face plenty of risk. Social-media companies with sky-high private valuations have plummeted on the public markets in recent years as investors doubted whether their business models could live up to the hype. Zynga Inc. (ZNGA:US) is 62 percent below its 2011 IPO price, and Groupon Inc. (GRPN:US) is down more than 40 percent. Facebook lost more than half its value in the four months following its May 2012 IPO, before climbing back recently.

Twitter’s business -- which relies on advertising -- is also nascent. Yet ad revenue is projected to rise 63 percent to $950 million next year from $582.8 million in 2013, according to EMarketer Inc.

Big Winners

Among the biggest winners in the IPO will be angel investors in Odeo, the podcasting startup created by Williams in 2005. After Odeo failed amid competition from Apple Inc., Williams returned money to his backers. A few of them -- Mike Maples, George Zachary and Ron Conway -- turned around and invested in his next project.

That ended up being Twitter, a messaging service that let anyone publish their thoughts online in 140 characters or less - - posts known as tweets. In mid-2007, Maples put the $25,000 he had originally committed to Odeo into Twitter, though he instantly had buyer’s remorse. Everyone around him was laughing at the site’s absurdity, he said.

“The lesson of Twitter has been that the really great outcomes seem kind of crazy at the time you have to decide,” Maples said in an interview.

Hustling In

Maples, who now runs venture firm Floodgate Fund, invested in Twitter at a $20 million valuation alongside backers including Naval Ravikant, who put in $100,000 out of a fund he had just raised. Ravikant, founder of startup investing site AngelList LLC, said a typical tweet at the time went something like: “Hey, I took a shower and it was really hot.”

Still, Ravikant was a fan of Williams, who prior to Odeo had sold the site Blogger to Google Inc.

“I heard about Twitter, saw the product, and hustled my way into the deal,” said Ravikant, whose stake is now worth more than $20 million.

That hustling included scoring a meeting with Williams at the Twitter office where Ravikant scribbled recommendations on a whiteboard for how the company could grow through viral marketing. The response was thanks but no thanks, Ravikant said, though they let him invest anyway.

The spreading of Twitter shares was aided by the emergence of a small group of investors who doubled as resellers. Startup backers Chris Sacca and Conway, in addition to establishing their own stakes, helped others seeking a slice of the company. They were given special rights by Twitter to buy stock when employees wanted to sell.

Arranging Deals

Conway, a longtime angel investor who backed Google and PayPal, facilitated a sale of $80 million of Twitter shares to venture firm Andreessen Horowitz in 2011. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Sacca, a former Google employee, first invested $25,000 in Twitter in the 2007 round. He later raised outside capital to purchase more stock, and then worked with JPMorgan Chase & Co. (JPM:US) on a fund to buy hundreds of millions of dollars of shares.

“A lot of people have pinged me for the stock over the years,” said Ravikant. “It is one of those products that, because so many people use it, it attracts a lot of interest from retail buyers.”

The magnitude of the wealth created by Twitter’s growth couldn’t have been predicted when Summize opted to sell itself and people like Ravikant and Maples placed their wagers. That’s the beauty -- and the curse -- of startup investing, Maples said.

“For a long time, people said how could you have invested in something so trivial and stupid at such a high price,” he said. “People underestimate luck.”

To contact the reporters on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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