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Elon's Twitter

So. Elon Musk has bought Twitter. It's been about two weeks, and the result, the response and the potential outcomes are mixed to say the least. In that time many rumours, stories and plans have come to light. From Elon turning up carrying a sink on his first day, to the lay off of nearly 50% of staff, to a "end of the lords and peasants" verification system.

I'm not going to dare speculate on the proper way to manage a company the size or reach of Twitter or what could make it a success or failure. People far more intelligent that I could ever hope to be have done an amazing job on speculating on the possible prospects of the bird.

Instead, I wanted to share a thought that I don't think I've seen widely circulating in my techie Twitter circles. What happens when a public company, the size, reach and model of Twitter goes private?

Being a billionaire is an interesting thing, because once you cross a certain threshold of wealth, your assets get counted alongside your liquid cash. See day to day, a person who say owns the majority of their £350k home, doesn't think of themselves as having a net worth of £250,000. Indeed being worth £250,000 doesn't mean you comfortably have that to spend. Hell, in many cases, you probably don't have a tenth of that as liquid assets.

So, a man, Elon, worth by some estimates £200b has through a mixture of liquidating assets or loans fixed against Twitter, acquired Twitter at a cost about a quarter of his net worth. In other words, if you are worth £250,000, you've sold a fraction of your house and borrowed another half to put together cash somewhere in the region of £67,000. More than that though, to buy an asset that you have limited experience in running.

Now, imagine being on the other end of this sale. Again, as stated, most billionaires don't just have cash lying around, in fact at a certain point having just pure cash loses you money. So their worth is tied up in assets. Even worse, you can't simply just decide to sell all of your shares at any point because the mass liquidation of a companies shares will inherently lead to a devaluation... Then, all of a sudden, another billionaire comes along and says "I'm happy to give you all this cash, at this price, give me all your shares". It's a get out of jail free card, that instantly unlocks all of your net worth into liquid cash, without any devaluation. In pure monetary terms, it's a dream come true.

But, and this is where I think this whole saga becomes truly interesting, Twitter's core business, as is most major social media platforms, isn't really data or advertising. Yes, that's how they make their money, but in the tech world, making money is about covering overhead not making a profit. Tech companies are a store of wealth. In the same way that one might buy gold bricks, or caskets of whiskey. You buy shares in Twitter because of its "growth potential". Everyone agrees Twitter can grow. It has 200M ish users, and Facebook has somewhere in the region of 1.5B. It can grow.

What growing does, doesn't really matter, as long as the company grows because this drives its value and therefore makes it worth investing in. Therefore, turning a profit isn't and hasn't ever been important. This is a business paradigm shift that has occurred across the tech industry because of the rise of Venture Capitalists (VCs).

In the Good Ol' Days (TM), starting a business was pretty simple, you saved up some cash, maybe borrowed some more, bought stock, hired staff, hired a building and started selling whatever it is you sell. This made the objective of the business, profit. Profit meant the owner(s) could pay off any debt, recoup their initial investment and then continue to receive dividends for however long the business operated for. This principle is as true in publicly traded companies as it is in privately traded ones. In publicly traded ones, value was also important, but really only because you wanted to see value grow in-line or above inflation. Companies rarely had 50% growth potential, because how do you suddenly go from making £100k one year, to £200k the next year.

The companies that did have 50%+ growth potential were always startups where the cash they had for initial infrastructure spend meant that first, second, third etc. year profits were not representative of the profit that initial capital would eventually result in.

VCs on the other hand offer cash for a percentage share. The recuperation of their investment is done through value, not profit. This has ultimately resulted in a separation of value from profit. An almost "get there then figure out how to make money" approach has emerged in tech. A business doesn't need to make money from day one, or even have an eventual model for how it'll make money, because there must be some value in have that many millions (or billions) of people using your platform to interact with one another.

So as Twitter has grown, it's bottom line hasn't. Indeed, as many people point out (on Twitter), they only made a profit in a 3 or 4 years of Twitter's 16 years of existence. But, that statement wholly misses the point. Twitter didn't make a profit because it was a failing business, it didn't make a profit because it was a succeeding tech business. The success - measured in growth.

Buying (and privatising) Twitter has fundamentally shifted that paradigm for Elon Musk. As a private business, value is less important. Fundamentally, a private business' job is to turn a profit. It may well be worth more in 5 years time than it is today, but valuation is determined by the market, and a business separated from market trading has no value until it attempts to relist itself. I'm not suggesting for a second Twitter is worthless now. If sold tomorrow it would presumably still fetch many billions of dollars in value - most likely because of the current "changes" being made, less, at least until those changes are complete and the effects of them can be measured.

The problem for Musk, and this is fundamental to the nature of the business he's bought itself, Twitter was never designed to make money hand over fist, it was designed to grow in value and balance the books. How do you completely retool that machinery to do anything other than that? The answer, at least in my mind currently, is you probably can't.


Adam Green


Published 11/11/2022