Why Twitter Is the Perfect Startup

The financial world is in ashes. But that makes adorable little startup Twitter all the more precious. It is perhaps the only Internet dream left. And any economist will tell you that scarcity creates value.

New York magazine sent Will Leitch to explore the crazy phenomenon of Twitter and why it's not making any money. Cofounder Biz Stone told him worrying about money was so New York. How San Francisco!

The nonchalance Stone (left) and Twitter CEO Ev Williams (right) display about making money seems incomprehensible from elsewhere in the country. Wall Street and Detroit are supplicants in the nation's capital, dependent on billions of dollars in government largesse for their continued existence. Unemployment in the state of California is at 9.3 percent, nearly two percentage points above the national average, and the state is running out of cash.

Such is the genius of the Bay Area's startup factory: Money's not the point. The region is still awash with money, and doesn't know where to put it. One venture capital firm, Accel Partners, recently raised $1 billion in new funds. What it's short on is ideas.

And Twitter is an attractively simple idea: short bursts of text broadcast to the Internet from the Web or a cell phone, meant to update a set of friends on what the user's doing. Jack Dorsey, the engineer who came up with the notion and was Twitter's CEO until he was ousted from the job last year, Twittered two years ago, "One could change the world with one hundred and forty characters."

Twitter could be the future of news, the future of communication, the future of marketing, the future of just about anything! That's because right now, it's nothing. It has 6 million users, a pittance compared to Facebook's 150 million; Facebook's status updates duplicate Twitter's main function, and it has a real business in advertising.

But Twitter has raised $20 million in venture capital, and reportedly is raising a new round that values the company, which has $0 million in revenues, at $250 million. That is an infinite price-to-sales ratio.

In the topsy-turvy world of venture capital, that makes sense. Why? It is infinitely easier to tell stories about a company that has no revenues than one that has some revenues. Zero revenues means blue-sky possibility. Any business success charted from here on out will look like a rocket ship, up and to the right.

How dull, by contrast, to talk about a company going from $100 million in sales to $200 million. A mere doubling? Boring! During the dotcom bubble of the '90s, investors punished companies that were making money, because they assumed they weren't investing enough in growth. CNET's then-CEO Halsey Minor once noted this in 1997: "We announced that our revenues were lower, our losses were higher and our stock went up $3. The Internet is its own phenomenon."

That phenomenon now lives in Twitter, whose early investors will surely succeed in getting others to buy into their dream. Simply adorable.

(Photo by Hugh Kretschmer/New York)