Many people become frustrated when they hit the 2,000 following barrier in Twitter. It's a limit imposed by Twitter that few people know about when they start but most will run into. In short, it's an anti-spam device by Twitter. You can follow up to 1,000 people in a day, until you've followed 2,000 people. After 2,000, you can only follow 10% more people than are already following you.

A Case Study

Let's take the example of the campaign shown in the graph. Following 1,000 people a day is a recipe for a quick suspension. Twitter closely monitors brand new accounts for churning activity. You're much better off to follow about 300 people/day for the start of your campaign. So you sign up for the free version of our PMS Social Suite and enter a brand new account with a snazy new background, a good profile image, and a few well chosen tweets. Since the list we're using is so powerful, you're getting a follow back ratio of about 60%. In a mere 7 days you've followed 2,000 people and have 1,200 followers. That's very cool, so you upgrade to the paid version and put the campaign completely on autopilot.

What Happened?

Hey, who are these fly by night guys from Promote My Site? The next day the software didn't follow any more than the 2,000 you had followed the day before! Actually, that's not what happened at all. You've hit the 2,000 barrier with an out of balance account. With only 1,200 followers, you can't add anyone because of the 10% limit. The software will also only cull a maximum of 5% of the people you're following, which means at most you'll cull 100 people that aren't following you back. So if you cull 100 people, the software can only add back 100 people and perhaps only 60 of those will follow you back. So the going is going to be very slow for the next few weeks as you're able to gradually cull more people and follow more people each day.

The good news is that the software is relentless and accurate. It doesn't forget to perform your actions each day, although you might. Gradually, the account will come back into balance and you'll be able to follow more people. So the long flat area in the following line in the graph? The account is stuck at the 2K barrier until the followers are brought back into balance, and then the graph slopes sharply upwards because as you get past 2,000 you're able to increase the number of people that you follow each day.

By the end of 60 days you're at 16,000 followers! You had a tough few weeks as you slogged it out through the 2K barrier, but slow and steady wins the race. Now you're seeing real results.

Lather, Rinse, Repeat

Just like the instructions on the shampoo bottle, this is a good time to start over with a new account. When you're in the 15K range you'll be at the top of many directory listings for any niches you want to market to. Make sure you've signed up for directories such as Twellow. Guess how these are sorted? Yep, by follower count. The number of followers you have is social validation. By being near the top of the list you'll start to pick up followers in your niche because you're there. If you had tried to build a "quality" account by hand from scratch you'd be #2043 on the list and be seen as a mere peon. Now you're a player. If you've been tweeting on your topic you'll be rolling.

Now go ahead and create a new Twitter account and enter that information into the PMS Dashboard. Just click Edit, change the Twitter username and password, and click Update. You can switch your Twitter account as much as you desire -- whatever account is active when the process runs it what will get run. It's far more powerful to have 5 accounts with 15K followers than 1 account with 75K followers. Losing an account to a suspension won't hurt you very much, and you can have your accounts retweet the news from your main account.

The Benefits of Paid Vs Free

Most people hit the 2K barrier while using a free account. If they aren't culling their own non-mutuals, the system will appear to have stopped working. It hasn't stopped, it just can't do anything because once you've hit your limit of following 2,000 people you have to remove some of the people you're following in order to follow more. Don't fall to the temptation to mass unfollow the 1,000 people that aren't following you back in one shot. The 2K barrier is also the time that Twitter seems to pay attention to accounts to see if they're going to start churning. It's far safer to remove 50-100 people/day until you get over the hump. The fastest way over the hump is to have been removing those people along the way as you grew so that you arrive at the 2K barrier with a fairly balanced account. If you're using the paid service you won't run into that problem. You'll just see a flattening of the graph for about 10 days and then you'll be back to the steady growth you had become accustomed to. Go ahead and Sign up!

A number of people have noticed that the Lt_Draper Twitter account is now sporting the Who Goes There Owl. In other words, it was suspended by Twitter for "breaking the rules." We'll point out that we've never done anything that is against Twitter's Terms of Service, but according to their terms, "We reserve the right, in accordance with any applicable laws, to refuse service to anyone for any reason at any time." They can terminate your account any time they please -- you haven't paid them any money and your account exists solely at their whim. Do a Google search for "Twitter Account Suspended" and you'll see a lot of people singing the Twitter Owl Blues.

Should I Be Worried That Don's Account Was Suspended?

At first glance, that might be cause for concern. If a popular account like the lt_draper account can get suspended, what does that mean for you?

In reality, Don gave his account so that others could live. We've always counseled our customers that if they're going to live on the dangerous side and aggressively market on Twitter they need to cover their bets by having several accounts. Lt_Draper was just one of many accounts we run here and we push the envelope very hard to find out what the limits are. With this particular account, we violated just about every rule we outlined in our previous post Stupid Twitter Tricks to Get Your Account Suspended.

• Certain Topics Tend to Draw Attention - This account was promoting articles about how to use automation on Twitter.
• Getting Blocked - This account was connected to an account on a forum where we took a rather unpopular stand with the rainbows, unicorns, and Skittles set. Some people were vocal about their intent to block and report as spam accounts that were taking the position that automation can be a useful marketing tool.
• Churning Follow and Unfollow - We were pretty much testing the upper limits on what we could get away with on this account.
• Hitting the Top 1,000 - Twitter seems to take a close look at accounts that hit around 20,000 followers, which is enough to put you into the top 1,000. Lt_Draper had just broken 28,000 followers.

So it's not shocking that the account got suspended. It didn't impact our business at all because we've been following our own advice. We've burned accounts before and we expect to burn them again. We're playing at the edge so you don't have to.

What You Should Take Away

There are some critical lessons you can learn:

• Have more than 1 Account - Yes, we sound like a broken record, but you really shouldn't put all your eggs in one basket. Twitter can terminate your account for any reason or no reason at all. And they do.
• Stay Under the Radar - When you get an account to around 15K followers it's a good time to start a new account. It's far more powerful to have 5 accounts with 15K followers than a single account with 75K followers.
• Stay Quiet - If you tweet unpopular things or take unpopular positions there will be spiteful people that will block you. Twitter looks at blocking activity as a vote against your account. So if it's a business account, stay quiet. Avoid the urge to tweet things like "David Beckham kicks like a girl."
• Don't use more than 1 Service at Time - We've seen some accounts get suspended and when we look at the google cache of their profile page it becomes evident that they were using several "free" services to enhance their account. The problem with that approach is that you don't know which service got you banned. If you want to try several services, then build several accounts and experiment. But mixing services is just pushing the limits.
• Let The Software Work - We've pushed the limits with several accounts to find out where they are. We've set our software up to stay within about 50% of those limits. Don't turn around and follow more people on your own or mass unfollow while the software is running on your account. You're busting carefully determined limits and asking for trouble.
• Be Patient - It's easy to get frustrated, especially when you're running up against the 2,000 Follower Barrier. The software will get you through that hump, let it work. If you really can't wait the week to ten days it will take to get past the hump, then run 10 accounts up to 2,000. That's by far the quickest route to being able to contact 20,000 people with your tweets.

This is part of what you pay for with our service - our willingness to create dozens of accounts and, through trial and error, discover what works, what doesn't work, and what really doesn't work. We also recognize that twitter has changing standards for what is allowable, so we'll always have a pipeline of twitter accounts at different levels (pre 2K, etc) that we manipulate and test on so that you can just use our service and concentrate on your marketing messages.

It's not us!  Twitter is currently unable to process follow and unfollow requests. Or perhaps they'll show up after a while. As of this afternoon, if you click follow on someone's profile it will say you're following them, until you click refresh in which case it will say you're not following them.

So yeah, our software hasn't added any users for you today. At least it was a computer that found that out instead of you spending your time on it.

We'll be back when they're back.

I don't know how many times I've said this, but I'll say it again. Don't use Twitter automation on an account that you can't afford to lose. If it's an account that you're personally invested in you shouldn't play with it. Don't bet something you can't afford to lose.

With that said, getting suspended on Twitter is not as nearly as common as some people would have you believe. Out of a sample of 650K Twitter accounts we've researched, about 2,700 of them were suspended. That's 0.4% -- pretty good odds. Out of the hundreds of accounts we've run through our system, we've seen about 1% of them get suspended. That's double the average, but you'd expect a higher rate among people willing to push the envelope. Whenever we see an account get banned, we look at the profile in the google cache and see what they were doing. They were all pushing the envelope. We've started to detect some trends of the type of activity that will get you suspended:

• Young Accounts Get Closer Scrutiny - Accounts that are a few days old and immediately zoom to follow 1,000/day will flag themselves for a suspension. An account without any updates or the default icon also draws attention. If you're starting with a fresh account, it's important that a high percentage of the first people that you follow follow you back. It's also important that you grow slowly until you get over the 2,000 follower hump. Then you can gain speed.
• Certain Topics Tend to Draw Attention - MLM, Email Marketing, Poker, Porn, etc combined with a young and aggressive profile will get the owl hovering.
• Automated Tweets - While it may seem like a cool trick to hook up a popular blog's (not your own) rss feed to TweetLater so that you've got automated tweets, Twitter seems to detect that you're only tweeting links, and duplicate ones at that. Likewise automatically tweeting the links from another social network such as all your Diggs or Stumbles and no other content will get their attention.
• Too Many @Replies or DMs - If you blast a marketing message via @reply or direct messages you'll attract attention. Yes, you can send up to 1,000 messages a day. Just don't make it a mass mailing.
• Getting Blocked - This is perhaps the number one indicator to Twitter of an abusive account. If people are blocking you and enough people do it they will take a look at you.
• Churning Follow and Unfollow - Don't try the cheap shot of following someone and then unfollowing them an hour later. That strategy used to work -- enough people were using services that automatically followed people back and those had enough of a lag that you could fool them into a one-way follow. But it's pretty clear that Twitter is looking for that behavior. To be safe, don't unfollow someone for at least 72 hours after you've followed them. And don't unfollow more than 5% of your total in any one day.

If you're using the PMS Social Suite you won't run into problems of following too quickly or churning. We enforce carefully formulated ratios on our automated activity to stay within the limits. If one of our users gets blocked by someone, no other of our users will try to follow them. All of the accounts in the system get the benefit of data gained from all the other accounts. Keep tracking of all that and making all those calculations by hand is a tall order, so automation is key.

What you do on your own time is up to you. But again, you're pushing the envelope by using automation. If you're a customer you've seen the giant gains you can get. But it's not risk free. So don't risk something you can't afford to lose. And don't push it even further by engaging in those other behaviors unless you're ok with playing the game of constantly getting your accounts suspended.

The Bottom Line

The bottom line is that your Twittering needs to be genuine. Automation is great for making the first contact, but that's not a license to spam. You should be using this strategy to make contact with more people. You still need to move them into other touch points in your sales system such as your blog, newsletters, product offers, etc. That doesn't mean build up a huge list of followers and then start tweeting only affiliate links at them. You've got to build up credibility. Throw in some useful information and links to other sources. You'll find that people are a lot more likely to click on the links you need them to.

We haven't had too many complaints about our service, but the most frequent complaint we get seems to be "Your software works too well!"

A lot of people have been surprised at how many followers they pick up, even with the free trial. The average seems to be about 1,000 new followers over the course of a week. For a few people, this has been enough to decide they don't want any more.

There's an easy solution to this: just go to your Dashboard, click Edit, then click Delete. The next day you'll get an automated message reminding you that you need to enter data if you want the service to work, and then you'll be done. Any record we have of your Twitter information will be gone and you won't end up in the next processing batch.

You Might Not Be Thinking About This Right

We've said several times that you shouldn't use this service for your primary, personal account. Aside from the danger that you could get banned (a small risk, but it can happen and you've been warned), it also means that your personal timeline will see a huge influx of followers. If you don't want to see that, then just create a separate business account and run that through the system. Don't mix business and pleasure.

It also comes down to diversifying your social portfolio. Do you really want to put all your eggs in one basket? If you're targeting five different niches, then you should have five different Twitter accounts -- at least!

Twitter automation is really hot right now. The strategy is working quite well. Will it work forever? Probably not. The only thing constant in Internet Marketing is change. You're not paying any money to Twitter, which means they can do pretty much whatever they want and you don't have recourse. Let's say things change dramatically in six months. If you've been following a particular strategy on a single account and that account becomes worthless, you've lost everything. But if you've got several accounts with different strategies, it's like riding out a downturn in the market with a diversified portfolio. It just doesn't make sense, from a business perspective, to put all your bets on a single account.

How to Keep Track of it All

There are lots of ways to deal with a flood of data in your twitter stream. If you're using the Twitter html interface, you're in a horse and buggy while being passed in the autobahn. It's quaint, but ultimately dangerous.

Our personal preference for a client is Tweetdeck. There are others, that's just the first one we came across that really worked well. If you've got a huge number of people you're following but are only interested in a few key areas, just create a real time search on those keywords. Tweetdeck will display tweets in a separate column that match that search. Now you're right on top of things in real time. You can have a huge net and personal interaction with the key prospects you're looking for.

Let's say there is a small group of people that you really want to follow. You can create a group and display just tweets from that group in a column.

Your RSS reader is also a great way to keep track of tweets in near real time. Look at a Twitter profile page. Down at the bottom of the right sidebar you'll see an rss feed for that user, such as Lt_Draper's RSS feed. You can load that into your rss reader and you'll see the tweets from that user arrive.

Or perhaps you'd like to follow a group of people with RSS. Just create a Yahoo Pipe like Don and Oliver's RSS Feeds. That pipe shows how simple it is to create a mashup of multiple RSS feeds. Click "Edit Source" and you can see how easy it was to build.

You Can Still Be Personal and Popular

There seems to be the misconception among many Internet Marketers that you have to make a choice between having a lot of followers and having quality followers. There's a group of people that think hand picked, delicately crafted follower lists have higher quality than huge lists gained through automation.

Anybody would agree that specifically targeted leads are better than shotgun leads in their eventual quality. But there doesn't have to be a choice between the strategies. Why can't you use automation to build up a large following while you're using manual methods to specifically target people? Automating just means that you have more time for higher value activities. I'll take a list of 30,000 followers, about 1,000 of which were carefully targeted, over a list of 1,000 carefully targeted followers any day.

The benefit to that approach is social proof. If you've got a larger following, the people you follow will see you as more credible than the guy with 60 followers. If you're concerned that people will be put off by your huge following, then run an account that is only handcrafted leads and a few others that are automated.

Find out for yourself. Experiment, measure, and repeat until you find what works. Just don't let the preconceptions you've formed without experience or data color what your'e seeing.

Oh yeah, there's a free trial available: PMS Social Suite. You didn't really expect me to forget to plug what we're selling?

Are you wasting your days whale watching? No, I don't mean spending time on vacation. I mean that special brand of fun you can only have when Twitter is acting completely out of sorts like it has all afternoon today. Half the time a page load times out. A few times they've even put up the "Twitter is over capacity message" but haven't even served up a fail whale.

We're Used to It

As long time Twitter users we're used to it. Is there any other web business where users would put up with such a high rate of failure? Slow response times and sporadic failures are a weekly occurence with Twitter. When Google went down for an hour it made huge news, but people shrug off Twitter going down like a piece of moldy bread. The beauty of it, from Twitter's standpoint, is that when they're having trouble, their user's can't even tweet about it! And when they come back people make a collective sigh of relief and go right back to Twittering.

It's a Problem if You're in Business

The problem with whale watching is that if you're depending upon Twitter to promote your business these outages cost you time. If you're following a manual methodology for adding followers you're going to eat up a lot of time. If you're trying to add twitter followers, the key is to keep up a steady amount of activity, every day.

Let's say you've become completely motivated and want to add a lot of Twitter Followers so you can have an effective marketing impact. You decide that every day you're going to spend a few hours following people on Twitter. Unfortunately, when the Fail Whale surfaces it's easy just to quit that activity and move on to something else. The chances are you'll forget to come back to your Twitter Following task. The next day you do a little less, and within a few weeks you've completely stopped. In another month you decide "Gee, I really ought to get back to that."

The problem with your manual method is that your competitors might not be doing it. Instead of spending an hour a today for a month following people on Twitter, they might have spent $39.95 for a month of the PMS Social Suite and had the autopilot run for several hours a day against an advanced database of people targeted within their niche and likely to follow them back. Perhaps you're proud of your 2,500 followers. They're adding that many followers every week.

What you're really saying by insisting upon spending an hour a day on something you could automate is that your time is only worth $1.33/hour. If that is all your time is truly worth, then perhaps this internet marketing thing isn't your cup of tea...

When the fail whale beaches itself a server based automation system will slog through. If you've installed software on your own machine to do the same thing, your environment slows down with Twitter. A server based solution that you can just set on autopilot and forget about it makes the most sense.

I'm Afraid My Account Will Get Banned

That's a reasonable fear. Which is why you shouldn't put all of your eggs in one basket. You shouldn't have a single account, you should have a stable of accounts, targeted at the various niches you're going after. If you've invested a lot of time and money building a single account, don't automate it. Create another account and use the automation to build it's followers. When you tweet, use the new account to retweet what you just said.

We have not had a customer get an account banned as a result of using our software. But obviously we can't guarantee that it won't happen. Twitter doesn't seem to mind the kinds of things our software does. Our customers have added 330,142 followers in that last two weeks. That's a lot of activity. Twitter has every motive to have as much activity among their user base as possible. They need to overcome the Oprah drop off effect (A lot of people signed up after Oprah talked about Twitter, and a month later their accounts went dormant). But that could change and Twitter could go to war against the power users much like Digg did. So don't put your eggs all in one basket. Get a lot of eggs, and a lot of baskets.

The pros in this business are all using automation. If you're shying away from automation because you're afraid of losing your account with 500 hard earned followers, you're getting your lunch eaten by the competition and you don't even know about it. They're getting more clicks than you have followers. You can't compete with that without automation.

Go ahead and sign up for a free account. Just register and click on the PMS Social Suite link. You know you want to.

How would you like to add several hundred twitter followers every day, forever? Without adding any additional work to your day? Without installing any software? Just put it on autopilot and walk away?

If that's an interesting proposition, you should read through this entire article.

New Twitter Limits

A while back, Twitter published some limits on following people on Twitter. The key numbers from this are:

• 1,000 per day - That's the limit for the number of people anyone can follow in a day. It doesn't matter if you're Ashton or just Joe Marketer, 1,000 is the limit. That applies to the services that follow people back for you as well.
• 2,000 people to start - You can follow up to 1,000 people per day until you hit 2,000 people. Twitter doesn't publish the next number, but we can verify that it's 10%. You can follow 10% more people than are following you after you've followed 2,000 people.

A Different Approach to Fighting Spammers

While Twitter does indeed go after spammers, they aren't as heavy handed as Digg. They don't seem to ban on a whim. Instead, they let the natural limits of the system determine what people can do. This is more effective than Digg's strategy, which seems to have been to make their system as unusable as possible for marketers. Twitter seems to realize that marketers are a key component of their ecosystem and have helped them grow.

Internet Marketers are like the helpful bacteria in your digestive system. You'd think they'd be bad for you, but if you eradicate them you'll end up sick. Social networks that take a heavy handed approach towards discouraging marketers are doing the same thing.

If you're a long time Promote My Suite Social Suite User, you'll notice some big changes that just went into effect. For one thing, we've dropped all the Digg support. They just didn't seem to be interested, and it wasn't worth fighting the constant battles to get a share of a declining market. Twitter is clearly outpacing Digg these days, so we thought it made more sense to put our efforts into a platform that was actually friendly to internet marketers.

What do the Limits Mean to You?

The new following limits aren't that big a deal to internet marketers (honest ones, at least). 1,000 people a day is a lot of follows. That's 30,000 people you could follow in a month if you were willing to put the time in. If you could get 80% of them to follow you back you'd be adding 24,000 followers a month. It wouldn't take you very long to be a real player.

The problem is most internet marketers don't work like that. They're chronically short on attention. They'll try something for a couple of days or maybe even a week, and then move on to the next shiny thing that pops up. It takes an overwhelming amount of discipline to pound your keyboard through 1,000 profiles every day, cull out the ones that aren't following you after a few days, and keep that up over the long term.

Put it on Autopilot

That's why the new PMS Social Suite is so hot! You can build your twitter following without any of that drudgery. Instead, you log into the system once, enter your twitter account information, and you're done. Our servers will take care of the rest. You can just wait for the status emails to tell you how you're doing or visit the site periodically and look at some pretty graphs.

And more importantly, you can spend your time interacting with people and doing real marketing instead of trying to make tools work and clicking lots of buttons.

Check it out: PMS Social Suite. There's a free version for registered users too!

The latest meme in the Twittersphere has been a complaint about people that use services such as Tweet Later to send automated thank you notes to new followers on Twitter. SocialToo took it so seriously that they dropped that capability from their service. Chris Brogan, Amber Naslund, and Tim Walker have all written on the subject. In fact, probably hundreds of bloggers have written on the subject. I'm now probably going to provide you with the only article in existence that argues against the commonly held belief that auto-DMs are evil.

Trust Us, We're in Marketing

We use Twitter for business. We've written several articles that question the business viability of Twitter, so rather than being on Twitter for peace, love, rainbows, and unicorns, we're there for marketing while they're still around. The proposition to our followers is straightforward. We tweet useful information (and the occasional funny stuff) in the hopes that people will follow us and periodically click on the links to our blog posts. We write blog posts so that people will be drawn to our blog and hopefully purchase some of our products. Once people get to know us they're likely to spend some money with us. In the end it's just a numbers game. If we can't sell anything then none of those other activities make sense. So there's going to be some commercial content mixed in with our message. Anyone that is approaching Twitter (or blogging) for any other purpose has someone else paying their bills, because if you can't turn a profit it's not sustainable.

The Commercials Pay for the Content

So when you receive an auto-DM after you've followed someone, don't whine about it. It's the commercials that pay for the programming.

The people that rant against auto-DMs have something else in mind. If you dig deeper, you'll find out that they also have a problem with the concept of advertising on Twitter in general. As Tim Walker pointed out in the discussion in the comments section we had on his blog, several blogging purists were against people that were getting into blogging to make money as well. If people find auto-DMs offensive, imagine what the reaction would be to corporately sponsored tweets! Is there really any difference between a corporate tweet advertisement and the auto-DM?

Answering the Arguments

Let's look at some of the arguments that have been made against auto-DMs. I'll admit that these are valid if you're on Twitter for recreation, but if you're on Twitter for business networking then I think it's a different situation. Here are some of the arguments that Chris Brogan made in his article:

• Irks me because it's a robot. So I suppose he's stopped watching television and listening to radio? Those advertisements are automatic as well.
• Annoys me because you ask me to click your junk. That's funny, given this and this from just today. So a DM that is just to the person that initiated a follow is annoying, but pimping links to your blog and ebooks to all of your followers is ok?
• Tempts me to go back and unfollow you on principle That's the marketplace of Twitter. If you don't like what someone has done, or what they tweet, or don't find value, then just don't follow them.
• If you're too busy to be an actual human on a social network, don't join another social network. That argument would only make sense if the people that auto-DM only auto-DM and don't provide any other value. But since he initiated the follow in order to get the auto-DM back, he must have been interested in their profile. So what he's really saying is that he wants the information he gets by following for free, and doesn't have time to be bothered with a "commercial" that makes the content profitable to the provider. Twitter should be about Win-Win.
• Follower count doesn't matter. What matters is who you follow. Probably the biggest lie told by the "Twitter Gurus." Without followers, you're just talking to yourself. There's no point in tweeting if there's no one to listen. If all of his followers left him I suspect he'd stop tweeting because it wouldn't be worth his time.

• Conversations are way better than "new blog post" tweets. I agree, but the "new blog post" tweets pay for the conversations. Sure, you don't want to follow someone that only posts the commercials, but there's nothing wrong with mixing those into the conversations.
• What service are you doing me by direct messaging me sending me your links? Quite a bit, if the DM that is sent has truly useful information in it. I agree, don't just send a link that's already in your profile, but something special is, well, something special. And what's so bad about getting the fairly common DM of "Thanks for following?" Are we all so highly stressed and easily offended that the mere courtesy of thanking someone rankles us?

Now let's take a look at Amber Naslund's arguments:

• If you hit me with a spammy sounding DM right when we get connected, I instantly think your community participation is a sham. Except that you've read through my tweets and have already come to a conclusion about following me. You've said "I'd like some free information please" and are upset about the tip jar on the counter.
• You don't know a thing about me yet, except what you read on my profile. How on earth do you know that what you offer is of value to me in the least? I don't, other than you followed me and that people who follow me tend to be interested in what I have to offer, which is why the auto-DM to followers is a reasonable message channel. Only a small percentage of the people that see a commercial on TV will be interested in the offer either. It's a numbers game. Getting upset about it is demanding labor for free. You want to see the work product of the tweets of the person you're following, but you won't accept anything except a 100% customized message?
• I'm a very social person, and dig meeting new people. Truly. So I'm excited that you're following me. Actually, she's got that backwards. She's receiving the auto-DM because she followed them, not vice versa. The only way you can get these messages is to follow someone.
• If your business proposition is more important than saying hello and getting acquainted, then it's clear to me that you don't feel the same way about people as I do, which means we'll probably have little in common anyway. We already said hello. You read my profile and clicked the follow button. You said "Hi" and I said "Hi" back and handed you a business card. That's completely acceptable behavior at a business networking function like a trade show. If you're at a different kind of party then I am, then just unfollow and walk away. But you came to me and said "Hi", I didn't initiate things, so stop whining when I act in a reasonable manner for the context I'm operating in.
• Like many, many other people, I do business with people I like and trust. But like and trust are not instant affinities. So you like and trust and have a personal relationship with your phone company, your power company, your grocer, and your mortgage processor? I'll bet the last time you filled up your gas tank you did it through a completely robotic interface. You can't build up trust merely through a conversation anyway -- trust depends upon performance. And frankly, I find it really hard to trust someone that claims to be completely altruistic and providing everything for free, when I know they have to be making money through their activity somehow in order to survive. I'd much rather deal with people that are up front about why they're here.

I don't disagree with the points that Tim Walker from Hoovers made. Go read his article and the comments below -- we had a very civil exchange. At Promote My Site, our approach to Twitter comes down to a numbers game. We picked up 6,000 followers on the Lt_Draper account in February. We had an auto-DM set up that thanked people for following and asked them to add our rss feed to their reader. We've had several people tell us that our rss feed is hard to find, so we thought that was reasonable "extra" information to put in the welcoming DM. Evidently a lot of people thought so too, because our feedburner stats more than doubled during the month.

Compare that to trying to manually research every follower (click their profile, click their website link, read their recent tweets and really get to know them). A very cursory approach might take 5 minutes each. That's 500 hours of labor for the month. Oliver and I are workaholics, but there's just no way we're going to be able to handle that. So instead we use an auto-DM. It probably does offend a certain number of people, but I'm guessing they weren't potential clients anyway. If you're so wrapped up in the idea that everything on the internet should be free and you don't want advertising interrupting your flow of information, then you're probably not going to purchase a subscription to our site.

So don't follow. But quit whining.

While the sub-prime mortage mess has gotten a lot of press about the excess of sheer idiocy and greed in certain financial institutions, the second great VC funded dotcom bubble has been every bit as crazy and yet receives little coverage. Sure, the amount of money wasted doesn't even remotely approach what's going on in the broader markets, but somehow this business got away from counting revenue and started counting eyeballs. And that's after everyone swore it would never happen again after the crash of 2000. I guess the problem is that most of the 20-something CEOs weren't around for that crash, and most of the VCs just don't know any better.

So this week, the news has been hot and heavy that twitter has raised yet another round of venture capital. Which is really impressive considering the current venture capital climate. The new valuation is widely reported as $250M. The Twitter team is to be congratulated, because while they haven't done much on the revenue side, they sure can raise money! I made the statement several times that Twitter wouldn't be able to raise more capital. If these rumors are true, then obviously I was wrong. Luckily, that's just the first time (you can ask my wife about that).

So Why is This Bad News for Twitter?

It's probably not, but the link bait value of the title was just too good to pass up.

But this really can be viewed as bad news for Twitter. People are heralding the $250M valuation as confirmation of Twitter's value. You can spot the people without any experience in VC funded startups because it's nothing of the sort. The pre-money valuation of a company in a round of venture funding is merely the number that sets the minimum payouts for the exit. Let's say you have a company that is absolutely worthless. A VC comes along and says "I'll give you a $1M valuation. I want 10% of the company for $100K." You take the deal and think "I'm a millionaire! My company is worth $1M!" No, your company has the same value it did, plus the $100K in cash you now have in the bank. But if you wrap up the company, you owe the VC their $100K back (last money in, first money out) plus whatever guarantees you had to make. The usual term is a multiplier of three. So had you sold the company for $300K, you would owe the VC $300K and you'd be left with nothing. A lot of term sheets require that the VCs get their money back, plus the guaranteed multiplier, plus guaranteed back dividends, and then you split the proceeds along the percentages. So let's say you sold the company for $1M five years later. It would be very easy to owe the VC $300K, plus $200K in dividends, and then you'd split the remaining $500K according to your percentages. And by the way, there are a hundred other things in the deal that will take care of the VCs before you. The founders only do well when the startup hits a grand slam. Hitting a single or surviving means the founders get nada. And that's as it should be, because without the VC's money they wouldn't have had anything anyway.

Remember that criteria if you're ever thinking about taking venture capital. It only makes sense for the founders if without the VC money they wouldn't have had anything anyway. Other than that, you're just signing up for an 80/hour week job with little pay and tons of aggravation. If you're not swinging for the fences and starting with nothing, you shouldn't go near a venture capitalist.

So what does this mean for Twitter? Go back and read the fire sale article we did last August if you didn't click the link the first time. By doubling the VC money in, they've doubled their yearly revenue break even point, and added another 20x factor to the exit number. When they had $20M total in VC money, they had to sell for $400M in order to be a win. With $40M in, they have to sell for $800M. They've just doubled down at the roulette wheel. Keep in mind that the only other thing the $250M valuation means is that they may have reset the percentages of earlier investors too.

Other than seeing an increase in users, what have they accomplished in the last year? Since their last venture round they had the Summer of the Fail Whale, shut down SMS in several countries, throttled their API, and still don't have a revenue model. Oh, and they turned down a bunch of Facebook stock that probably wasn't worth as much as they already had capital in. But they were able to raise another round of VC money, so you really have to hand it to them.

Revenue Prospects

Despite a ton of chatter on the intarweb about possible revenue models for Twitter, I still haven't seen a single model where the numbers break down into any hope of Twitter hitting the break even point from a VC funded standpoint. Most people think of revenue break even as being able to cover your expenses (revenue in > cash out). When it's postive the owner can usually sell the company for some multiplier of either revenue or earnings. That's true of a normal business, but the numbers are different in a VC funded business. To be a success, the company has to sell for 20 times the investment in. Less than that and it's a miss and the VCs will lose interest and wrap up the company. Twitter has the advantage of being so hyped right now that they'll keep interest, but that won't last forever. When the revenue numbers eventually start to come in and the business model doesn't work the fire sale signs will go up.

Once again, Marketing Pilgrim took a stab and getting Twitter some revenue. There were some very novel ideas there. Let's take a look at those and some other ideas floating around the net for how Twitter is going to hit it big and become a cash cow:

• Search and Analytics - They've got a ton of data, and it should be straightforward to put together a search engine that's compelling. The ability to get to real time news in the twitterverse has to be worth something, right? There are a ton of problems with this. First, how much would anyone pay for this? Either through memberships or advertising, access to the search data just isn't that compelling. And the search data is already available for free now -- anybody can just spider the site. Google already has. You can find anything you want with the appropriate site:twitter.com query. If Twitter can become the next Google by monetizing search of their data, then why haven't all the other social networks been able to monetize any of their data?
• Twitter as a Protocol - Alistair Croll suggests that Twitter isn't a site but a protocol. I agree with what he says in the article, but the jump that others make that somehow Twitter can monetize this fact just doesn't add up. The reason protocols work is that enough people agree on them, which means they're very difficult to monetize. A monetized protocol has another name -- a closed standard. The same thing that made Twitter so popular to begin with -- a plethora of third party apps to make up for their interface -- is also the reason they can't monetize. They don't control the user experience.
• Sell API Access - The idea here is to sell unlimited API access to certain companies. The problem is the market isn't very big. Take the total amount of revenue all those companies could generate, and then multiply that by a small percentage that they could afford as a "tax" on their business and you have the amount of revenue Twitter can generate from this. That's why Twitter throttles their API rather than trying to pursue it as a revenue opportunity -- there just isn't enough money there to make it worthwhile. Could this possibly be a business model with more than a few million a year in revenue? Doubtful.
• Sell an Enterprise Version - Much like the Global 2000 already blocks AIM, MSN, and other chats out of security concerns, it's only a matter of time before they figure out that Twitter is a giant security hole that's leaking their confidential information and start blocking it. Imagine a lawsuit where the plaintiff is showing the jury the CEO's tweets! So the solution is to just have Twitter transform itself into an enterprise software startup and sell a private version of Twitter to run on the corporate intranet. Those of you with experience in the enterprise software market can now take abreak and wipe the spewed coffee off your monitor. To those of you who don't let me explain a few things. 1) Twitter is Small Fry in this Market. Competing with IBM, Oracle, Microsoft, and SAP will not be a pleasant or lasting experience. The most they could accomplish is to establish that the market exists. All of those companies could roll out a secure enterprise version of Twitter that works in their own architecture in a few months. In fact, they may already be doing it. Twitter small group of business development people are not going to compete with 10,000 IBM salespeople. Oracle could drop more money into a marketing campaign for a new twitter product than Twitter's current valuation and it wouldn't even approach a round off error. Microsoft could put it into Office for free. At the same time, they'd all be telling their customers about the security risks of allowing their employees to use the free version of Twitter, cutting into their market. 2) Startups Can't Sell to the Enterprise. It used to be the case that two guys and a coffee pot could write some great software, sell it to a big company, and get rich. That ended during the crash of 2000. Enterprises became completely gunshy after getting burned by the Dotcom 1.0 failures. Add in the post-Enron compliance standards and selling into the enterprise became a game only for the very large. That's why the startup software model moved away from enterprise sales -- either to open source, advertising supported, or membership/SaaS. The first question to every Twitter salesman would be "What about the fail whale?"
• Insert Affiliate Ids into the Twitter Stream - This one is cute. They could analyze the twitter stream and every time someone posts a link to Amazon or something similar they could modify the URL and put in their affiliate code. Or they could do their own version of TinyURL and move people into something that's framed with advertising. I don't think most people would be happy with having their links hijacked. By drawing attention to the affiliate opportunities they'd just encourage people to put their own ids into any links. And frankly, it's just not that much money. Go look through your last 1,000 tweets. How many of them were monetizable links? Perhaps they could do a Kontera deal and turn words in the twitter stream into hot links. Take Twitter's 40M visits/month times 10/pages/visit and you get 400M page views. Let's say 10% of those have something that can be monetized (highly unlikely it's that high since your last 1,000 tweets didn't). If you get a click through on affiliate ads of a half percent, and 1% of those convert, you're getting 2K conversions/month. If they got a $10 commission on that, it's a $240K/year business. And I think those numbers are WAY overestimated. Of course, how long would it be before the third party tool vendors just replaced that? Or someone wrote a FireFox plugin to get that junk out of your way?

There are lots of other ideas out there and I'd be glad to hear them. But before you claim that you've got the idea that will save Twitter, be prepared to show how the amount of revenue you'll generate will turn them into a billion dollar company. Because with this last round of VC money, that's where the bar has been moved to.

So What is Their Plan?

Remember the criteria for when to take venture capital. When you don't have anything without the money. Twitter meets that criteria. There's corollary to this as well: If you can't get a big exit, keep raising money and have a good time. Perhaps the Twitter guys are swilling the koolaid and still think they're going to build a billion dollar company. Or maybe they're just chuckling at how foolish the VCs still are. They're young, they're famous, and they've got a ton of cash to play with. They're the 16 year olds that have been handed the keys to Dad's car and a bottle of whiskey for their birthday. People complain about how tough the dotcom crash of 2000 was, but frankly there were a lot of CEOs making a ton of cash and throwing great parties. The Twitter guys are living the vida loca. They just may know something the Twitter fanboys don't know and are living it up while the living is easy. Given the numbers, that explains raising this last round of capital better than any other explanation I've seen.

BTW, the news of this last $20M are just rumours. Nothing has been announced. There's many a slip between the cup and the lip. The VCs still have to make their capital call, and we're likely in for a rough couple of months in the market. They may find that negotiations break down at the last moment. A term sheet is not a check.

I'd just like an invite to the party when they close the deal.

I've been thinking about this for a long time, and I just can't see how Twitter is going to make enough money to justify their venture capital investment (which is reported but not publicly verified to be around $20M) or $80M valuation. Five years from now we're going to look back at the Twitter phenomenon the same way we scratch our heads today when we try to explain Pets.com. If you can't look at the $80M valuation of Twitter and figure out that the Web 2.0 bubble is going to pop, then there's just no helping you.

A lot of people have been musing about how Twitter can make money. As users that's important, because we don't want to see the service disappear. But frankly, if you have to think long and hard about how a business idea is going to make money, it's probably not going to work. I'm really wondering what the elevator pitch was for Twitter, because after reading a dozen blog posts on this subject I still haven't seen a complete idea. Maybe I'm wrong and they've got something absolutely brilliant up their sleeve, but more likely the pitch went along the lines of "We'll have millions of users, that's got to be worth something!"

It Takes a Lot of Money to Be a Successful VC Investment

You have to keep this in the context of a VC investment. VC's don't invest to get a 7% return on their money. They're not in that game. They invest in high risk levels, and fully expect only 1 out of 20 companies to pop big time if they're doing a good job. Which means to break even, they define success as 20x return on investment. That doesn't mean they'll get it, but in order to justify the investment they have to be able to see a way that they'll get a 20x return. That means that Twitter has to sell for at least $400M in the exit. In that case, the founders probably get a pittance because the VCs are going to get the first grab at the money until they've met their goals. It doesn't matter that you've only sold them 20% of the company, you won't get your money until they get theirs.

What kind of revenue does a company with a valuation of $400M have to generate? It depends upon the multiplier, but in this environment a valuation of 10x revenue would be pretty strong. Or maybe 100x earnings. So Twitter has to be a $40M revenue company just to break even in the eyes of the investors. The general rule of thumb for silicon valley VC investments is that you want the company to get to $100M in five years to be a success. If you want to see an explanation of how VC investments work, go back to our oldie but goody post on Venture Capital Term Sheets.

Riding the Wave

There's no way they can hit those kinds of numbers. Not a chance. Let's keep in mind some of the major factors in their successful adoption so far:

• It's Cool - Twitter was riding a wave of coolness at the height of the Web 2.0 madness. Anybody who was anybody was Twittering. To quote Eldon Tyrell, "The light that burns twice as bright, burns half as long. And you have burned so very very brightly, Roy."
• It's Free - The barrier to adoption was miniscule. Just go to their page and sign up. They don't even collect much demographic data; you just need a nickname and an email address. Unfortunately, as Twitter is finding out, there's a huge difference between free and a nickel.
• Third Party Tools - They were smart and built an ecosystem for third party tools. They provided a fairly open API, which allowed a wide array of blogging plugins, readers, bots, etc to be built. There's only one problem with that: They killed their advertising potential. You can't serve banner ads to someone that doesn't visit your pages. Judging from the people I'm following, more than 75% of the Twitter power users are using something other than the web interface to tweet.

Basic Assumptions about Twitter's Business Model

Let's take a look at the basic business model limitations for Twitter. To do this, we need an idea of the number of transactions, users, customers, etc that they can support. Since none of this is publicly available, we'll have to make some guesses.

• How Many Twitter Users are There? - I've seen estimates of 3.8M users, but frankly there's no way the number of active users is that high. The 3.8M number may be the total number of people that have actually signed up for an account, but there just aren't that many active users of Twitter. Take a look at Twitterholic. The number one Twitter user in terms of followers is BarakObama, with 60,601 followers this morning. What percentage of active Twitter users are following Obama? 10%? I'll bet it's a lot higher than that because it's something cool to do. But if it's 10%, then there are 600K active Twitter users. If you look at the entire top 100 users and assume there is no overlap in followers between any of the 100 (in other words, just add up all the followers in the top 100), you get an upper limit of 1.3M users. Now that 600K is starting to look a bit high, isn't it? But I'm going to be generous and assume that there really are 600K active Twitter users, although it's completely apparent that there aren't. The actual number, which only Twitter knows, is probably a lot closer to 100K active users.
• How Many Pages Views a Day do they Get? - This is pretty hard to even guess. A SWAG on it would be that the average number of refreshes for their 600K users is 5/day? So 3M pages views a day? Evan Weaver did some playing around with Compete and came up with 71M views/month, which is a mere 2.3M pages views/day. Twitter's Alexa rank is hovering around 1,000, so 3M page views seems extremely optimistic.
• What Rates Can Twitter Charge for Advertising? - Pubmatic says the CPM for large sites is down to $0.67. I doubt very much that Twitter can command high CPM rates because people aren't on their site to look for advertising, they're focused on something else. The average CPM of large sites is $0.92 for the last three months, so let's be generous and say Twitter can get a CPM of $1.00 because they're so cool.
• How Many Tweets Could an Advertiser Send? - I'd be really surprised if users would put up with more than 1 tweet a day from a sponsor, and even more surprised if they'd take up to 3. But let's assume that Twitter can deliver 3 tweets/day as a sponsored advertisement.
• How Much Would Someone Pay to be a Twitter User? - This is tough because different users get different value from Twitter. For most users, anything over free would cause them to stop using the service. But as Andy Beal pointed out, he's got 3,000 followers so he'd be willing to pay $5/month. LinkedIn gets $19.95/month for their premium service, but there's a lot more utility and payback. When you're on a job search, $19.95 doesn't seem like much. Let's be generous again and say that Twitter could charge $20/month and get the top 10,000 power users to pay. That's pretty aggressive. It's more than Andy said he would pay, and he's a real Twitter nut.
• How Many API Users Do They Have? - It's a lot. The rumor is they have peaks of 12K/sec on their API services. My guess, based purely on sampling from my own feed, is that about 50% of the users out their are getting their Twitter fix without hitting Twitter's web page. That sorta fits with the 2.3M page views/day estimate and their 600K active users. That would be 300K users doing 7.6/page views/day, and the other 300K leaving their readers open and hitting the API every minute or so.

What Options Do They Have?

Andy Beal over at Marketing Pilgrim brought my attention to this in his article "Twitter Needs Your Help to Make Money". He summarized Ben Kunz's viewpoint article at Business Week that suggested 4 routes Twitter could take to monetize:

• Twitter Could ask Users to Pay - Alas, this one just won't generate enough revenue. If they can charge $20/month ($240 year! Wait until the wife sees that credit card charge!) and 10,000 of their power users that would see the value sign up, it's just $200K/month in revenue, or $2.4M/year. In other words, an underpaid CEO's salary would be 10% of their revenue. And the value to someone like Andy goes way down when his 3,300 followers start to bail from the service because it's not worth that much money to them. $5/month is much more reasonable, and that's only a $600K/year company. The bulldog will be mighty hungry.
• Twitter Could Get Paid for Messages - The idea here is to insert tweets into the twitter stream. Kevin Makice had a great comment on Andy's blog that suggested that Twitter could "make it a requirement to follow 2-3 (minimum) official sponsors in the same way and context you would any other friend or organization." Again, the problem here is numbers. 600K users getting 3 tweets/day at $1 CPM is $648K/year. But what is a 140 character, easily filtered message worth? Realistically, it's $0.50 CPM for $324K/year. That won't even cover the sushi bill. Worse yet, to get to just $10M in revenue at a CPM of $1 they'd have to send their 600K users 46 commercial tweets/day. Think about that. I doubt there would be many users left.
• Twitter Could Extract Money from User Data - Which would cause a backlash among users who seem to forget that the intimate thoughts they're tweeting every day are available for all to see. Besides that, the cat is already out of the bag. Google crawls Twitter heavily. Just do a site:twitter.com google search. I just can't see more than a few million in value here, and the risk of completely alienating the customer base. But let's give them $2M because they need it. This one is important to remember because it's bait for someone like Google to buy them.
• Twitter Could Sell Ads - Again, the numbers are even worse. They're getting at best 3M page views/day, so at a CPM of $1 they can get $1.09M/year in revenue. Ben Kunz came at the number in a very different fashion and came out with an upper value of $12.26/user/year. Using his numbers and the estimate of 600K active users you get $7.3M in revenue at a max. But his numbers require a CPM of $7, which I just don't see advertisers being willing to pay in this climate. And people getting their tweets through a Reader don't see the ads, so divide everything by 2.

What My Tweet Peeps Had to Say

I also asked this question of my Twitter Followers and additional ideas were:

• Charge for API Access - Twitter would charge API providers to have access to the API, perhaps on a sliding scale with a certain amount of activity for free. The basic problem with this is that whenever your business plan includes the concept of building a platform for someone else you're likely to fail. Missionary work takes a very long time -- much longer than Twitter has if you make a few guesses about their burn rate. But the bigger problem is that it's now a revenue split. Using our assumption of 300K API users, could the API vendors really extract more than $10/user/month in fees? Most API users would just stop if it required cash to use the tool. Trust me, it's hard to get people to shell out cash, even when you've got an awesome tool. And yet still, Twitter can only take a percentage of the revenue that the API using applications generate or they kill the ecosystem. A license fee of more than 10% is probably not sustainable. So 10% of 300K users at $10/month = $3.6M/year. And that's if all of their API users switch over instead of dropping out. If they only convert half, it's $1.8M/year. No way.
• Make Money From SMS - Communications companies make money when you receive text messages. A lot of money, because they get to use unused bandwidth to deliver your messages. It's not like voice where it has to have a guaranteed delivery time. So there's probably a model in there where they can get some money as a kickback for generating all that traffic. So you'd think Twitter could pull off a deal where they get paid to send SMS traffic. Unfortunately, the money goes the other direction, which is why Twitter had to abandon SMS Services in many countries. "Twitter estimates its costs to be as high as $1,000 per user outside the US, Canada and India." $1,000 for a user worth $12.26? But even if they could work out a deal with a carrier in the US, the revenue potential is less than that of banner advertising. Nobody is going to sign up for a paid SMS model to get Tweets about what someone is having for dinner at 10 cents a pop.

Andrew's Thoughts

Andrew Finkle posted a response to the Business Week article titled "Monetizing Twitter." He covered a lot of the same ground we already have, but here are a few of his unique ideas:

• The Roboform Model - He rightfully points out that RoboForm was very successful with the freeware model. The problem for Twitter is that there is a wide variance in the value proposition among users. While everyone gets the same utility out of the freeware model, only a small percentage of Twitter users get enough return on investment to justify any kind of cost. And the fewer users that convert, the less the value proposition becomes to the users willing to convert. Would Andy still pay even $5/month for Twitter if he only had 100 followers?
• Contextual Ads - This is a really interesting idea.

  Someone will "Tweet" about a great book they just read, and that Tweet will be tied to an Amazon affiliate link where others can purchase the book. Or perhaps the Tweet will be location aware - "Craving Pizza in NYC", and as GPS allows Twitter will attach ads from local pizza parlors in NYC.

  But again, the numbers don't add up for enough money to make it worth Twitter's while. First, only a small percentage of Tweets have any content that could be monetized. I did a somewhat random sample and came up with about 2% of the tweets in my feed that one could attack an ad to. But you'd have to analyze every single tweet to determine if you can overlay an advertisement, so we're dramatically increasing the processing power requirements on a system that's already struggling. And what will be click through rates be? I commented on Andy's blog that they might be lucky to get a 2% CTR on 3.8M users for 10/day. That works out to $3.4M in revenue for the context ads. And that's back when I was willing to give them 3.8M active users. Use the more likely number of 600K and it's $536K/year. I'll bet that there computing cloud charges at Amazon would go up more than that for this scheme.

The Real Problem for Twitter

The real problem is that "All of the Above" is not an option for them. They could do a combination of things, but some of these are competitive. For instance, nobody is going to pay $20/month for a service that bombards them with ads. Nobody is going to pay a user fee and also pay an API fee. What they probably can do is charge for API access, thus driving people to the organic site, and then place advertisements. So what's their revenue potential? Usually the best way to approach these things is to look at the high and low ranges of the very pieces of your business model and then do a best and worst case analysis.

Scheme	Low Revenue	High Revenue
Commercial Messages	$324K	$648K
Site Ads	$1.09M	$7.3M
Contextual Ads	$536K	$3.4M
API Charges	$1.8M	$3.6M
Data Sales	$1M	$2M
Total	$4.75M	$16.94M

The best case scenario for Twitter doesn't cut it. They took $20M in venture capital. If things go perfectly they're still at less than half the $40M in revenue they need for the VCs to think they broke even. Remember, the standard benchmark for a company that does well but isn't a home run is $100M in revenue after five years.

Here Comes the Fire Sale

So why should you care about whether the VCs are happy? Because to paraphrase, if the investors aren't happy, ain't nobody gonna be happy. They've got to get their cash out. They don't make these investments because they're nice guys. When the VCs start to realize they've made an investment that's not going to work out, they start doing these things:

• Bring in Outside Advisors - Who will wager that the analysis they did on the foreign SMS costs was driven by a VC board member who was aghast at their burn rate? Their last round was for $15M, which usually is supposed to cover the burn for 2 years. 4 months later they were looking to cut costs, which means that the VCs started getting worried about the burn. They realize they've got to make that $15M last for quite some time given the current investment climate. I wonder if that last round of $15M came in traunches?
• Bring in Adult Supervision - You can always spot a VC funded startup in trouble. The founder/CEO gets a new business card that says "Architect" or "Visionary" and a CEO with gray hair is brought in to fix things. Why VCs don't just require that startups have adults in charge is beyond me.
• Cut Costs While Looking for a Suitor - If the company can't make the big hit it needs to, the VCs will administer a "haircut" and get costs in line so that the company can be bought. The problem for the founders is that their exit is pretty much gone at that point. The problem for the customers is that the original vision is not going to happen.
• Sell It Off - It's always funny to note that the amount an underperforming venture funded company is sold for is closely related to the buyout value for the preferred investors. The company doesn't have to be failing -- it just has to not be in range of a major home run any more. It costs VCs money to give their attention to companies, so it's better for them to sell it off and make it someone else's problem rather than continue the care and feeding, even if the company was making a small profit.

So to all the well wishers who say "Twitter is going to be able to make revenue somehow": I hate to rain on your parade, but some revenue isn't enough. They are a heavily venture funded company. Less than a home run means the sharks will be circling. If they turn into a $20M a year in revenue company they're a failure. They'll be sold off in a fire sale.

And their problems go much deeper than that. Evangelical work is always extremely difficult in any market. They've already accomplished something hugely impossible -- they started with nothing and created a ubiquitous service. That's a home run. But now they need lightning to strike in the same place 4 times, because they have to build a new business model, switch everyone over from free, and somehow grow their user base, without a competitor knocking them out. And everything they do to monetize will make their user base numbers trend downwards. Their only way out is a fire sale.

Why won't Google or someone just buy them as a "hood ornament" as Kunz suggests? They may very well do so, but the price will be a fraction of what Twitter needs. What if Google decided to provide a competing Twitter product? It could integrate with Gmail, Reader, their social networking, even search. It's a slam dunk for them. And it would probably be less expensive for them to develop it themselves to work within their existing architecture than to even pay a fire sale price for Twitter. The perfect time for Google to launch this service would be the day that Twitter announces their new monetization scheme. Google could offer to migrate all of your data from Twitter into their system. They're already crawling Twitter heavily anyway. Does anyone think they couldn't do it? And why would users take a chance on Twitter if the venerable and reliable Google offered a competing service for free? The same goes for Microsoft and Yahoo. And given the way the market is right now, are any of the big guys going to make a hood ornament acquisition unless it's a steal?

So enjoy Twitter while you can, but don't get too attached to and certainly don't make your business reliant upon it. It's fun, but so was Igrocer, pets.com, and a thousand other sites that we couldn't figure out how they were going to make money.

I'll say it again. If you have to think long and hard about how a business idea is going to make money, it's probably not going to work.