According to private-company intelligence firm CB Insights, now is a particularly bad time to try to raise money if you’re a company built on top of Twitter.
The ecosystem of third-party Twitter apps has seen a 50% decline in early-stage investment over the past year. Whether it’s due to Twitter’s evolving business model or due to the number and nature of new apps on the market, investors have decidedly cooled on “pure play” Twitter applications in the past 12 months.
Between June 2008 and May 2009, a total of $21.6 million was pumped into Twitter-based startups. However, between June 2009 and this May, that number had dropped to just $10.4 million. This number would include such deals as TweetPhoto’s $2.6 million Series A, around $2 million for oneforty, and a round of an undisclosed amount for TwitVid from DFJ.
The number of deals have seemed to hold steady, but the amount per round has dropped by about half year-over-year.
So why are investors becoming so squeamish about third-party Twitter apps?
Third-Party Apps and Twitter’s Strategy
Just before Twitter’s developer conference, Chirp, the company announced it had acquired iPhone app Tweetie. By adopting an official iPhone app, Twitter had taken a step into almost virgin territory: It had moved ever so slightly away from its core product, a microblog service, and had begun thinking about consumer features that could potentially lead to more users and more revenue.
Both developers and VCs saw this move as a loud and clear signal to those who had built their businesses on top of Twitter’s platform. The message was succinct as it was ecosystem-altering: Make way.
In other words, if you had made a business around developing a Twitter-based feature as a third-party app, and the company saw some profit in making that function part of an official, internal feature, you’d better watch your back and beef up your value proposition.
Within months, Twitter rolled out official apps for Android and BlackBerry as well. They also announced their ad platform.
Were developers and entrepreneurs shaken? Absolutely. Was this strategy in Twitter’s best interest? You bet.
While third-party apps have drifted toward the shallow end of the investment pool, Twitter itself has been raising healthy rounds to continue growing its staff and infrastructure. In September 2009, the startup closed a $100 million round, just a few months after closing another round in February. Apparently, buying into small companies with features built on top of another company’s core product has not been as attractive as going to the source itself.
How Third-Party Apps Can Still Get Funding
Back in April, we reported that investors were less than bullish on third-party Twitter apps. Venrock’s David Pakman asked the question on everyone’s mind at the time: “Where are there currently opportunities that won’t risk overlapping with Twitter’s current or upcoming features?”
Interested parties should read the rest of that post, which contains advice from a panel of VCs. Pakman continued to summarize, “There’s a huge amount of data being thrown out by Twitter. Going through the data and finding value for consumers and businesses seems a lot smarter than making features.”
Over the next few months, expect to see only the most savvy entrepreneurs securing funding for Twitter apps. Those apps will probably integrate with other services, à la TweetDeck and Seesmic, and they will likely offer revenue-creating features that Twitter isn’t currently exploring.
What’s your take on trends for third-party-app startup funding? We’d love to get your insights in the comments.
Reviews: Android, BlackBerry Rocks!, Chirp Blu, Seesmic, TweetDeck, TweetPhoto, Twitter
More About: business, funding, startups, third party, twitter
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