VCs and Angel Investors Invest Over $20 Million in Pure Play Twitter Startups

Twitter, the well-funded startup which has amassed $55 million from various angels and VCs, has ascended into the world spotlight over the past six months. The increased interest in Twitter has corresponded with an equally dramatic increase in the number of Twitter-related applications and startups. While most of these startups/apps are not angel- or venture-funded, there have been some notable investments in startups that are primarily predicated on Twitter, e.g. pure play Twitter startups.  In fact, to-date, $23.27 million has flown to 11 such Twitter-based startups from a variety of angel investors and venture capital firms (data taken from CB Insights as of the first week of June).

We wanted to take a look a closer look at this investment activity to understand the types of Twitter-related startups being funded, the amounts of funding, the investors backing them as well as overall trends and implications for such startups going forward.

As already mentioned, the spotlight on Twitter has remained intense and largely positive resulting in a remarkable amount of momentum for the micro-blogging service. If the growth and zeitgeist surrounding Twitter were to continue unabated, it would not be surprising to see investment in startups offering capabilities/services based on Twitter also growing.  But the last couple of weeks have also seen some critical analyses of the service which may temper enthusiasm for Twitter and as a result startups predicated on Twitter. A new Harvard study highlighted how a large portion of Twitter users are not active. The median number of tweets by a Twitter member was 1 and the 75^th percentile number of tweets was 4, while the average was 26.71. The study found that the top 10% most prolific of Twitterers accounted for 90% of the content on the site. Similarly, Erick Schonfeld over at TechCrunch wrote that “On Twitter, Most People are Sheep” but did ultimately conclude that “Twitter is no different from any other form of participatory media”.

But the questions and skeptics of Twitter are still seemingly in the minority. In Time Magazine’s recent cover story about Twitter, Steven Johnson wrote how “the key development with Twitter is how we’ve jury-rigged the system to do things that its creators never dreamed of” and that “the most fascinating thing about Twitter is not what it’s doing to us. It’s what we’re doing to it.” And then there was the recent announcement by Howard Lindzon and his partners at Social Leverage who’ve created a Twitter-only incubator - 140Labs.

So on the whole, what does this mean for Twitter focused startups looking to raise money and investors looking for opportunities?  One of the best ways in our view to understand where things are going is to understand where we are coming from and so we decided to leverage data about investors and startups contained on CB Insights to examine Twitter-focused startup and investment activity in the recent past.

Please note that we are only looking at startups whose core functionality/capability is centered on Twitter. There are numerous startups that tap into Twitter, Facebook, iPhone, etc but those are not in scope for this analysis.  Essentially, Twitter has to be at the heart/core of what the startup does. Also note, we did discover a number of Twitter startups that have been acquired. We decided to omit the acquisitions because this study focused on funding by angels and venture capital firms, not purchases by other Twitter related companies or in some cases by Twitter itself. However, if these companies had received venture capital or angel funding prior to being acquired (i.e. Summize), the funding was included while the acquisition was not.

Mashable reported on 140 Twitter-related tools and apps so the aggregate number of apps is likely in the thousands. Given the many Twitter-related startups, only 11 have actually received funding as detailed below.  The aggregate statistics for these eleven companies are given below.

Comparing the average level of funding to the median, we see that most deals have actually been small, and that a few very large deals have raised the average, specifically Topsy Labs which has raised nearly $15 million for a search engine based on Twitter.

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We then broke the eleven companies into six distinct industry categories based on the number of investments and the dollars invested in each as can be seen below.

While it was interesting that each sub-industry had roughly equal number of investments, the amount invested heavily favored search engines, specifically because of the aforementioned Topsy Labs, which identifies popular links and the influence of each individual posting a link.

After looking at where the money was going, we wanted to look at who is actually providing the money. As can be seen in graphical representation below, investment by round has been evenly split between angel investors, venture capital firms, and Angel/VC investment collaborations.

Overall investment totals $23.27 million and a breakdown between angel, venture capital, and mixed angel and venture deals can be seen below. In aggregate, when we look at funding amounts, the portion of funding coming from a mixed group of investors, e.g., angels and VCs, was much larger than overall investment for either solo angel investments or solo venture capital investments. Note that one $500,000 investment did not release investors and is thus omitted from this chart.

While funding of Twitter-related companies has occurred over the past 2 years, investment was quite small until December of 2008. As illustrated below, investment has increased significantly over the past 6 months, and the vast majority of the overall money invested has been invested in the very recent past.

So with this data in-hand, we wondered how well investment in Twitter matched overall interest in Twitter. To gauge interest in Twitter over time, we used Google Insights data as a proxy. Google Insights offers a glimpse into how many searches have been done for a particular term, relative to the total number of searches done on Google over time. Interestingly, when these data points are overlaid on each other, as they are below, the funding activity seems to map quite well with the spike in interest of the company.

Given that Topsy’s large investment skews our data, we also looked at the number of investment funding rounds per month compared to interest in Twitter. Again, this graph shows that very few deals occurred before December of 2008 and that funding for Twitter related companies has increased primarily over the past 6 months.

While there have been some recent well-publicized criticisms of Twitter, there is still a highly positive sentiment about Twitter and it’s real time capabilities (the events in Tehran further demonstrating this value), it will be interesting to see the amount of investment in Twitter-focused companies going forward. We’ll aim to revisit funding for Twitter-related companies in several months to see how this study and the trends we’re currently seeing are faring at that time.

In the meantime, what do you think about the future trajectory of funding activity for Twitter focused startups? Should such startups be funded at all given the uncertainty around Twitter’s own business model?  If yes, what types of Twitter-specific applications/startups will be funded going forward? What do you think of the current crop of funded startups focused on Twitter? For those of who you have built or are building Twitter-specific apps and are seeking funding, how are investors, whether VCs or angels, receiving your ideas?