Why the Twitter Startup Market Won’t Get More Cash

Peter Kafka’s latest article over on AllThingsD (a must-read for me) caught my attention quickly. He found that the amount of investment cash flowing into “pure play” Twitter startups fell to $10.4 million for the June 2009-to-May 2010 period … from $21.6 million the previous year. The 52 percent year-over-year decline probably feels like a shock to the system, but it looks like there are some clear drivers for this change.

Kafka cites the natural ebb and flow of venture capital deals, as well as Twitter’s rush to fill gaps in its services. The latter, to me, is a no-brainer, as I remember trying to keep up with it. During last spring’s Chirp conference, Twitter announced a number of new measures that rounded out its product set. Of course, it came at the expense – whether Twitter wanted to admit it or not – of the many companies that had arisen as a result of the market opportunities created by Twitter’s gaps.

Now that Twitter has revenue coming in from multiple sources and is likely still sitting on a hefty pile of cash, the sector surrounding the social media company isn’t as attractive to institutional investors. At best, it looks like a Twitter pure play would have to find a niche and make money on it quickly, since any major successes will attract Twitter’s attention and cause it to enter the same space.

So, what about starting a Twitter pure play with the hope that Twitter will buy it up? I wouldn’t bet on it: the barriers to entry are low enough, even without the advantage Twitter ostensibly has through the knowledge of its own platform.

If I were looking to start a Twitter-focused company at this point, I’d either do something industry-specific with some sort of value added or develop services around strategy and execution (e.g., social media marketing). Kafka mentions opportunities in cross-platform development (such as Tweetdeck’s move to “incorporate feeds from every social service under the sun”), but the aggregator space is getting too full already. I’d go in a completely different direction.

Follow me on Twitter at @tjohansmeyer >>

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