Venture capitalists tire of Twitter-y start-ups

Venture firms seem to have realized that Twitter accessories may not provide huge financial gains. It's the platform, not the extras, that matter in the Twitterverse.

New data from research firm CB Insights shows that venture capital firms have tired of pure-play Twitter start-ups as investment financing has dropped by half over the last year.

From June 2008 to May 2009, $21.6 million was invested by venture capitalists and angel investors into pure-play Twitter start-ups. In the June 2009 to May 2010, time frame, the investment funding dropped more than 50 percent to $10.4 million. The average amount invested also dropped dramatically from a nearly $2 million average round last year to just over $1 million more recently.

Investments in pure-play Twitter startups
Investments in pure-play Twitter start-ups CB Insights

According to CB Insight's Anand Sanwal, there are a number of theories as to why this has occurred, ranging from a "feeling of uncertainty by application developers and investors alike about the direction Twitter will go" as well as whether or not Twitter acquisitions have filled gaps in the product that start-ups were attempting to address.

In addition to these theories, I would also guess that developers have realized that Twitter could simply replicate their feature sets and make their client/service the default choice. This is of course, Twitter's prerogative, and is also the risk developers undertake when building for a platform they don't control.

I have no doubt that Twitter wants an ecosystem to thrive around its platform, much in the same way that Facebook wants an ecosystem around its social network. However, as I wrote all the way back in July of 2008 , VCs must wise up to the fact that investing in accessories that can be reproduced and easily packaged as part of a core offering may not be the best business strategy.

That said, there is still enough room in the space for innovative companies to figure out ways to take advantage of Twitter's information flow. More than half of the recently funded deals have been financed by a combination of VC and angel dollars, which shows that investors still have high hopes for the ecosystem to grow.

 

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