A Look at Twitter's Venture-Capital Business

Image source: Twitter.

About 15 months ago, Twitter (NYSE: TWTR ) launched its Twitter Ventures arm, investing $85 million in Cyanogen. Most recently, Twitter Ventures made another large investment in SoundCloud -- $70 million.

The social-media company has about $2.1 billion in net cash -- cash minus debt -- on its balance sheet. Compared with other companies with venture-capital arms, such as Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Qualcomm (NASDAQ: QCOM) , Twitter has very little to invest. Alphabet has around $67.8 billion in net cash and Qualcomm has about $28 billion. That puts Twitter Ventures in a much different position from the venture-capital arms of other corporate VCs.

Twitter Ventures' investments

As mentioned, Twitter Ventures' first major investment was Cyanogen, the company behind the CyanogenMod mobile OS. Its other major investments are VenueNext and Swirl, as well as the recent SoundCloud investment.

All of these have one thing in common -- they all offer strategic assets to Twitter. While most VCs attract businesses by offering industry insight and connections, most are interested only in seeing their investment succeed, so as to capitalize with a payoff. Twitter's VC business seems just as interested in developing businesses into something its parent company can use as part of its main product. Alphabet maintains that its VC arm invests in businesses primarily to take advantage of its cash pile.

Cyanogen offers the potential to integrate Twitter more deeply into a mobile OS. Microsoft invested in the company as well, and it's worked to integrate its mobile apps into the OS. VenueNext specializes in live concerts and events, helping users connect with the venue on mobile and get the most out of their event experience. Swirl helps businesses generate location-based offers to shoppers in real time. And SoundCloud is a music platform that Twitter tried to purchase outright a couple years ago.

This strategy offers a way for Twitter to develop close partnerships with companies it can't otherwise acquire. But investors shouldn't see it as a means to grow Twitter's cash. Twitter only recently started producing positive free cash flow, and its investment portfolio remains limited compared with most VCs, including Google Ventures and Qualcomm Ventures.

Alphabet and Qualcomm's VC successes

Alphabet and Qualcomm have both had success with their venture-capital arms. Unlike Twitter, most of their investments are made with the goal of generating capital gains. Google Ventures has made over 250 investments in its history. Qualcomm Ventures has invested in 180 companies, with nearly 50 exits.

While Google later acquired some of its Google Ventures-backed companies, most notably Nest, its investments have a wide range, including Blue Bottle Coffee and Walker and Company (specializing in health and beauty products), that have little if anything to do with its core technology businesses.

Qualcomm has also had its share of big wins. It was an investor in Fitbit 's last round of funding before going public, and it invested less than $10 million in InvenSense in 2007. The latter is now worth nearly $600 million, but Qualcomm exited when it was valued at over $1.5 billion.

Google Ventures and Qualcomm Ventures invest in companies that could benefit their core businesses as well, but they both seem more focused on billion-dollar exits like InvenSense than Twitter Ventures is.

Twitter Ventures' investment in SoundCloud is a clear example that it's more interested in strategic alliances than in capital gains. SoundCloud is already worth $700 million, and that's the same value investors gave it in its last funding round in 2014. SoundCloud also raised debt last year, and it's struggling to stay afloat in the competitive music-streaming market.

Investors should know what to expect from the tiny VC arm at Twitter, as it has a different outlook than some of its peers do.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), InvenSense, Qualcomm, and Twitter. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Fitbit. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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