At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Source: The 451 M&A KnowledgeBase *451 Group estimate

This comes on the heels of other vertical social networking M&A. We believe this uptick in acquisitions, despite growing disinterest in traditional social networks, is a sign of a shift in focus to niche verticals. Venture capitalists have recognized this as well, and from what we hear a large shift in funding, especially among early-stage investors, is taking place. So what other vertical social networking sites are ripe for the picking?

LinkedIn, arguably the most successful among the verticals, springs to mind. The social networking site for professionals has been profitable for two years and is on track to make $100m this year from advertising and subscriptions. Founder Reid Hoffman has indicated to us in the past that he is open to offers if the price is right. Having recently attained the $1bn valuation we alluded to in the past, however, the site is now too expensive for most. And Hoffman seems content to wait for the struggling public markets to recover.

This is the exception to the rule, however; most other sites will be acquired. One such example is Flixster, a Shelfari-like social networking site for movie buffs. NewsCorp and Amazon could want to either eliminate an obvious and growing competitive threat or supplement their own Rotten Tomatoes and IMDB portals. With more than 40 million users, we estimate that Flixster could fetch more than $100m.

Select vertical social networking deals in 2008

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate