Who's Worth What and Why
If Web 2.0 needed a publicity agent, BusinessWeek is making a good case for the job in the wake of its latest cover story on Digg and its potential value ($60 million, anyone?). While the story has caused a storm of disbelief, outrage, etc., it has thrust the issue of how Web 2.0 firms are valued firmly into the spotlight. What are the metrics used to determine whether a company is worth $60-million (Digg) or $1-billion (Facebook) or $3-billion (MySpace). Are we talking about page views, unique visitors, page views per unique visitor or time per visitor? What role does revenue play in the valuation game given it seems to be a tool that gets little attention? Without wagging my finger too much, it seems the whole valuation environment has gone back to the dot-com boom. The big exception is nearly all the “hot” start-ups are still private as they anxiously wait for a suitor to snap them up, whereas five or six years ago they did IPOs. Of course, value is determined in different ways. Rupert Murdoch's $580-million deal for MySpace last year much to do with News Corp.'s strategy to quickly establish a foothold on the Web. Aside from these kind of strategic deals, valuation often comes down to revenue and the prospect for profitable growth prospects - or at least it should. As a result, everyone involved in the Web 2.0 world needs to look at where the revenue is going to be generated. Can AdSense really support business models for every Web 2.0 start-up offering a cool, new service? Is it possible to build a business this way even when development, marketing and distribution costs are so low (relatively speaking)? Without getting too dramatic, the valuation game is out of hand because the “tools” people are using are vapor-ish rather than grounded in fundamentals. While BusinessWeek's cover story on Digg is, I guess, entertaining and eye-catching, the magazine should know better than to throw out wild estimates on a company's value when all anyone is doing is guessing.
Update: Fred Wilson has a good post looking at how the last bubble is impact the current investment environment - and some of the similarities that exist. Om Malik offers his take, including a troubling reference to the concept of “vapormillionaire concept”.
August 5th, 2006 at 5:29 pm
Hi, Mark. Though the BW article was a farce, the subsequent firestorm may finally force a conversation to determine how we truly value such companies. In my old-fashioned opinion, the majority of the equation (Stage 1) has to come down to revenues and profits, especially the latter.
EXAMPLE: If ABC company is generating $1M in annual profits, you can give it a multiple of 15X and value it at $15M.
Only then, when ABC has proven itself to be a viable business, should we take into account the size of the market/eyeballs etc. leading to future growth and higher valuations.
If a company such as DIGG hasn't been able to turn a profit at this stage, then there is no point in discussing eyeballs, page views, growth and valuation because we're just spinning wheels.
Profits first. Everything else is just fluff metrics meant to hide the fact that we haven't figured out how to make a profit but look at these other cool things we can do
P.S. Have a look at my post on Kedrosky regarding the BW article that Jason from 37 signals replied to as “PRICELESS”.
Best,
George
August 6th, 2006 at 7:11 am
All good points Mark. I would be shocked if Digg attracted a $200M sale price. Having said that, who is to say what 'Digg' the brand is really worth? Furthermore, will the buyer of Digg be buying Digg because it makes X dollars in annual revenue, and/or will the buyer buy Digg because of the attention, community and brand awareness it has captured? When Yahoo bought Flickr, did they pour over their balance sheet and basically say to Butterfield, 'Flickr's making X dollars after 12'ish months in operation, so we'll give you Y multiple of current earnings'? Or were less tangible and quantifiable things like brand, human capital, market attention etc. also significant factors in the valuation? BusinessWeek's article is the journalistic equivalent of a National Enquirer piece, for sure. But I do feel that some people are missing the boat when they think it's all about the balance sheet when it comes to acquiring these 'web 2.0' type businesses/sites. In some cases, the acquiring company is in a much better position to monetize an existing web business than the founders. The acquiring company may be able to leverage an existing network of sites and/or advertisers, and thus it becomes a 'value added' play for them and their existing revenue base.
Kevin Rose hasn't made anything close to $60M and Digg isn't worth anything close to $200M until some large corp. comes along and writes that on a cheque. But do not discount the value of a brand. Especially as attention in the online marketplace gets even more difficult to aggregate as the space continues to mature and saturate. Ultimately, if you're not building a brand in the marketplace, you've got nothing.
August 6th, 2006 at 7:47 pm
“Hi, anonymous.”
Whoops. I didn't intend to be anonymous. I filled out the contact info but it didn't put the info on the comment, although I see my name on it. I've now created a profile. My bad.
“We shouldn't allow BW to ruin 2.0 by giving the masses the impression that we are going down that path again.”
Actually, Kevin Rose should never have allowed that to happen. You never 'kiss the trophy' before you've won the match. It looks and smells terrible. Bad move. A real faux pas. Butterfield/Fake didn't get villified for their Newsweek cover, did they?
“I would rather have seen an article about 10 companies generating $1M in profit”
Totally agree with you on that.
“1 company that can now afford to pay the rent.”
By your above definition could Digg actually qualify? They might be pulling a $1M profit right now. But you are underestimating their market/brand influence, considerably, and what that could be worth to a potential suitor.
“You better decide if you're just having fun, or building a business of value.”
What about having fun building a business of value?