Web 2.0 startup valuation: Social Networks

  • MySpace.com (sold to NewsCorp) $580 million
  • Weblogs.com (sold to Verisign) $2.3 million
  • Skype (sold to eBay) $2.6 billion
  • Upcoming.org (sold to Yahoo!) $1 million (rumored)
  • del.icio.us (sold to Yahoo!) around $30 million (rumored)
  • MeasureMap (sold to Google) under $5 million
  • Writely (sold to Google) around $10 million (rumored)
  • Rojo (sold to SixApart) $10 million
  • YouTube (sold to Google) $1.65 billion
  • And the list goes on (feedburner,flickr,blogger etc). Valuation of a start-up is a complex process.It become even more complex when you have to deal with unreliable data,unproven bussiness models and mix of noise and hype.Unfortunely in case of web 2.0 companies we have to deal with these issues making valuation of SN very mysterious.

    Ok.Then how did we reached to numbers these numbers.? What factor affect valuation?  How objective is the process?

    I made a attempt to find answers to these questions by looking in to stories,news,blogs and follwoing comments around the most talked about startups of the world.

    1.Why It’s So Hard to Value Social Networking Sites.

      “You have little data on what kind of revenues they can generate and what their cost structure is.”

    Valuing advertising-driven sites is particularly hard because the same numbers — such as the number of users or page views — can mean different things depending on how the advertisers are billed”

    “But is Google a good benchmark? ”

    Analysts also like to factor in a company’s future prospects, using any number of calculations to derive a figure for “discounted cash flow.” Essentially, they look at expected revenues over a given number of years and subtract expenses to arrive at a figure for “free cash flow.” Then, using various assumptions about interest rates, they determine what money received in the future is worth in today’s terms. Analysts can never be sure about any company’s future revenues and expenses, but the problem is even worse when dealing with a young company in a fledgling industry. “

    2.Startup Valuation – The VC Method

    3.: Guess the Value: Basecamp 

    Virtual valuation game, in which reader are asked to guess the financial worth of a popular web app.

    4.Why Myspce is overpriced.

    “How much yearly profit would you expect from a $500 million purchase? How about a profit of just $10 million equating to a profit margin just under 2%. That’s right, the world’s largest social networking site, constantly in the top 10 web sites in the world, managed to make only $10 million on $550 million in revenue!”

    5.High Tech Startup Valuation Estimator

    This seems to be a highly objective process which include a multiplier for everything from size of market,stage of start-up,revenue,indusrty etc.But I doubt we can use this in case of SNs as calculation of multipiler is still a issue whihc is based on past history of industry,market,product and team.And yes ,we do have a fair amount of subjectivity here.

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    1 Comment »

    1. Alex Choo said

      Thanks for this insightful article.

      Now I know how NOT to value my startup, WP Text Ads 🙂

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