A what-if, as in what if this was now April of 2000
Company valuations are what the market says they, until the market says otherwise. People learned their lesson (at least with internet investing) in 2000, and there has been a dearth of big internet IPOs since – with that lack of offerings comes a dearth of information. What back in the last internet bubble could be gleaned from checking your brokerage account now comes via private investment extrapolation and backchannel chatter. Internet companies (and in particular the social network crowd) are presently illiquid private investments whose valuations are prone to ambiguity.
Take Facebook for example. The website received a $250MM investment from Microsoft late last year, and several monied individual investors (and a few institutional types) quickly followed-on at purportedly similar price tags. This investment pegged Facebook’s worth at a cool $15 billion, and social networks and related “applications” have been nipping at their heels ever since. However, there has been little information to judge the true value of the company – Microsoft also has an exclusive advertising deal with Facebook and many agree that there must be some strategic value associated with that. Still more debate whether that Microsoft investment was the true sign of “bubbledom” number two.
A few weeks back, Mike Arrington of the TechCrunch blog took a stab at valuing a number of social networks, based on an advertising expenditure survey and ComScore statistics, and a few recent transactions in the space…including Facebook. Silicon Alley Insider gave the work a general thumbs up, and then proceeded to pick apart some of the advertising assumptions (as well as the real value of Facebook and some others). I enjoyed the number tumbling too, but noticed something different was missing. Time.
Time is a cure all (although it also puts you in the grave). Time is also a critical component of valuation. When time races by in the public markets, valuation comes instantly. But when it is accompanied by fits and starts, like in the private investment markets, valuation is harder to come by. With those prospects in mind, I decided to revisit Mr. Arrington’s data to see if it still jived just weeks later. I had some more of that “backchannel” information to work with too – some rumors about brokered sales of Facebook stock – via Arrington himself.
The original valuation results via TechCrunch came about like this: Arrington first developed a “raw score” for each site, based on advertising expenditures across the internet, applying per user averages (using ComScore data) to each social network, and then factoring in the latest transaction data for three of the sites, Bebo (March ’08), LinkedIn (June ’08), and Facebook (October ’07). Valuation based on those transactions is depicted below:
Subsequent to this analysis, it was revealed that insiders at Facebook might be trying to sell their shares. The rumored asking price was putting Facebook’s valuation at somewhere between $3 billion and $4 billion. There’s now new information, and we won’t bother going into what could be gleaned from knowing insiders are attempting to sell at a discount – that’s a story for another time. Nevertheless, taking this new data (with optimism, at $4 bil) and inputing it into Arrington’s model, the mean values of the 25 internet companies listed would look more like this:
In addition to reducing composite mean value by almost $15 billion, there’s another adjustment that might be worth making. After Arrington created the “points” system, recent deal values were applied to create a dollar value per point – Bebo, LinkedIn, and Facebook received $240.78, $1,325.00, and $1,467.16 per point, respectively. Bebo seemed the bargain. But based on the latest data regarding Facebook, it would now get $391.24 per point. Now LinkedIn looks like the outlier – furthermore, their deal was completed while the Facebook valuation was still firmly on investors’ minds. If we tossed in the New Data Discount Factor (copyright, me…wink, wink AP), LinkedIn falls in line: $391.24 / $1,467.16 = 26.67%. Then $1,325.00 * 26.67% = $353.33. Some will argue that LinkedIn’s professional userbase should be more valuable than the playgrounds – my contention is the “kiddie sites” have turf encroachment in mind; as well, I know plenty of people who still use LinkedIn’s free offering – LinkedIn is surely chock full of smart, saavy internet users that know how to ignore ads, meaning they are subject to the whims of the ad industry and its market prices like everyone else. Failing that, the numbers simply look more reasonable side by side.
Recalculating with the latest $/point for LinkedIn and we get:
Total downward revision under this simplistic analysis – roughly $28.4 billion.
None of this is mathematically perfect – nor are its assumptions. But I believe it sheds some light on what investors might be thinking about if there was a public marketplace full of these social networking sites, consistent with the last. One of free flow of financial information, instantly recognizable and actionable (and most assuredly so on rumor and innuendo). One that wound up looking like this:
UPDATE: Venture exits are sparser than anyone imagined they’d be, although I think that will change for some companies (not necessarily social networking/internet) during the next upturn. I think that is what Mark Cuban is saying too.
Also, the value pegged for Facebook shares distributed in the ConnectU lawsuit? 3.75 billion. Off by a measly $400 million.