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Valuations and internet companies

Page history last edited by PBworks 15 years, 5 months ago

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Table of Contents:


 

 

 

Business Valuation Techniques:

 

see our discussion on:  business valuation for how to value non-internet companies, as well as more techniques for all startups, internet or otherwise.

 

 

Valuations and internet companies

 

 There is allot of debate about the right way to value internet startups.  During the first internet bubble in the late 1990's and early 2000's, people argued that net present value of future cash flows was irrelevant, and that there was a "new economy" in which profits didnt matter, but what mattered most was generating large audiences (or "lots of eyeballs"), and that this was sufficient for a business model.  But, then came the dot-come bust, and most of the companies went bankrupt.   If you are starting a Web 2-0, or come from Silicon Valley, chances are you've heard about the legendary bursting of the internet bubble in 2000. But the question of today is... have things changed?

 

What didn't go away, however is the need for a good way to determine the valuation of the internet companies.  Some companies such as google have grown to monster sized corporations, and although they do generate cash flows (from advertising), they are in no way generating enough cash flows to justify their inflated share prices.  But what does?  

 

Many have argued that in order to value an internet startup company, its improper to use NPV or cash flow analysis because it doesn't take into consideration real options.  for this reason, theories like Black-Scholes have attracted allot of attention.  See our discusson on real options for how to incorporate options onto VC valuations.

 

Some tools

 

Here is a nice tool for estimating the value of your startup:

 

Links from KookyPlan

Also see:  Venture Capital Method of Valuation

 and:  Angel investor valuation method

 

 

Do business plans really matter?

 

Others have argued that business plans dont matter for some types of internet companies becasue they are not planning on turning their application into a business, but instead they are looking to capture a massive audience, and they then hope to sell their audience to an established company that has experiece running ad networks.  In this way, the new internet companies are more like TV shows, or audience catchers, and the existing networks are like the TV networks that have experience commericalizing that audience.

 

2 distinct  types of internet companies (and  2 ways to value them):

 

 

Unlike the conventional business plan advice given to you by business school professors, it actually doesn't make sense for developers of new internet applications to bother with a business plan.  The problem is that these professors don’t understand the fundamental difference between the internet “applications”, and the internet “ad networks”.

 

 

Internet applications are like hit TV shows.  They draw in audiences who like the experience of the “show”.

 

Internet networks are like the TV networks (think ABC, NBC, CBS, Fox).  They have developed serious business plans that know how to turn the audiences into money. The equivalent in the internet-world is Google, Yahoo, and Microsoft.  These are the guys that have the ad delivery mechanism figured out.  And, as a result, they shop around for newest applications that are drawing in a big crowd (such as Facebook, MySpace, and the like).

 

An internet application (like YouTube) is very similar to a TV show (like Friends, Seinfeld), in that they bring in viewers and attract an audience.  So, like a TV show such as "Friends", the producers, writers, directors of the show should not be particularly concerned with commercializing the show. They do not need to think about the business model, but rather they should focus on creating an excellent experience for the consumer.  

 

Then, someone else (TV station, network) can come along, and figure out how to make money off of that audience.  

 

But, where does a company like google fit in?  They are like the TV networks of old...like ABC, NBC, CBS...in that they have the infrastructure in place to commercialize an audience.  They have the advertising and the ability to wrap content in advertising.  Google, Yahoo, MSN seem to be the big 3 of online advertising...and they are out there shopping for content that people want to watch, so they can wrap that content in advertising (just like what the big 3 TV networks do).   

 

So, what is the implication to small start-ups...well, it means that (contrary to what your business school prof says), you do not really need a business plan, or any real plan for how your website is going to make money.  You just need to develop a very user-friendly and necessary tool that millions of people will want to use on a daily basis (not easy to do all by itself).  If you can do that...you have essentially come up with a hit TV show, and the big networks will compete to see who can buy you....think Facebook, MySpace, Twitter, etc....all of those internet based "companies" with valuations that business school profs scratch their heads trying to understand.

 

If you can start to think about internet “applications” as the TV shows (such as Friends, Lost, etc), and the internet “networks” as the TV networks (such as ABC,NBC, etc)…then it becomes much easier to understand which sites should have a business plan (networks) and which ones should not (the applications).  Confusing these two concepts has led many a small company down the wrong path.  If your goal is to develop the greatest TV show the world has ever seen (internet application), then focus just on that, and let the business guys (the networks) figure out how to make money off of your audience.

 

 

 

 

 

 

 

 

 

 

 

 

 

Links

 

 

Links from KookyPlan

 

Private Equity

 

 

Related Pages

 

 

 

trends

 

 

Pages names with "Venture Capital"

 

More pages wtih subject "Venture Capital"

 

 

More related links:

 

 

 

 

 

 

 

 

 

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