Valuation 2.0

Valuing companies is always great fun. Ask 100 different analysts and you will likely hear 100 different numbers. Even with reasonably good transparency and sound forecasting methodologies, the final value is highly subjective. The short answer is simple: a company is worth what someone will pay for it. The end.

Things have become far more challenging in the era of Web 2.0 - an era characterized by Sarbanes Oxley, private equity, and "free." The challenge for the analyst nowadays is not only to provide the most objective articulation of underlying assumptions and data, but to essentially invent whole new methodologies. One example of such an approach is Adonomics, a portfolio company of Altura Ventures, the Facebook-centric venture capital firm. Adonomics provides valuations for Facebook applications based on a proprietary methodology which takes into account the number of installs, daily usage, and advertising potential of each app. The site provides a searchable database, and publishes the Adonomics 100, a valuation ranking of the companies behind the applications . The top company, Slide, founded by PayPal co-founder Max Levchin and maker of the popular FunWall, Top Friends, and SuperPoke applications, fetches a $322 million valuation.

The latest entrant in the valuation game is the Silicon Valley Insider, a blog founded by, among others, former Merrill Lynch star Internet analyst and dotcom implosion poster boy, Henry Blodget. The SAI 25 is a listing of the "world's most valuable digital start-ups." SAI's methodology is fairly straightforward, taking into account industry comparables, financials (when possible), market share, and growth rate. SAI fully admits the hazards involved in this exercise, particularly the effect of information asymmetry, but there is clearly some serious thought involved. For example, SAI values Facebook at $9 billion, versus the $15 billion based on Microsoft's stake. The rationale? As part of the transaction, Microsoft agreed to sell Facebook ads and bought preferred stock, thereby reducing the value of the common. Overall, the SAI 25 it is an interesting contribution to a growing body of work in this area.

Conspicuously missing from the list are Finance 2.0 companies, and an accompanying "Contenders" supplement includes only Mint ($50 million), and Prosper (<$50 million). This is hardly surprising, given that the valuations of the SAI 25 range from $250 million to $9 billion. Moreover, the revenue models for Finance 2.0 are still a bit uncertain - advertising, data aggregation, or premium services. The ad model is losing favor as users are increasingly tired of intrusive banners, preferring a cleaner, richer, and therefore more engaging (i.e. stickier) experience. Data aggregation holds great promise, but is both unproven and controversial. Premium services are perhaps the best route to "hard money" results, but it is difficult to justify fees when competing sites likely offer comparable services for free.