Re: How to value a web site?

From: Jae Kim <jykim_at_redshift.com>
Date: Fri, 15 Jan 1999 10:50:01 -0600 (CST)

> hello all,

valuations. my favorite subject. : )

Just a quick intro, my name is Jae Kim and I am a media
analyst with Paul Kagan Associates. We publish 40 different
newsletters covering all facets of media (best known in
cable, motion pictures and wireless...and, if i do my job
right, the Internet.) our newsletter subscribers are
typically media executives and Wall Street investment
bankers/analysts and portfolio managers who use our research
and findings as tools to assess the value of media assets
(film libraries, newspaper companies, cable systems, etc).

That being said; fundamentally, an asset that is intended to
generate revenue will be valued against a handful of metrics
(some are no brainers, some require some thought)

First, is its ability to grow revenues. second, its ability
to generate cash flow or net income. third, industry
comparables. fourth, the overall condition of whatever
market it is in (public or private)

**caveat, when a company is blazing a new trail (or is in
early VC stages) forget about all of the above. the company
is valued against negotiated multiples against 2nd to 3rd
year forecasts...and the % stake the founders want to have
and what the VCs want to take.

It is partially the company's responsibility to explain--and
justify--how it should be valued. take for instance the
acquistions that have taken place in the "community" space
during the past 3 years. several "community" type deals have
been done at $40-$45/member. ICQ and Hotmail are two
examples. while it can be argued that hotmail isn't a
"community" in the same sense as ICQ or GeoCities, the
baseline metric was still the same because the number of
members was the substrate upon which the deals were built.

That does not mean all companies in the same space are
valued the same, however. I know GeoCities was valued
against a certain multiple vs. 2nd-3rd year revenues. As it
stands now, GCTY is valued at nearly $957/member, more than
20x the take out valuations of ICQ and Hotmail.

Having talked with broadcast.com's underwriters i know the
company was taken public at 8x 2nd year revenue forecasts.
By doing so, it was able to build into its valuation its
potential to grow revenues at a pace the company's
management was comfortable with.

So, getting back to the intitial post by Jonathan Corbet;
choose your metric. if "steeply growing" traffic is the
sites crown jewel, then argue for a multiple against revenue
forecasts. if it is your substantial base of loyal, sticky
users, then evaluate the value/user number and defend why u
should be valued above or at a comparable figure to other
deals in the space. one thing to look out for, however, is
you can sometimes sell yourself too cheap. remember hotmail
and icq have more than doubled their memberships in less
than a year...dont sell yourself short.

Selling yourself short is easy to do when you operate a
business with a short operating history. remember, when
YHOO was taken public it came out an eye popping 314x
trailing revenue multiple. two years out, however, when
gauged against ACTUAL second year revenues ($200 mil.) it
was valued at only 1.5x revenues. say what you did back in
96, in reality YHOO (along with the other portals) were
taken public cheap. not exactly what everyone thinks, eh?

Now we get to Ben Peterson's post regarding actual and
perceived value and how emotions and day to day market
sentiments affect valuations. the short answer is YES, all
of the above magnified by a factor of ten.

You answered your own question in your final statement,
"apparently the IPO bandwagon is filling up rapidly." y now
instead of the middle of summer? because everyone in the
market is feeling good again. Greenspan cut rates two-three
times since Russia defaulted on its debt to minimize the
impact on the US economy and to forestall what many felt was
an iminent credit crunch stemming from the $500 bil. in
Russian bonds that Goldman floated (now worthless) just days
prior to the announcement.

That relieved the intstitutions allowing them to focus on
making money, chiefly through stimulating the flow of funds
through securities, such as stock. Remember, the recent
market mania in Net stocks started back on 11/16 when
Goldman (gee, wonder why that name keeps coming up) upped
its price target on eBay from $95 to $150. how has that
affected valuations? well, look at the tape.

Remember, you can try to value your company however way you
want to in an IPO...but if the public doesnt like it you get
nothing. a good example is Pointcast. Arguably a much
better product now than it was a couple of years ago, its
IPO valuation was substantially less than the $425 mil.
price Rupert Murdoch was said to be willing to pay for the
company. why? the company has received a black eye and has
the unfortunate stigma of being "damaged goods." perception
and reality. is there a difference? sometimes no.
perception often causes reality.

Anyways, the recent price movements have shown bankers these
stocks and companies and web sites have a lot more upside
than they EVER believed possible. will this affect
valuations? you bet. if the market crashes again in coming
weeks will it affect valuations? yes again, and if i were u
i'd double-down that bet.

Ben, there are only three basic exit strategies.
one, IPO
two, merger/acquistion
three, shut the doors.

Go for the one that creates the most value. if you think
you can go it alone, go the IPO route, that is yahoo for
you. if you are andy b. at granite, and the gigabit
ethernet technology you're working on is desired by Cisco
(either to fully develop and integrate into its product
line, or squash like a bug to prevent competition) go the
acquisition route. either way, the bottom line is this,
value is often tempered by the sobering reality of the
market.

i look forward to any follow up comments. also, i am
moderating one of the panels during the previewtravel/onsale
conference coming up that monique russell posted on Jan. 11.
 would love to see all of you there. :

Jae Kim
Analyst
Paul Kagan Associates, Inc.
126 Clock Tower Place
Carmel, CA 93923
jae_at_kagan.com

vox: 408-624-1536 x 335
fax: 408-624-3105

...to know and not to act, is not to know


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Received on Fri Jan 15 1999 - 14:15:28 CST