There has been so much talk recently about the new generation of social network companies and how they are not only attracting huge user bases, but also huge valuations.
On the one side, there is talk of multi-billion dollar valuations – and on the other, that this signals the start of another bubble with valuations expected to come crashing down in the not too distant future.
So I thought I’d try to break down the numbers and look at six of the hottest companies side by side to see what we can learn. I’m not interested in looking at each business individually – that’s been done to death. What I want to do is to look at the numbers relatively to see how they compare against one another and what can be learned from that.
|Implied value |
There is no doubt that some of these companies will justify their huge valuations and go on to be very large public companies and a brand that is part of our lives for many years to come,” he writes. “But there will be others that will be exposed as unsustainable and will end up either being sold or their growth trajectory will come to a grinding halt, as they are either unable to scale or are overtaken by a competitor they didn’t see coming.
It’s only in comparing these companies that we can start to predict who the lasting brands will be and what these businesses need to do to live up to the hype.
Value is clearly not just about the size and growth of your user base. Skype actually has the largest user base out of the group, and is also unique in that is has become a universally recognized verb for internet-based calling – something that none of the other group can claim yet. But this doesn’t translate through to its valuation that is thought to be in the $5bn range.
That’s is because people don’t go to Skype to ‘hang out’ – they go to make free calls and this limits the revenue generating potential of the vast user base. Indeed only one to two per cent of Skype users are paying customers, and they come almost entirely from the service that enables local calling from Skype to any phone. So not only do they have a very small percentage of paying users but they also have an over-reliance on one product.
Other than Skype, Facebook has by far the largest user base of more than 600 million. Moreover, it continues to grow rapidly and is starting to generate significant revenues with the 2010 figure thought to be in the region of $1.75bn, and expectations that 2011 could be between $3-4bn.
“This all adds up to by far the largest valuation of the group at $50bn, and the very high value per user of $83.3. One thing for sure is that Facebook will need to continue to drive its monetization strategy hard in order to justify its valuation.
For example, I’ve never clicked on an ad in Facebook and I’ve never used any of the chargeable games or other applications that use their platform and form an important part of their revenue strategy – so at this point it’s difficult to imagine that I’m worth $83 to them!
No-one doubts that they are an amazing business with extraordinary potential and highly engaged users, but there’s still doubts about how responsive those users are going to be to ads when all they want to do is share information and hang out with friends.
Twitter is interesting when you look at the business in this way. On one side, their valuation feels relatively high in terms of the 100x multiple of revenue – by far the largest multiple in the group. However, when you look at it in terms of value per user it is the second lowest number and therefore you could argue the business is undervalued, again as compared to the rest of this group.
It’s clear that Twitter is the furthest behind in terms of translating their user base into revenues – and you either conclude that’s because it’s going to be a very difficult thing to do or that they just haven’t been focused on this side of the business until recently.
Groupon has by far the largest value per user of $166. I think this can be explained by their users having actually signed up to see deals and to buy things so it’s a more commercial relationship from the start. But that said, it’s still a very large number and they will need to show that users are not only responding to offers but they are also coming back time and time again.
I signed up for Groupon around 12 months ago, more out of curiosity than anything else, and I have not responded to a single offer. The main reason for this, and I hear this a lot, is that they are not speaking to ‘me’ but instead seem to just carpet bomb their entire user base. If they are not able to deliver a more personalized and relevant experience for their users then I would say that the valuation multiple and the implied value per user will move forever downwards.
Zynga and LinkedIn
If there is such a thing as averages in this group, then I’d say that Zynga and LinkedIn both seem to be somewhere in the middle in terms of revenue multiple and value per user. But in fact they are very different businesses.
LinkedIn is most compelling because it is more niche, focusing on the professional user, many of whom presumably have plenty of money to spend. This specialized position would seem to be a good defense against competition, but the challenge for LinkedIn is to get their users more engaged and actually using the site on a more regular basis. They probably have the least engaged users of the group (certainly true of me) but potentially the richest – they just need to create products that these people actually buy into.
Zynga, on the other hand, is ramping up its revenues at a very fast pace and expectations are that they could pass the $2bn figure this year, which would be an amazing achievement for such a young company.
I think for Zynga, unlike the more traditional social networks, the challenge is launching one good game after another to keep their users active. The games business is similar to the music business in that you need to keep releasing hits – people get bored of games and Facebook will make it very easy for them to switch to another company if the conveyer belt starts to dry up.
It will be fascinating to see these businesses continue their remarkable growth over the coming years and to see who lives up the hype and who doesn’t.
Jos White is co-founder of Notion Capital, an £8.5m-portfolio venture capital fund. He set up MessageLabs with his brother Ben in 1995, later selling the business to Symantec in 2008 for $700m, making it (at the time) the second-largest transaction for a private company in the history of the IT security industry. Jos also writes a great blog, which you can read here.