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Website valuation metrics: big vs. small—and other complexities |
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Article from BV Wire, issue 72-1 September 10, 2008
Do the valuation metrics for large and small websites differ? Internet veteran James Nicholson believes so. Based on his research, James identified two value measures that differ for big and small websites: revenue multiples and cost per user.
Excluding some outliers, James found that “larger, established websites generally have been valued at anywhere from 3X to 10X annual revenues,” while small websites have been valued at just 0.83X to 2X annual revenues. For sites without much revenue, a better measure of value, he argues, is cost per user—which exhibits an even greater variance. The study he conducted found that larger websites sell for a range of anywhere from $20 to over $200 per user, while most small websites sell for less than $1 per user. Read the Nicholson article at http://seekingalpha.com/article/92809-valuation-metrics-of-large-vs-small-website-acquisitions?source=feed.
Sounds simple enough, but Mike Pellegrino of Pellegrino and Associates, disagrees. “Mr. Nicholson's observations of website valuation tend to obfuscate the valuation issue. They provide no guidance into the true value of a website. A smart investor should never pay anything outside of a value range spanning the present value of a website to the seller on the low side, and the present value of a website to the buyer on the high side. Further, the variance in his data is so large as to render the results moot."
One needs only to look at recent history to see the perils of improper valuation of dot coms. In an ever changing technical industry, the issue of website and dot com company valuation will only get more complex. Pellegrino has researched this extensively, and states that he has “yet to find a peer-reviewed academic paper that proves any of the dot-com valuation methods worked, particularly across different product verticals (think books versus groceries). The market valued Priceline.com using a revenue multiple at $10 billion, or almost as large as the entire airline industry, yet it lost $3 for every revenue dollar at the time and even had negative gross margins (i.e., it sold its tickets for less than it paid for them). Free cash flow and its closest relative, earnings, are what matters.”
For a much more detailed analysis of Pellegrino’s research in this area, see his paper titled “Valuing Early-Stage Technologies” by clicking at http://www.pellegrinoandassociates.com/resources/publications/PAA_VS_EST.pdf.
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