How do you value your social media startup with investors?

Founders always have one big question when fundraising or looking to exit. What am I worth? Today we will deal with social media valuation.

You’d think that would have an easy answer or clear methodology to follow, but it couldn’t possibly be further from the truth. Valuing a company is incredibly hard. It’s far more art than science, where FOMO and potential is the real metric.

Let’s start with how you don’t value a startup…

How do you value a stable, boring company?

If you’re an established company with predictable revenue and growth, then valuation follows a clear methodology. It’s still hard to do and takes a loooot of time (Trust me, I’ve done this for billion dollar deals. FML).

There are three main things a banker would do to value a company. Let’s briefly look at them.

1. Discounted cash flow
2. Comparable traded companies
3. Comparable transactions

Discounted cash flow

DCF in the lingo, you forecast revenue for 5-10 years, make a load of deductions and then ‘discount the future cash flow to today.’ The discount rate and all the assumptions are all BS, but bankers have all sorts of tricks to back them up with fancy analysis so you can argue for them with a straight, tired face.

Here is an example of a comparable traded companies by Deutsche Bank:

 

You can see examples of Discounted cash flow here.

Comparable traded companies

This is easier than the DCF. You pick public companies which are similar (or you argue they are and always remove the ones you don’t like ;)). You take their historical numbers and aggregate the forecasts from analysts for forward 1 and 2 years (forecasts). Typically you will use revenue and EBITDA. You calculate their enterprise value and market cap and divide them by their financials to get multiples. Say 5x revenue and 10x EBITDA.

You then apply the multiples to your company. So if you are doing 2m revenue, your valuation is 10m if the market average is 5x. Simple, right?

Here is an example of a comparable traded companies by Lazard:

You can see examples of comparable traded companies here.

Comparable transactions

You do the same thing, but you pick deals that have happened in the private market.

So the public market is Snapchat, since they are listed. The private market is Youtube, since they got bought by Google.

Again, you pick which transactions you want to support the valuation you want.

Here is an example of a comparable transactions by JP Morgan:

You can see examples of comparable transactions here.

Football field

You chuck all these together and then min/max and mean/median the numbers to get a trading range. Maybe give weighting to different methodologies, depending on how you want to distort your story more.

Then you argue what the valuation is.

At the end of the day, the numbers are fine… but what you want is a competitive situation with FOMO. You get the big money when people are losing their shite.

Example: Facebook has no mobile strategy so goes on a soccer mom-like shopping trip and buys Whatsapp and Instagram for major cheddar.

You can see examples of football fields here.

Youtube = FOMO = money

This article from CNET in 2009 explains FOMO perfectly. Back then, most did not see the logic.

After Google’s $1.65 billion buy of YouTube, many questioned why it valued the site so highly. In a deposition, the CEO explains the behind-the-scenes decision making.

These days, most would say Youtube was a great deal… but for many years people have thought differently.

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer–because of who Google was–paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

Read this again: the price, remember, is not set by my judgment or by financial model or discounted cash flow. It’s set by what people are willing to pay

Boom. That’s how you make the big money.

The real way you value a startup is by what people are willing to pay. But, some benchmarks would be useful to understand what you ‘could’ be worth, right?

So how do we do that for your social startup? Well, I already told you.

Social media valuation

If you actually have grown and have some sort of useful metrics, there is one way to measure your value. That’s your MAU, or Monthly Active Users.

Well, there are in fact other ways, but that presumes you have revenue, lol! So let’s skip that!

So you have users, you’re growing fast and yes you do have value.

So your value is really simple. You pick a value per user and multiply by the number of users, or MAU you have! Simples….

Only now you’re like, um so what are the ‘Comparable’ companies/transactions for me that we talked about before? Yeah, that’s boring as hell to do. Luckily I still have M&A Stockholm Syndrome so I pulled all the comps for you tonight… yay…. fuuu…unnn.

The comps

Let’s get down to it.

These are all the social media comps:

This is interesting right, but you’re wondering ‘what now?’ right?

Well, what you need to do is use these and apply them to your startup.

So let’s presume you are sort of killing it and are up to 5m MAU. That’s worth something… but how much?

Well in banking we look at the min, max, median and mean to get the full range of values (This is before we start ‘fiddling’ to manipulate’). You can see these range of multiple per user:

• Min: $16 – YY… not on my watch!
• Mean: $71, pretty good! But there are some big outliers, right?
• Median: $38, half of the mean…
• Max: $247, what’s up bitches! Yeah, but Linkedin and FB make real revenue… are you like them?

So you can see that at 5m MAU your valuation on comps is between $81m and $1.236b (with a b). That’s a big arse difference.

You don’t want to be seen socially with YY and you want to date Linkedin (or at least take selfies). But you’re going to have to argue how cool you are. Just because you have facts, doesn’t mean you have to let them get in the way of your (BS) story.

This pretty chart is for both public and private comps… so if you want to get your nerd on this is totally illogical. Public comps are around 30% (sometimes more) higher than the private (M&A) comps since there is a liquidity premium, but maybe let’s not get into this level of nerd…

To get the ‘where does this come from’ nerd on though you can see the whole thing here:

Then just type in the name of your potential unicorn startup name and your MAU. There are two little yellow boxes at the top. The social media valuation model will automatically add your name and MAU.

Take the founder excel course if you want to learn! It’s totally free!

The hard thing is going to be justifying you’re more like LinkedIn than YY… but come on, if you’re having this discussion you’re on the back foot. FOMO, MOFO!

I’ve kept this sort of high level. If you have questions, ping me in the comments and I’m happy to unload the nerd on you (or pretend).

Conclusion

Hey! You made it all the way down. This valuation stuff is all a bit complicated. If you are interested in how investment bankers charge clients millions, you can see real examples of M&A presentations here.