How do you put a value on web-based companies that get lots of media coverage, have millions of users, but may be still far from earning profits? This was the topic of a BMI Insight Session on April 14 led by BMI EMBA Professor Eamonn Walsh of University College Dublin, Ireland.
"For the companies, it's all about creating dreams. You have to sell it as a big dream or you won't get much money," Prof. Walsh told the gathering of executives. "As an investor, you need to analyze it like any business. Get it down to a simple story about how much you're paying for each user and see if there's a realistic path to collecting that much revenue per user," he recommended.
That means identifying and "unpacking" the business model, he said. Examples are ad-selling companies like Twitter or Facebook, "freemium" models like website-builder WIX where a basic service is free but users have to pay for added features, e-commerce sites like Amazon, and SaaS (software as a service) companies like the HR portal TriNet. Based on the model, the company's data and the nature of the market, you can estimate the business's profit potential and value.
The markets are littered with disappointed dreamers, the lecturer noted. Twitter, for example, began trading in late 2013 at $44 a share and quickly rose to $70, but now goes for less than $20 since user growth slowed and ad-selling plans largely flopped.
"If you just buy the dream, you're going down the wrong path," Prof. Walsh warned. "On the other hand, comparing market value per user and revenue contribution per user is almost always a good lens for assessing the value of these types of companies," he said.