Facebook Valuation Bubble?
A recent New York Times article by Silicon Valley journalist extraordinaire, Brad Stone, talked about the recent mad rush on Facebook applications (5500 and counting…) and the subsequent fight by venture capital to fund fund fund anyone making an app to throw food at a friend on Facebook. I know there are some (a lot) of very smart folks out there so I’m trying to figure out the rational behind a $2MM valuation on an app that has 500,000 users on Facebook and NO view for how to monetize on or off of Facebook.
Here’s what I came up with for reasons:
1) Simple Math: Given the portfolio theory of VC funds, this may be a way to break down the traditional model into smaller pieces. Instead of 10 $10MM deals for $100MM a FB strategy can fund 20 deals at $50k for only $1MM. 2x your chance of success at a tenth the cost. And you’ll get results in months, not years.
2) Find a Team: Regardless of the app, every developer worth his/her salt wants to build the next great FB Food Fight. This is a cheap way for a fund to find a talented, driven team that can execute. What you do with them after that, it’s up to you…
3) User Acquisition: With 500k – 1MM users and a $2MM valuation, that’s a value of about $2 – $4 per user. Assuming you can translate some significant portion of those users to real money, that’s actually a pretty low CPA for new users.
Other reasons?
October 31, 2007 at 8:16 pm
Hah! Stumbled on your blog by accident. Somebody was asking if I had your number and I meant to go to my database, but absent mindedly typed Jordan Kobert in Google instead.
On Reason #3 Above:
Many subscription models can yield perhaps a 2% signup rate. Let’s say you get 4% here, because users are already hooked on the product.
4% X 500,000 = 20,000 paying $10 per month.
$200K per month X 12 months is $2.4MM. Can the extra $400K pay for the additional overhead?
Granted, not everybody that signs up will stick for a year. Also, realisitically, you might introduce an upgrade version of the App for a cost. This way, you don’t lose the other 480,000 users. You keep pitching to them, or advertising to them, depending on the App.
It would take longer.
Honestly, I just did the numbers. I don’t really know what the app is or if the model above could be applied to it in some way. I don’t even have a Facebook profile and am unfamiliar with the apps being discussed (what they do, how they work, etc.).
As you stated, $2 per *satified* or *addicted* user might be cheap. Surely you can monetize a few percent. At $10 per month? Don’t know. Depending on the app, you may ony get a one-time fee.
Nevertheless, your talented team from reason #2 can now create a portfolio of apps from reason #1 (with no additional investment cost, other than salaries / overhead) and the valuation begins to look reasonable. Especially since you already have the potential to bank on reason #3 alone.