Ask HN: How to do proper valuation of a web appliation?

https://news.ycombinator.com/item?id=2348279

by anujkk • 15 years ago

27 12 15 years ago

news.ycombinator.com

How a web application's worth is determined? What is the process behind it? Is there any reliable tool for website valuation? How can I make sure that I'm not underselling my web application?

patio11• 15 years ago

A web application's worth is the price at which a buyer and seller mutually agree to sell it. That isn't the answer you want, but it is correct. There are a variety of factors which can increase or decrease that number:

1) Is the person selling it unsavvy about business? Just like engineers suck at salary negotiations and end up working for $45k, if you suck at negotiating sales price, that has an outsized impact on value relative to any objective factor.

2) Does it solve a strategic need for the acquiring company? For example, if you're Google, it isn't maximally relevant to you that an acquisition target "only" has 10k users, because you're going to put Google Muscle behind it and distribution is trivial to you. If it solves a problem for, e.g., AdWords adoption in a particular vertical, like say local, valuation is utterly unconnected to current revenue/users/etc. (A foreign telecommunications firm put in a fairly generous offer for Appointment Reminder when it had no customers and no revenue, with the intention of slotting it straight into their product lineups.)

3) Failing the strategic acquisition factor, some web apps (typically ones you won't read about in the newspaper) are sold as turnkey businesses. Valuations are generally based on a multiple of the last year's profits, with the multiple sensitive to the amount of risk, etc. If I sold BCC on Flippa, for example, I could reasonably expect to get ~$25k for it: a wee bit less than 1X last year's profits. $50k would be pushing it. Nobody in their right mind would pay $100k for it if they were just intended on keeping it running as it is.

4) Are there multiple prospects to play against each other? Bidding wars raise prices, sometimes very significantly.

5) Is the app in a "rich" vertical? There are occasionally examples of heavily undermonetized web sites bought for anomalously high sums of money. Some SEO friends of mine love taking people's hobby projects and bolting on effective monetization. If there is an obvious route to this, then the fact that current revenues are terribly might not necessarily predict a 1 * $TERRIBLE sales price.

6) How risky is the web app's current position? Is it highly dependent on a single source of traffic (cough Google)? Is it highly dependent on a single source of traffic and has it gotten that traffic through grey hat tactics which could be discovered at any time via manual or automated review? Is it in a declining field? Is it in a rapidly evolving field where competition could reasonably be expected to eat its lunch?

7) What are the upkeep expenses, including fair market salaries for employees for any skills needed? Just because my time is free to me doesn't mean the Rails programmers and SEOs that the company grabbing any of my sites will need are also free.

flyosity• 15 years ago

It's worth what others are willing to pay for it. A good (and time-tested) way of determining this price is to start low and then hike the price up steadily until your revenue starts to level off. When you reach this level, this is a decent indicator of how much to charge for your application.

orijing• 15 years ago

This isn't what the OP is asking about (Correct me if I'm wrong, OP). He's referring to valuation of the project in the sense that Google is worth $200b, not how much to charge customers of the application.

As for your strategy for deciding how much to charge (which is a different problem, again), there are two problems I see:

1. Users don't like when prices are gradually being hiked. There are subconscious effects like number-fixation (where people are attached to the first numbers they see), which causes them to perceive future prices as excessive, and there are conscious effects like the disdain of price hikes.

2. This strategy maximizes short-term revenue. There are other considerations which are more important, like profit (revenues minus costs)--with costs that are not purely fixed, maximizing revenue will not maximize how much money you make ultimately. Another consideration is the long term--charging less may cause faster adoption, which may be better for the long term.

You never want to be completely myopic in pricing unless you don't think there's a future to your app and you want to extract as much money as possible.

anujkk2• 15 years ago

Yeah, right. I'm not asking about pricing strategy for a web based product but how to determine how much my web application is worth if I want to sell it. For example, sites like threewords.me isn't generating any revenue but still it has been sold at some price. How to determine the selling price of such web app?

kingsidharth• 15 years ago

Web-apps are worth nothing. The business around the app is what valuation is about. You can build an app for guessing color of user's underpants, but if it ain't paying or doesn't have potential business lurking around - it's just worth nothing.

anujkk2• 15 years ago

Let me clarify my question through an example site everyone here knows - threewords.me. The site became popular and got sold even though it had zero revenue. While selling such sites, how to determine a proper selling price? What affects the valuation of such sites - page views, number of active users, niche concept, it's usefulness for the target buyer etc?

sagacity• 15 years ago

>What affects the valuation of such sites - page views, number of active users, niche concept,

In many cases, factors listed below may also be taken into account:

* Sources of organic (free) traffic, and how diversified/stable they are (e.g. if 90% of your organic traffic comes via Google, not much good)

* Quantity and quality of (natural) inbound links pointing to your site

* Average conversion rate (even if you're not selling anything, there would probably be a 'most preferred action' that you want from the users - how many take this?)

* Even bookmarking rate can be used a valuation factor

dritanm• 15 years ago

I have never sold (or bought) a web app before, but I have had to value various different types of assets due to my job. The most common valuation technique would be to use the Discounted Cash Flow model. In short, you project your pre-tax cash flow for say the next 10 years, and discount them at the required return which the investors are looking for. This rate is determined by a multitude of factors, such as the stability of your business model, target market, etc.

Then at the end of your projection, you simulate a sale of your business by 'capping' it at a certain rate. Then you add this terminal value to the sum of all the discounted cash flows calculated above, you have the total value for your business.

Of course in hi-tech sector things fluctuate too much too quickly. But the model should be the same, you just have to adjust your discount rate and terminal capitalization rate to account for those fluctuations.

petervandijck2• 15 years ago

How can I make sure that I'm not underselling my web application? -> one easy way that I know of: say no to an offer. If they come back with an higher offer, you were underselling.

pathik• 15 years ago

What if they reject it, and you realize you should have taken it and go back to them, but then they quote lower than the original offer sensing that you are desperate to get it off your hands. It works both ways.

petervandijck2• 15 years ago

The question wasn't "how can I get the highest amount of money for my web app."

haploid• 15 years ago

Easy. Using the Standard Q2 2011 Bubble Valuation Form:

Start with $500k.

Application Factors: If it has anything to do with "social", multiply by 5. If it's written in a functional language, multiply by 2. If it ends with -ify or has a .ly TLD, multiply by 3.

Personal Factors: If you live in silicon valley and hang out at hipster bars, multiply by 2. If you're far better at name-dropping than you are at producing actual value, multiply by 4.

If none of the above are applicable and you have an actual product or service that people actually use, figure 12x annual earnings, plus a premium for growth expectations.

Ask HN: How to do proper valuation of a web appliation?

Related Stories