Over at Vitamin they are playing the “guess the valuation” game with the seminal Web App, Basecamp. Presumably, the guys at 37signals don’t have Basecamp up for sale, but this is an interesting exercise to work through for anyone who’s ever thought about selling a business of any kind, including a web app.
Valuing a business is a very difficult thing to do. The only true valuation of a business is what someone is willing to pay for it. In this case since Basecamp isn’t for sale, we have to look to other metrics to value it. A common approach is to look at comparables. This means comparing Basecamp to other businesses that are similar that have sold. Ryan suggests some in his post. While they are all recent Web 2.0 era deals, I would argue that MySpace, Weblogs, Inc, Upcoming.org, and YouTube aren’t really appropriate because they are advertising-based business models. Skype is in a different realm altogether. But, MeasureMap, Writely, and Rojo, might be comparables because they are web apps, or services that people would pay for (or not, depending on if Google buys you and re-releases your service for free… hint hint Basecamp).
Although we have presumed valuations for each of those companies, we don’t have the necessary metrics to compare each of them to Basecamp. However, thanks to Ryan’s transparency with the sale of Dropsend, we’ve got a lot of information to compare DropSend and Basecamp. So, let’s get started.
To follow along with our analysis, please open up the Google Spreadsheet here, or see the PDF version here.
- DropSend Metrics: We start by building metrics for DropSend based on the public information on BareNakedApp. We break down revenue contribution for each account type, because this is the assumption that we will have to make for Basecamp. We also will use the percentage of accounts that are paid as a metric.
- Costs Are Irrelevant: I am not arguing that this is always the case, but it is an assumption for the purpose of this exercise. Development costs are sunk costs. Servers & maintenance are not significant to the valuation because it is going to be heavily based on the value of the intellectual property and moreover the value of the current customers.
- Revenue-based Valuation Multiple – For DropSend, we calculate the valuation multiple based on valuation / annual revenue. Revenue is based on 12 x most recent monthly revenue. Some might use trailing 12 months, some might use forward looking, but we are going to keep it simple. The valuation we are assuming to be the $900,000 that Ryan has stated that 3 companies are willing to pay for DropSend. So based on our calculations the valuation multiple is 8.87x.
- Extrapolating Account Breakdown for Basecamp. – We know what types of accounts Basecamp has, and we also know what the cost for each one is. Based on Ryan’s comment here, where he and Jason Fried of 37signals are comparing the breakdown of the revenue contribution of each plan, we will extrapolate the breakdown of users over 4 plans with DropSend to 5 plans with Basecamp. Once we do this with Basecamp, we can come up with the revenue contribution for each plan.
- Account Conversion – This is a pretty big factor, the number of total accounts that are paid accounts. Both DropSend and Basecamp appear to have a much higher number of users than they do paying customers. Ryan mentions in the Vitamin post that Jason Fried said “Our Basecamp conversion rate is higher than DropSend which was 0.87%, right? I won’t tell you how much higher. Could be just 0.01 higher, but it is higher.” Because its a big unknown to be conservative we will use the Dropsend metric of 0.96% of users are paying customers.
- Annual Revenue for Basecamp – Based on the same analysis we did for Dropsend, and the assumptions above, we calculate the annual revenue of Basecamp to be about $5,456,385.
- Valuation of Basecamp – Taking the revenue-based valuation multiple we derived for Dropsend and applying it to Basecamp we calculate the valuation of Basecamp to be $48,372,000.
One thing that I always apply to calculations like this that involved a lot of assumptions is whether or not it passes the smell test. If we would have come up with a couple hundred thousand or a number in the billions, I think our metrics might have been off, but $50 million seems like an appropriate valuation. The interesting thing is that this is a number that was tossed around in the comments a few times by other readers on Vitamin.
So, good luck to Ryan with the Dropsend sale. When it sells, and probably for more than the baseline $900,000 that we used for this calculation, that will drive up our valuation for Basecamp. And to the 37signals team, we’re interested to see if there is any action with Basecamp over the next year. I predict that there will be, but with annual revenues where we’ve calculated them to be, they might just want to hang on to their cash cow.
We’d love feedback from our readers on our valuation, and of course if anyone wants to confirm or correct our calculations or assumptions, please feel free.
Came across The Ten Best Internet Acquisitions Ever on Techmeme, and thought it would complement this post well. See it here: http://internet.seekingalpha.com/article/2121
Your logic makes a lot of sense and I wouldn’t be surprised if you were exactly right. Valuations are so hard to calculate, especially since what you’re worth is what someone else is willing to pay for you, but this is a comprehensive way of getting a pretty good idea. bk
Where did you get the 1,000,000 basecamp user accounts number from? If it was this (http://everything.basecamphq.com/archives/000465.php), then it’s incorrect. In that post they say the 1,000,000th person was added to basecamp. Each user account can have an unlimited number of people associated with it, and it’s unlikely than any paying account have less than a few people in them.
Ben -
Thanks for your comment. I am pulling from the data provided by Vitamin in the Guess the Valuation post. For Basecamp, the “number of users: Over 1 million (Note: not all of these users are active)”. This is just an assumption, so it is likely to be somewhat off, but it is the best guesstimate we have. But the assumption compares nicely to DropSend’s calculation for user accounts, they create an account each time someone is sent a file, so it actually compares pretty well to the Basecamp method of accounting for “user accounts”. The user accounts may not be paid, and they may not be active, but I try to correct for this by using the conversion metric from DropSend, and even though Jason Fried said “our Basecamp conversion rate is higher than DropSend”, I applied the same conversion rate to keep the whole calculation conservative.
What are your thoughts? What would you use as a number for the number of user accounts?
Thanks, Chris
OK, that’s where the 1 million came from. Yeah, without knowing the actual number of users and the conversion rate then I guess that method is just as good as guessing that they have, say 500,000 user accounts and guessing their conversion rates.
Ben, Thanks for your feedback. Any thoughts? Do you think we’re high or low on Basecamp?
I’d guess high – but maybe not by huge amounts.
Chris,
Good analysis man. The methodology is sound and it does pass the “is this ridiculous?” test. I think that earnings would be very strong for them as well so looking at it that way 20-30X you arrive at roughly the same # bases on the sales you mention.
Mark
Thanks Mark, I appreciate the comment. So, in my mind for 37Signals, the question becomes do we sell during this Web 2.0 (don’t call it a bubble) heavy acquisition cycle or do we keep milking the cash cow. – Chris
I personally think for a strong multiple you take the money. This, of course, always depends on the situations of the stakeholders. If it’s their first big check I say get it to the bank. Or, at the minimum, sell off some of the company and build it up from there. Funny things can happen – like the US being invaded by Iran, China, and Russia…this would put pressure on their business model
It’s always easier to optimize for the long-run when you have enough cash to not work.
Chris, very nice analysis – thanks for this data and extrapolation. This allows a little musing and indulgence in looking at the ‘exit’ opportunity another way.
Assume a plan based on trying to dress the respective companies for acquisition (e.g. beefing up revenues in forward looking 6 months). Presumably, this comes from (a) increased # of paying users and (b) increased pricing. Presumably, the easiest to calcuate would be (a) increased user base.
Aside –
It could be instructive to look at clickthroughs, subscription, and conversion rates in order to back into the ad-spend required to up the valuation.
– End Aside
For instance, assuming a 5% subscription (to free account – this is a web retail standard: e-consultancy.com) of all users who visit the site and taking your .96% of users pay figure we get .048% of unique visitors wind up paying.
We could then arrive at: [Desired Marginal Increase in Unique Monthly Visitors]/.048% = Marginal Number of Uniques Required per Month.
$47.30 average price per user (based on your spreadsheet)X 12 = marginal revenue per user/per year X 8.87 = marginal increase in valuation per additional user of $5,034.65
So, roughly, for each additional 1K paying users per month, Basecamp increases their valuation by $5,000,000
Dividing a Desired New “Paying” users of 200 by .048% = ~416K new Uniques a month
——-
…
BTW, I suppose I also could have taken the easier route and divide the valuation ($50,00,000) by the total number of 1,000 users (9.6) to get approximately the same figure for marginal increase in valuation per user
Thanks again.
Hi Sunjay –
That is really interesting analysis too. It is very interesting how you come up with the marginal increase in valuation per 1000 users ad it is relatively similar to the numbers we arrived at. Thanks for taking the time to contribute.
Chris
Chris et al,
I would think churn and pace of growth would have a big impact on the revenue multiple. So if BC has $4M in 2005 and $5M in 2006, and a 40% churn per year, they are worth far less than a comparable that had $2M in 2005, $5M in 2006, and a 5% annual churn.
How might one consider churn and pace of growth in their valuation calculation? Thanks for the great post and comments.
Hey Geoff –
Thanks for your comment. I agree, churn rate is a very important factor. I think that often companies quote their growth rate but neglect the churn rate. How would this work as a true metric of growth:
True Growth = New Subscribers – Cancellations – Inactive Users
Would that account for it?
Chris – I hear you. Thanks. I think I mashed together two related but distinct questions:
1) How should pace of growth influence the valuation multiple? If two similar businesses both have $10M in LTM revenue, and one has enjoyed 3x revenue growth for each of the past 3 years while the other has enjoyed 1.5x growth, the 3x guy is worth (a whole lot) more. How might one calculate the valuation premium for the 3x guy?
2) All other things being equal (i.e. revenue, cogs, expenses, etc) ought the business with the higher retention rate enjoy the higher valuation?
Hi Geoff -
I agree on both your points.
1) With regards to growth rate, I think the valuation multiplier would factor in the growth rate. If you have 2 businesses with $10M in rev, and you are using a Revenue multiple rather than a profit multiple to calculate value, then the multiplier would reflect the growth rate. For example a mature $10M company like a golf course that might be growing at 10% a year or so, but is relatively mature would maybe receive a valuation of 1-3x, so would be valued at $30M. A internet company that is at $10M in rev, but is growing at 10% a month and is on track to grow substantially would receive a much higher valuation multiple, perhaps 10-15x, and this then would be reflected in its valuation of $100 – $150M.
2) I definitely agree on your second point. The higher the retention, the greater inherent value in the business. If a business has a churn of 50% a month and another one in the same area has a churn of 15%, meaning it is losing 50% of its customers to cancellation each month, then the first company would have to expend significantly more marketing resources just to stay at its present level.
Great points, thanks for the conversation on this topic.
Cheers, Chris
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