Rob Webb – RobWebb2K – Markets, Information, Technology, Law

A subject often mulled over by startup founders and investors alike is the value of a user. Web services, just like brick and mortar service providers, try to make money from of those that use a service. Some sites charge users directly, but most rely on selling some form of access to their user base to others. Display advertisements, job postings, and direct messages are the three predominant monetization strategies used today. In the past several months, web services have begun to offer more and more targeted and focused access to their users, a trend that will certainly continue in the social network space in particular as companies begin to focus on monetization.

As this is a popular topic, Arrington recently ran an article entitled “Modeling the Real Market Value of Social Networks“. Ironically, he ignored a large amount of relevant data and instead posited a new way to value social networks…completely disconnected from any and all real market valuations (he missed a few major social networks as well). His end analysis is that demographics are the key factor in determining the value of a user base. I’ve been analyzing valuations, user bases, and user access recently and disagree with this analysis.

In order to examine the true drivers of user value, I aggregated below all of the recent available real market valuations for companies that monetize user profiles. I used a combination of enterprise values, acquisition prices, and pre-money valuations, all of which represent real market valuations. Dividing the number of profiles each company had at valuation by the valuation amount delivers the value the market put on one of that service’s users.

The numbers show that demographics are just part of user profile value. The other driver of user profile value is user tolerance, or what level of access a typical users is willing to endure. Gerson Lehrman (#1) has an extremely small user base in relative terms, but it is a group of professionals (high-end demographics) and, by definition, every user is willing to receive cold calls from Gerson Lehrman clients (perhaps the highest level of access there is). Dice (#3) has only 2M users but all are technology professionals interested in job opportunities (valuable demographics) and all are willing to receive messages or alerts about potential employers (high tolerance to access). In fact, five of the top six on the list allow for direct access to their user bases, while almost all of the bottom half of the group relies entirely on generic, unfocused display advertisements and will likely face much resistance to increased profile access (see: Wikipedia).

Going forward, it’s going to be important for web services to not only enable targeted access, but to also cultivate users that will stick around to receive it.

Company Valuation Derived from… Profiles Value Year GLG $875M Investment 200,000 $4,375 2007 Facebook $15B Investment 50,000,000 $300 2007 Dice $500M Enterprise Value 2,200,000 $227 2008 CareerBuilder $1.55B Investment 24,000,000 $65 2006 Affinity Labs $61M Acquisition 1,000,000 $61 2008 LinkedIn $1B Investment 22,000,000 $45 2008 Geni.com $90M Investment 2,000,000 $45 2007 Twitter $80M Investment 2,100,000 $38 2008 Badoo $300M Investment 10,000,000 $30 2008 Monster $1.88B Enterprise Value 80,000,000 $24 2008 Bebo $850M Acquisition 40,000,000 $21 2008 MySpace $580M Investment 22,000,000 $26 2005 Friends Reunited $208M Acquisition 15,000,000 $14 2005 Fotolog $90M Acquisition 10,000,000 $9 2007 Photobucket $300M Acquisition 40,000,000 $8 2007 Plaxo $150M Acquisition 50,000,000 $3 2008 Tagged $102M Investment 30,000,000 $3 2007 Various $50M Acquisition 18,000,000 $3 2007 BlackPlanet $38M Acquisition 16,500,000 $2 2008

Buzznet $15M Investment 7,000,000 $2 2007

If anyone has hard valuation/user profile data for yelp, myyearbook, orkut, HI5, Ning, classmates.com, friendster, reunion.com, habbo.com, hyves.com, imeem, live-journal, mixi, multiply, netlog, perfspot, skyrock, sonico, stidivz, V Kontakte, wayn, windows live spaces, xanga, xing, or any other companies in this genre please send them on.