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I cannot find a good way to to ask this question:

Every day I read the news about the sale of "Twitter" or "Friendster" or "hi5". What I would like to know is how the price of such websites are evaluated?

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Website or Company? –  StingyJack May 9 '12 at 17:51

6 Answers 6

In a world ruled by reasonable people, it would depend on how much money the website already makes or is at least expected to make. Something like "earnings per year * 15".

But then, since the premise doesn't always hold, the price could be rather a product of baseless assumptions and insanity.

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+1 for "reasonable people" :) –  Darknight Jan 17 '11 at 13:49
    
It kind of depends on the maturity of the company though. In it's first couple of years you wouldn't expect to value a company based on earnings as so long as you have a solid business plan, losing money during that period is reasonable. The issue tech has is it's inability to assess the validity of the business plan and revenue model (or indeed in many cases even bother to see if there is one). –  Jon Hopkins Jan 17 '11 at 14:08
    
Jon Hopkins: True, that's what "expected to make" means for me. If they have a solid business plan, it means they expect earn some money later. –  user281377 Jan 17 '11 at 14:28
    
Also, "earnings" can be different depending on what a company does with a website. There may be factors like getting useful demographic data, getting a company new exposure, wnatever. –  David Thornley Jan 17 '11 at 20:48
    
David: in general, true, but in this case, we talk about websites that get sold, so they better do something to earn money directly –  user281377 Jan 17 '11 at 21:23

Magic Number

What I know it is highly correlated to number of users. Each user is worth XXX$.

For example Twitter was worth some $$$ before generating any money.

More User = More Audience = More Advertisement = More money

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I think it depends a lot on what kind of users a site has. For example, an Amazon user (=someone who very likely buys stuff) is probably worth much more than e.g. the user of a news aggregation site like digg.com –  user281377 Jan 17 '11 at 13:30
    
Rather similar to the Something -> Something -> .... -> PROFIT! meme isn't it... Go and ask Yahoo how that sort of measure worked out for Delicious, Geocities and their video hosting site (which I believe was the second most popular site of its kind on the internet) and have all just been closed down. –  Jon Hopkins Jan 17 '11 at 14:04

Not sure this belongs here but anyway... I was playing with this just the other day, entering the URL of sites owned by friends of mine.

I know some people use sites such as this (there are a few others out there): http://www.urlappraisal.net/ But I wouldn't be surprised if many more things were taken into account. Bottom line, I don't think this means much. In the end I'd say: How much is it worth to the buyer, and how much is the buyer willing to offer. They'd have their own metrics to determine this I guess.

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For public companies it's their market capitalisation - that is if you bought every share at the current share price, what would it cost.

In the case of Twitter and Facebook and anything where they're not available on the stock exchange but where shares in the company have been sold (to VCs or investors), they're based on extrapolated market valuations using the sale price of those shares.

For instance, JP Morgan have just set up a fund to sell shares in Facebook to high net worth investors (that is you can't buy a couple of thousand dollars worth). A particular share of the company is available and will be sold for a particular amount. The latest valuations of Facebook are based on the assumption that if you sold the whole company for a the same amount per share, that's what it would be worth ($50 billion or something equally improbable IIRC).

The issue here is that the assumption that just because some multi-millionaire thinks that a company is worth X, that doesn't mean that it is. Publicly traded companies are valued on the basis of many thousands of transactions so they are at least based on some sort of consensus - lots of people think that that's a fair price. With privately traded companies that doesn't hold true, it's based on a far smaller set of people.

Beyond this you're into the realms of major speculation - usually based on metrics such as users and page views. While there is some method in these valuations, they should generally be taken with a pinch of salt as as often as not they're as much PR for a fund raising effort as they are a serious valuation of the organisation.

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During the one week auction for a website I was after, no-one challenged the reserve amount I had placed for a certain technical website and so I was awarded ownership of the domain. Literally thousands of domain buyers saw this website was up for grabs and I wondered why none of them challenged the first bidder. I guessed it was because they knew it had value , but if they purchased it they would not know what to do with it. It was a strange subject to them and so had no value. I perceived great value in this site and was willing to challenge others in the bid for it but luckily no-one dared bid against me. I guess value all depends who is evaluating

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The value of a website is by definition the amount of money it will make during it's lifetime.

The price someone is willing to pay is governed by several factors:

  1. The prediction of the value,
  2. The accuracy of the prediction,
  3. The qualities of the prediction (is it likely to over-estimate? under-estimate? what is the probable error?)
  4. Does the prediction put the "value per time" at a higher rate than a safe investment?
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"the amount of money it will make during it's lifetime" - not exactly, you have to consider the interest rates. A company that makes 1M in 100 years is worth less than a company that makes 500K next year. –  user281377 Jan 17 '11 at 15:07
    
@ammoQ, If you include the amount from interest in this figure too then it works. –  dan_waterworth Jan 17 '11 at 15:17
    
dan: yes, exactly –  user281377 Jan 17 '11 at 15:23
    
@ammoQ, actually, having thought it through, my last comment is wrong, because then the value of a bank account with any money in it is infinite. I will edit to take this into account. –  dan_waterworth Jan 17 '11 at 15:33
    
dan: your last comment is correct, but it goes the other way: you have to calculate the current value by deducting interests from the future value –  user281377 Jan 17 '11 at 16:12

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