I often say that valuing consumer businesses can be more art than science. If we're talking about a high flying consumer app with an explosive user base, you may find yourself putting your finger up into the wind. Some of these businesses may be going after fuzzy or new markets, have unclear business models, hazy unit economics, and usually no profit or even revenue to speak of. How then do you go about valuing such a business?
It is relatively straightforward to value mature companies. All you have to do is look at the valuation multiples based on a universe of comparable companies or use a method like discounted cash flow analysis (DCF). For no-revenue consumer apps, you must TRIANGULATE value after taking into account a huge variety of different elements, many of which are qualitative or hard to explain. Two quantitative ways to triangulate value is to look at "equity value per user" and "revenue per user" of comparable consumer apps.
Let's do a case study with a sample company called Company X. Company X is a high growth mobile app that has 10M monthly active users (MAU). Below is a chart showing the monthly active users for a sample peer set of consumer apps. All of the data is either public or based on rough estimates:
As you can see, the "equity value per user" depicts a huge range from $10 to $302. This is to be expected given that the businesses in the peer set wildly differ. The whole purpose of this exercise is to see where Company X fits into the range. Do you believe that Company X is more similar to a Cheetah Mobile, Yelp or Weibo at the lower end? If so, then it's probably worth a couple hundred million dollars per the chart. On the upper end, power houses like LinkedIn, Facebook, Snapchat and Twitter drive the highest equity value per user. This makes perfect sense since those are foundational platform companies that create a ton of value. If Company X was similar to these companies then it might be valued at a whopping $1B-$3B. Alternatively, if you took the median of all of the companies, Company X would be worth $67 per user or $672M. Again, the purpose of this is to find an appropriate range for Company X, not to prescribe an exact value per user.
Note: This is just a sample peer set. You can use any comparable apps that you think make sense. You will notice that I estimated MAUs for Snapchat's $10B valuation round, but I could just as easily have included all of their other valuation rounds as data points.
The other metric used to help triangulate value is "revenue per user". Using a similar method as above, we can look at MAUs but instead compare it to revenue:
By looking at a similar set of comparable consumer apps where revenue data is available, it is possible to see how much REVENUE Company X can drive per user. LinkedIn has the highest monetization due to the natural revenue streams associated with their career-oriented social graph. Company X would have to be pretty persuasive in order to convince investors that they could drive $26 in annual revenue per user like LinkedIn - if they were able to justify it then they could drive over $500M of revenue on their current user base of 10M MAU! If the service was less "fundamental" than LinkedIn, which is most likely, then perhaps it would drive a revenue per user more akin to a Cheetah Mobile, Momo or Yelp. Naturally, this yields revenue that is a magnitude of order less than when using LinkedIn's metric.
"Equity Value per User" and "Revenue per User" are just two of the methods that can be added to your arsenal when valuing high flying consumer apps. There is no right answer but understanding what is reasonable versus what is outright crazy is critical.