How To Evaluate a Internet Property Part 2 - Rate of Growth
This is part 2 of an series of posts of how to evaluate an interenet property. You can read the first post here which is about the financial aspects
The rate of growth is a pretty easy concept to understand. Either your company /business has been growing or its not. Rate of growth is not always measured in profit. For instance a website growing in users at the rate of 50,000 per day but slowing in revenue is much more attractive then a company gaining in revenue 10% per month but slowing in users by 150% per month.
One important word here is hockey stick growth. It’s when you look at a chart of your website/company and see a hokey stick in the shape of the chart for the metric you are measuring. But as mentioned earlier this growth is not always just about profit. For instance if you are just buying a simple domain. Lets say the domain is iphoneusers.com. Being the only asset for sale is the domain name it makes it fairly simple to figure out the main metric should be the amount of mentions and news this niche has been getting and if that trend is up or down. As you can see below the iphone niche has seen “hockey stick” growth.
But lets go a bit further and say that iPhoneusers.com is a forum or social network. Now the rate of growth valuation for this web property has a new component to measure… human equity. Yea… it sounds a little harsh to phrase it like that but that is exactly what it is. We will get into the valuation of human equity later but for now lets lets keep it to rate of growth. For this forum/socialnetwork – iPhoneusers.com there are a few tools to measure its rate of growth. By far the best indication for this site would be site statistics from Google Analytics or some other Javascript based tool. A javascript based analytic tool is important because it reports true hits to the website and not just remote loads. Another tool most websites do is webalizer or a similar log-parsing tool. This will show a lot more information because it logs analytics that javascript ones do not. Let me give you an example. On my blog- Shoemoney.com I have a picture with me and a Google Adsense Check for $132,994 for one months revenue. I also freely give permission for people to put that image on there site as long as they give a link back to the source site (my blog). Now this image has the most loads on my site then anything else but 95% of those users are not actually hitting my site. They are simply loading it from my site but visiting someone else’s site. Other things like that mixed with browsers that just do not parse the JavaScript are examples of why there is such a discrepancy between analytic programs. There are other 3rd party analytic programs like alexa.com, compete.com and Comcast to name a few. These use toolbars and ISP data to measure traffic. A good combination of these mixed with the server logs and JavaScript based analytics will give you a good idea for the rate of growth metric for human equity.
But that is not all. You can have all the traffic you want but if you are not measuring the rate of conversion growth then you are missing a valuable part of a website valuation. Keeping with the iPhoneusers.com example being that it is a forum/social community you will want to be sure to measure the rate of growth that pertains to new users. Rate of growth in this area is important and can play a very big part in your valuation of the site. The site might have a ton of traffic but is failing to convert those people into users. This is generally measured by the user signing up for the community or forum and being active. This is often where the gold is found in buying websites. Most people just do not understand how to convert traffic into users. I love to see a site with a hockey stick growth in traffic but a poor rate of growth in conversions.
For typical business selling products online the rate of growth can be measured many ways. For one you have the site analytics as mentioned above and you also have user conversion but there are other things to look at with user conversion. A user conversion is generally measured by a purchase but there is also in just acquiring that user to market to in the future. The of course there is just the obvious net and profit margins rate of growth to measure.
A blog or news site rate of growth is measured by site analytics but with blogs and news sites there is also something called RSS. RSS (really simple syndicaion) basically makes it really easy for people to keep up with the news from the site by including it in there news readers. RSS is a up and coming thing. Currently on my blog I have about 15,000 RSS readers. It’s very powerful. Measuring the rate of growth of RSS subscriptions is one of the few good metrics of conversion for a blog or news site.
So you see the rate of growth is a very important factor in determining a sites valuation. And as shown by many examples above what matters to you in that rate of growth could be different then what matters to someone else. Some people buy sites purely for niche traffic… others to aquire more users to their existing communities and businesses often buy compeditors purely for the database of customers. Whatever your reasons are the rate of growth is a very important factor.
Tune in next week as we cover chapters 3, 4, and 5
- 43 Comments. What say you?
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Shoe I love that you are getting back to what made you so famous. I would put you right up there with Seth Godin and Guy Kawasaki except you have had more successes then even they have!
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Good read. How does all of that tie together to generate a number in terms of value? Would it be ok to say that one could take their cost per action and apply it to their user and / or hit base; then apply that to a forecasted hockey stick curve?
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“Measuring the rate of growth of RSS subscriptions is one of the few good metrics of conversion for a blog or news site.”
I agree. It’s not the number of subscribers but the rate in which they’ve grown. 400 subscribers is cool. 400 over 5 years is not very good. 400 in 3 months is great.
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You are starting to let on that you’re pretty smart dude. I actually like this method of how you’ve been introducing the content, since it’s easier to take in one post at a time. Looks like it’s going to provide for a fine resource when all of the chapters have been posted. Appreciate you sharing this, know you could’ve gone another route.
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i have moments every once in a while… unfortunately not always the time to express them in writing on this blog
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I will tie it all together at the end
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lets not get too carried away now
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Possible hint to the shoemoney play book ???
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This is really similar to company valuation for non-internet stuff too.
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Great post, I didn’t realize how conversion rates are more important than actual traffic numbers, thanks Shoe for your great insights again on Part II.
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Sorry but guy must be a VC for some reason… shoe’s ok too but affiliate marketing != VC.
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Ricardo you need to do some research on Guy Kawasaki and VC. He has never financed 1 thing that has succeeded. He also admits this pretty regularly. Nothing close to the success of AuctionAds and how that made ShoeMoney suddenly appear on every VC funds screen.
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What exactly is a “slowing in users by 150% per month”? Do they lose all their users in a given month (-100%), and then an additional 50% walk away a second time?
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lol… if you have 1 user then gain a user that is a 100% increase… but if you gained 10 users from that 1 user that would be a 1000% increase… and so on. but then if it dropped significantly you could have a equal high percentage in slow down. 100% is not a absolute number and its why you see similar numbers used by companies in respects to growth and other stats. Hopefully this helped answer your question
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Absolutely love the tip for finding hidden gems by looking for sites with “hockey stick” growth but flat conversions. I’m gonna keep that on my radar screen. Good stuff Shoe.
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Shoe, I have question. How would you ever put a valuation where the brand is so closely tied to the owner. For instance, if you wanted to sell shoemoney.com obviously the growth and conversion formulas would be considered but new ownership would change the entire dynamics of the asset. I think this would be a relevant topic as there are so many blogs out there that bring in great numbers but can they actually get true value for them? Just wondering your take on that…
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agreed on that one … Jeremy has had much success.
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Its good to stay humble … but sometimes it is not too bad to accept that you are good
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The Internet is a weird and wonderful place but I still don’t understand valuations of domain names. Recently iReport.com sold for $750K just for the name, surely they could have bought some other name for 1/100 of the price and saved themselves a load of money?
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The domain market is very competitive. Relevant domains increase in value as time progresses.
http://3magin8.com
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Hey, good info on evaulating internte properties. I didn’t know about hockey stick growth. Looking forward to the next episodes.
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I like the idea of valuing a domain by the amount of mentions or news trends. Simple but effective. I also concur on watching out for false positives on the visitor counts. google analytics weeds out that stuff very well. I like the recommend to look at a mix of the analytics tools with a healthy understanding of the limitations of each. It will definately help you zero in on the real traffic. I think it also important to figure out how much if any traffic is purchased — If any is from traffic brokers or other crappy mass traffic it is usually a deal killer.
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Good Info
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Good yes, more success then Seth Godin?
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Part 3?
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You’re right. But still, people don’t generally think about internet companies the way they do about brick-and-mortar companies. So its helpful to walk through it.
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Yea, why would you spend all that money on a domain? Crazy. I guess it does succeed as a market. Problem is finding those catchy domain names.
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Well okay, this may be true. But I still think that you cant compare both as they mostly work in other parts of the business.
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Innaresting posts, Shoe. It seems you are working backwards here. How about coming up with these wonderful ideas in the first place? The hockey stick is an interesting phenomenon as it was used to inflate IPO issuing prices in the late 90s way beyond any rational level of valuation. As we know, a lot of people got burned, But I guess you’re not really so much talking about bogus earnings as you are visitors, users, subscribers, etc.
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In my opinion it is also important to say that every site will grow in the internet. I know that in the USA you are a lot farther than in germany but I think you also have an enormous growth in every niche.
So if you’re #1 in computers that will definetely be more worth in a few years. It’s just the same with people who registered domains about 15 years ago - They have now many good domains.
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yeah this is a great post. I am impressed how things have gotten so well on the internet since the beginning. Seth Godin is just a beast with his blog.
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Great post- lots of useful info…looking forward to Part 3!!!
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I think he said there would be 5 parts…
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so a perfect combo will be a growth in both revenue and visitor/member base?
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I have to admit that reading statistics is very important. Percentages and averages are often misleading if you don’t know where they come from in what you are examining. My day job is in the medical industry. Cold hard facts are a way of life with us. Subjective evidence is often spoken in the laboratory in averages. People’s opinions are nice until cold hard documented facts are sifted through to give objective evidence. Knowing where they come from will empower you even further. It’s funny, but sometimes I feel like I’ve learned a new relegion when it comes to this perspective. I find I can apply it in so many places outside of medical manufacturing.
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Shoe: I’m wondering, do you throw this into a spread sheet? Have you standardized any methodologies?
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I’d like to hear more about terms like “hockey stick growth” - ok, I see the shapes, but what do people think it means and when are they wrong? I’m glad that RSS is “up and coming” - makes me feel less behind the curve for only starting to use a real RSS reader last week
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That is great, thanks a lot…
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[...] How To Evaluate a Internet Property Part 2 - Rate of Growth - ShoeMoney® Either your company /business has been growing or its not. Growing in users at the rate of 50,000 per day but slowing in revenue is much more attractive then a company gaining in revenue 10% per month but slowing in users by 150% per month. (tags: web business) [...]
[...] of “How To Evaluate a Internet Property”. You can read part 1 - Financials here and part 2 - part Rate of growth here and part 3 - The Run Rate Here and part 4 - Resources [...]