With the credit crunch, it seems inevitable that upstart companies will face challenges getting fresh capital. Yet, as seen with recent deals – such as the $28.7 million financing of Digg – there is still interest from investors.
To get some insight on all this, I had a chance to interview Thomas O'Keefe. He runs a cool site called Bizak, which helps value Net startup companies.
No doubt, O'Keefe knows the space fairly well, having founded a variety of companies (like WiredAlumni.com and Research Connect) He was also a financial equity analyst at Thomson Reuters.
Now, to the interview.....
Q: Some background on Bizak?
A: Bizak gives equivalence to startups so investors and entrepreneurs can make equal comparisons on their earnings potential and business valuation. I founded Bizak so entrepreneurs could compute the financial performance of their startup, compare their performance to industry averages and research profitable industries for future ventures. The premise for Bizak came from the earnings per visitor metric (EPV) which allows startups to equally compare their financial performance to other startups on a per visitor level - in essence the EPV creates an equal comparison irrespective of traffic volume.
Q: You are also launching a new offering?
A: On Wednesday I'm launching the investor side of Bizak. This launch allows investors to access the financial performance & valuation of internet startups - they can also compare those performances to industry benchmarks and connect directly with startups. Additional, this final phase of launch activates our XML data feeds which enables investors to integrate our data (benchmarks and specific startup information) into their database.
Q: What are some of the approaches of valuing an early stage company? Some recent trends?
A: The approaches of valuing an internet company compared to an offline company can be significantly different. The main difference comes in the fact that many internet companies give away their "product" for free. This free model would be an absurd business plan for any offline store who would never think of giving away the milk for free. However, when it comes down to the financials of a business (whether online or off), it is revenues that matter. Bizak's business valuation is based on revenues, however we also integrate comparative web analytics so investors can also analyze traffic and the value of each one of those visitors. This is useful for those companies who are still in beta and haven't initiated their revenue stream quite yet.
One of the biggest trends that I think is developing with internet companies is a progression to a more sound business model. For a number of years the only revenue source for the majority of internet companies was Google Adsense. Originally Google (Nasdaq: GOOG) Adsense was a profitable source of income for these companies, but now with its proliferation the revenues are spread thin. I see the decline in "easy money" as a good thing since it will ultimately give rise to new technology, new sources of advertising and a more creative business model.
Q: Thoughts about the recent financial instability and what this may mean for startup valuations?
A: The recent downtown of the real estate market, the massive decline of financial stocks and the overall decline of the stock market has resulted in a massive loss of wealth for some. Some of those individuals used this wealth to fund internet companies. Combine this loss with the difficulty to obtain bank loans and this will trickle down to the funding and acquisition of internet startups. Those internet startups who rely on angel investors and/or bank loans to fund their application could find it more difficult to launch that application. However, as we saw when the internet bubble burst in 2001 the eventual result was a more efficient and profitable internet company. Those companies who had weak revenue streams and high costs lost their funding and lost their business. Those who ran their company efficiently survived, which ultimately led to a new era of internet growth. This current economic downtown will likely have the same effect resulting in a smarter business model, new markets and more efficient operations. I do however believe that internet startups will weather the storm better than brick and mortar businesses. The reason being, startups are significantly cheaper to launch - for those who can develop their own application the costs are minimal. Compare the costs of hosting a website with the costs of leasing a storefront and it's likely that internet companies will continue to launch while stores may not.
Tom Taulli is the author of various books, including The Complete M&A Handbook
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
