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It is very difficult to accurately value a private company that has little or no revenue, operates at an undisclosed loss, and where few or no recent comparable sales exist. Yet, I have read reckless valuations for Zillow of $350M, according to the Wall Street Journal. I would say that valuation is worthless unless they can provide some reasonable logic for how they derived that magic number. Maybe she was hired by the VCs!
This article mentions the $350M estimate and provides some interesting details that could be used to form an opinion on valuation;
http://blog.kelseygroup.com/index.php/2007/09/2...
Of note(but not verified, as of 9/2007);
1) 4.4 M monthly visitors (verifiable)
2) 17% YoY growth of "site traffic" (verifiable)
3) 20 national sales reps on staff (possibly verifiable)
4) 6,000 advertisers x $50 avg spend = $300K (non-verifiable)
5) $87 M invested
6) Losing Money
7) Down RE Market
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I think the most important metric that can be used in valuation is the number of annual visitors per year growing at 17% YoY. The growth rate cannot be reliably used to extrapolate traffic for the next 12 months. Also, note that Compete.com reports 2.6M monthly visitors and quantcast only 2M monthly visitors to Zillow. This has been a bone of contention and I have heard Zillow report as many as 5M monthly visitors, recently. Compete.com reports that traffic at Zillow has been dropping since Feb 29th, 08', a very bad sign.
I think it is safe to say that Zillow receives between 3-5M visitors per month. At 36-60M a visitors per year, once we know the value of a visitor, we can come up with some valuation metrics. Google is offering traffic for sale with the following prices by keyword per click;
appraisal
$1.37 - $1.85
home appraisal
$1.67 - $2.40
real estate
$1.90 - $2.73
trulia
$0.81 - $1.04
trulia.com
$0.94 - $1.19
zestimate
$0.23 - $0.33
zillow
$0.28 - $0.40
zillow.com
$0.32 - $0.42
Most of Zillow's traffic is direct url entry, e.g. someone typing in Zillow or Zillow.com into Google. Some of it is for real estate, others for homeappraisals and zestimates. Thus, a blend of the above should be heavily weighted for the low costs clicks in the 30-40 cents range. Thus, the average visitor is worth between 50 cents and a buck each, max.
Thus, traffic to Zillow is worth between $20 and $60M per year, max, if every click was sold at the rates that Google is able to sell them (good luck Zillow). I think the lower end of the range is more reasonable.
Now you can use this "revenue potential number" or "gross traffic value" and multiply it by a set number of years, factor in a 17% growth rate and discount heavily for the risk involved (traffic can be reduced or dry up entirely as market dynamics shift). Using a classic cash flow discount model (and using our "revenue potential number" as if it were actualized), one would get;
On $20M in Cash Flow at a 30% discount rate and a 17% growth rate gives about $180M in Net PResent Value. Of course, gross revenue, if ALL traffic was sold at the average rate that Google sells it (a flawed assumption) is different than Cash Flow or Free Cash Flow which is the amount left over for distribution to share/debt holders after taxes, capital expeditures, etc. Since we don't know the operating budget, we will have to assume that it is in the range of $10M - 20M per year, since payrole alone for 150 employees is over $10M alone!
or as follows;
Cash Flow/yr discount rate(%) Cash Flow Growth% Net Present Value (M)
$0 0
$5M 30 17 $45M
$5M 20 10 $55M
$10M 20 10 $110M
$10M 30 15 $77M
$20M 20 10 $220M
$20M 30 15 $153M
$30M 20 5 $210M
$30M 20 8 $270M
Some approximate guidelines for discount rates based on the stage of the company are: Seed stage: 80%+ Startup: 50-70% First-Stage: 40-60% Second-Stage: 30-50% Bridge/Mezzanine: 20-35% Public Expectations: 15-25%.
My personal opinion;
50M annual visitors worth 60 cents each = $30M - $15M operating budget = $15M max possible cash flow - 35% discount (max discount used since this is ASSUMED Free Cash Flow and not actual) and 15% growth. . .
This gives a valuation of $86,250,000. Nearly exactly the $87M the VCs invested. A big loss so far once you take into account the cost of capital.
Jonathan
I'm glad you liked it. I've done a few deals like this in the past, so I have some first hand experience on how the bankers and PE guys operate. It normally comes down to a multiple of cash flow or forward cash flow but these companies don't have either yet. . . So we can only guess.
I think the website traffic valuation model is interesting but when you have so many people searching for a zestimate for their own home, Realtors doing research, etc., advertisers will quickly determine just how valuable the traffic really is, as they adjust their spends accordingly. . . And then we will know the real FCF or free cash flow. . .(assuming an IPO or public acquisition, of course).
Personally, I like the space, so I am working on my own Real Estate 2.0 play (full disclosure). I have a site in development and in beta testing at http://www.RealEstateSpace.com and one in production as well but we are focusing on generating revenue out of the gate and have been selling homes around the country over the past few months. I have seen our conversion rates in Georgia, Texas, Utah, and most suprisingly California shoot up since the begining of June. My limited data set makes me think that a recovery is underway because the average buyer is behaving differently now that recent price reductions have taken affect.
I have learned that you don't need $87M to play in this space (albient our site still needs significant improvements and could use a small piece of that pocket change). I think that sort cash for an early stage makes the players lose focus on the bottom line, their revenue model, and in short, making money.
I also think that the ad revenue models of trulia and zillow are flawed.
While I think these websites are great, selling advertising doesn't quench the market's thirst for solutions that truly add efficiency to the real estate transaction process and to the market as a whole. The market needs to be come more efficient and downturns like this will make that happen.
Trulia, while the current leader in my mind, also stops the website user experience at the property listing page and sends you to a broker website to be disappointed. How are we really any better off if we end up in the same place (a sub-par listing agent/broker website) as 5 years ago and before web 2.0? People need to push the envelope (Founders and VCs, especially) and reshape antiquated industires, if we are going to be competitive as a country. What else do you do with $87M?
Jonathan Cardella
CEO, NeighborHubs, LLC
www.RealEstateSpace.com