Twitter’s announcement that it would soon file for an IPO wasn’t unexpected but it should have other start-up entrepreneurs pulling out their calculators. The company is the last of the big social media firms to go public, after Facebook and LinkedIn, and it provides a valuable look at how the market values not just social media platforms but also the users of those platforms.
That’s vital information for anyone working on some sort of social media site — or even just trying to create an audience to push ads towards. If you know how much the market values each user, you’ll know how many users your product will need before you can call yourself a millionaire.
The bad news though is that the numbers can vary tremendously.
Facebook’s shares are currently at an all-time high of around $45. That makes the company worth nearly $100 billion, a valuation based on an expected $1.2 billion in profits this year from revenues of $7.5 billion. With around 1.15 billion users logging in each month, that makes each Facebook user worth about $87.
That user valuation is pretty close to LinkedIn’s. The professional networking firm has about 200 million active members and is valued at $18 billion. That makes each LinkedIn member worth about $90.
Based on those two valuations a new company that uses some sort of social networking needs little more than 10,000 users who return each month before its owner can say that he or she has a firm worth a million bucks. That won’t happen overnight but it doesn’t have to take too long. Pinterest launched as a closed beta in 2010, with founder Ben Silbermann sending his phone number to the first 5,000 users and meeting some of them personally. It had picked up 10,000 users within nine months. After two years the site had nearly 12 million visitors.
Become a Millionaire in Just Nine Months… Maybe
In theory then, you could have a million-dollar business within just nine months of launch and be a multi-millionaire just a couple of years down the road.
But it doesn’t quite work that way. When Facebook bought Instagram in April 2012, the photo-sharing site’s thirteen workers were believed to have hit the jackpot. Facebook paid $300 million in cash and another $700 million in shares. That’s a billion dollars for a social media platform which then had around 100 million users. But if those users were worth the same as Facebook’s and LinkedIn’s Mark Zuckerberg’s company should have paid closer to $9 billion. Facebook’s accountants valued Instagram’s users at just $10 each.
Twitter comes out a little better. Although the shares haven’t been priced yet, the firm is expected to raise $10 billion at its IPO. Trade in the “grey market,” in which shares in a company are traded before an official listing, suggest that the company could be worth as much as $13.15 billion a day after going public. The company is believed to have about 240 million active users which means that its users are worth about $54 each.
That valuation may be low. Twitter hasn’t revealed its finances, and because revenues are less than a billion dollars it doesn’t have to, but the company is expected to earn somewhere between $530 million and $580 million in advertising this year. It’s not clear how much of that is profit but it represents more than $2 per active user each year. Facebook, by way of contrast, manages to suck out less than a dollar from each of its users each year, and yet the market values those users at nearly twice the price of Twitter’s.
The problem is that a number of factors will go into valuing both a social media platform and its users. While current revenue and profit per user should help to account for much the current valuation, investors also look at growth. Facebook’s shares fell dramatically after its IPO as investors worried about the company’s ability to make the most of the mobile platforms to which users are migrating. Facebook was able to put those fears to rest this year. In the second quarter, the company announced that ads in mobile news feeds now make up 41 percent of its ad revenue. The news helped to push its share price up from a low of just over $17. Twitter, like Instagram, has the advantage of coming to the market mobile-ready. Sixty percent of the company’s users log in through a mobile device at least once each month. Those mobile users will spend more time on Twitter than desktop users. They’re younger, engage more with content and are 60 percent more likely to follow brands.
What’s the Value of Hype?
It would be nice to say that once your social media platform or your blog has picked up 10,000 or 20,000 regular users each month that you’ll be a millionaire. And it’s possible that you could have those numbers within nine months to a year of launch — or even sooner. But for those users to be worth anything (let alone between $54 and $90 each) you’ll need to be able to show that you can monetize them. You’ll need to show that you can monetize them on mobile platforms.
And, most importantly, you’ll need to show that you can attract lots of them.
No one was valuing Pinterest at a million bucks when its membership was no more than five figures. It wasn’t until the site had been operating for nearly two years and was generating closer to 11 million visits each week that people started paying attention.
And that’s probably the most important thing you’ll need to turn your product’s users into a million-dollar business: hype.
Ten thousand regular visitors will tell you that you’ve got the platform right. It might show that you have the potential to create a million-dollar business. But it’s not until you have several million users that anyone is likely to take notice. And that takes longer than nine months.