VALUATION OF SOCIAL MEDIA COMPANIES

Startup founders always try to hunt the answer of an evergreen

perplexing question when they want to raise fund or divest in the
company. What is the worth of their business? As the founder wants to
ensure that they are using rational assumptions and premise behind
valuation amid this dynamic environment, extensive research of the
industry and constant watch on the macro environment factors is
pertinent while valuing the startup.
Now, think of the investor who is investing money in that startup. There
is no clear answer or smooth process to value a social media startup as
there is no data related to financial statements available in public
domain. Further the founder will always show the rosy picture so as to
entice the investor.
Ways to get the highest return per rupee spent (ROI) is one of the most
heated controversy in marketing. John Wanamaker coined the phrase,
“Half the money I spend on advertising is wasted; the trouble is I don’t
know which half.” The situation is no different in valuation of social
media. What is the value of a tweet or return of a like? These questions
need to be analyzed before calculating social media payoffs for your
business.
To figure out the real value of social media in the organization, both
relational and transactional approach are needed to be taken for
consideration as a lot of the value from social media doesn’t show up
immediately. For instance, a prospect with whom a product article is
shared on Facebook may purchase from the entity even four months later
as they might have saved the content for future reference. And if they
clicked on a Google Ad, credit will be given to Google, even though
social media contributed to the conversion that is why a lot of social
media value is not shown immediately.
Firstly, specific goals that need to be accomplished from social is to be
determined. Below are just a few examples:

 Get more traffic

Social continues to prove one of the most valuable traffic

generators. Further, one of the biggest advantages of driving traffic
from social in comparison to other sources is that the branding and
awareness benefits that get along with it.

 Build awareness

Social media is platform where people tell their friends about their
favorite products and brands. Most of the people say they’re more
likely to purchase a product after a friend or family member shared
it on social media. So definitely, it’s a great way to build
awareness.

 Capture leads and market share

Profits per customer are directly proportional to engagement of

audience on social media. As social media followers spend twice
as much as their average customer organizations can significantly
increase their top line and profit margin .

 Retain and serve current customers

Social media is considered as consumers’ top priority for seeking

customer service. As customers are using social media to talk
directly to seller, to resolve problems and create great experiences,
it is necessary to reply on customers complaints over social media
platform.

Goals of an entity can be one or combination of the above referred but

social media ROI will look different depending on what an entity is
trying to accomplish.
Valuation of social media is generally in terms of acquiring new
customers. However, consideration should be made on comparing the
cost of retaining the existing customer vs acquiring a new customer. Just
as social media can be used to amplify brand image of an entity, it can
have the same effect on the negative experience’s customers have with
the company. Nowadays, when someone Tweets or posts a Facebook
rant about their dissatisfaction with the brand, it’s no longer private.
They’re sharing the information with all their friends, family members
and potentially anyone else online over the internet. Shifting the
prospective of social benefit from a transactional viewpoint to more
relational is required.

Valuation Methods
 Value Per User in respect of comparable companies
In this method firstly, all the comparable companies are jotted down
and then weights are given to each comparable company based on the
similarity in respect to type of users, content, size, financial
characteristics, purpose of the platform etc. with the valuing startup.
After which the weights on comparable companies, per user value of
comparable company and Active users (Daily/Monthly) of the
startup, we are valuing are multiplied to each other to find the
weighted valuation of the startup with respect to different companies.
At last, end values calculated above corresponding to each
comparable company is added to find the valuation of our required
social media startup.
The Enterprise value calculated from the above method can further
be validated by the following two methods-
 Discounted Cash flow (DCF)- It is one of the oldest and widely
used method to calculate the Enterprise value of a company. In
simple terms Enterprise value is nothing but Total Equity + Debt
 – Cash and cash equivalents. DCF method attempts to figure out
the value of an investment today, based on projections of how
much money it will generate in the future. The present value of
expected future cash flows is arrived at by using a discount rate to
calculate the discounted cash flow (DCF).
Enterprise value (considering equal growth) =
(Discounted future cash flow *(1+Growth))/ (WACC- Growth)
In the period of growth, Free cash flows fluctuate to a great extend
in social media startups so the above formula can only be used in
the stage of maturity. Before maturity each year free cash flow is
discounted
Individually to present value with cost of capital of the entity.

 Precedent Transactions valuation –This method estimates the

valuation of a company by tracking the previously valued
companies in the similar industry and adjusting the following
factors with premium or discount.
 How innovative and feasible is the idea?
 How competent are the Co-Founders?
 How effective is the Business/Revenue model?
 Are the Future strategies related to marketing, operations etc.
effective or not?
Precedent transactions analysis creates an estimate of what a
share of stock would be worth in the case of an acquisition.
Transactions that occurred recently are considered more
valuable in terms of usefulness for analysis as current data is
more relevant for analysis.