Ev Williams on how to value media startups

I think it’s a bit unfair to blame Wall Street for how so much attention is paid to number of users when assessing how good a media startup is doing.

Investors allocate money by doing research.  They need a way to make apples to apples comparisons between different investment opportunities that they might be interested in allocating investment dollars.  If users is such a flawed metric, then what is the better metric? If there is one, let’s talk about it because any good investor would die to know.

The medium tail of media startups suggest that sheer scale of the user base matters more to them than it does to Google or Apple because they can’t monetize users nearly as well as either of those companies.

The rule of thumb for making money in online media is that you have to multiply a really small dollar number to a really huge user number to make it work.  The only way you can break out of that is if you can make more money per user than what we’ve historically seen in this space.

If you’re trying to measure the value of a company, it’s in theory a lot simpler. The value of a company, from a financial perspective, is its ability to make money over time. This is not easy, and growth trajectory matters a lot for new companies. But what’s amazing — despite the contrary examples of Google and Apple — is that Wall Street has seemed to buy into the users = value equation. That, of course, trickles down to the valuations of private companies and the obsessions of VCs and the tech press.

via A mile wide, an inch deep — Medium.