Valuations 2.0: Thoughts On The Kiko Auction

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Valuations 2.0: Thoughts On The Kiko Auction

 


My article last week on the demise of Kiko got a fair amount of visibility (not sure why, as the article itself wasn’t particularly insightful).  Guess news trumps nuance in the blogosphere.  But, in any case, now that the initial dust has settled on the news, I’d like to take a look at the issue from a slightly different perspective.

Clearly, Valuations 2.0 are based on something other than revenues and profits.  That’s OK.  Those of us in early-stage startup land are used to that.  Basically, what we’re trying to do is determine future value and use that as a way to back-in to current value using a series of steps that in aggregate amount to voodoo math.

This is not particularly new.  In the Web 1.0 world (before the much needed patches were released), valuations were based on things like eyeballs, hits and other words to generally describe traffic.  The idea was that this traffic would somehow be monetized.  Now, in Web 2.0, the approach is similar, but it’s just easier to get to the monetization bit.  Things like AdSense make it possible for just about every startup to make money as soon as they have any visitors.  This means that if you have any friends and your family hasn’t disowned you, you can be a revenue generating startup within about a week.  (Of course, nobody talks about revenue magnitude or the fact that you’re only making pennies a day, but that’s a topic for another article).

As you likely already know, Kiko’s assets are up for auction on eBay.  I’ve had some discussions on the blogosphere as to whether or not this is a good thing (for the founders, the investors, etc.).  This got me to thinking about the auction itself.  What I’m particularly intrigued by are the “variables” in the equation of calculating the “fair value” of Kiko.  Thought I’d share some of those thoughts.

Thoughts On The Kiko Auction
 
The fact that Kiko decided to exit the business by way of an eBay auction is interesting.  Though there’s been some discussion on the merit of this strategy on the web, I think it’s not a bad approach.  Given that many of the potential acquirers that might see value in the Kiko assets are not likely to participate in a closed negotiation process, a public auction makes sense to me as it’s likely to draw out some of these potential buyers and get to a closer approximation of “fair market value”.  The other big upside to an auction on eBay is that it makes the exit much more “efficient”.  Otherwise, a fair amount of time could be spent trying to find acquirers and negotiate with them.  Since part of the motivation of the auction is so that the team could move on and pursue other interests, this puts a nice, tight deadline on the process.  I did find the minimum bid of $50,000 a little high, but that’s just me.
 
Here are some observations on the Kiko auction.  I’m trying to figure out all the various “components of value” that one might use in determining a fair price.
  1. No Advertising Revenue:  In an update on 8/18/2006 to the eBay listing, it was noted that “Kiko has no advertising revenue”.  So, it’s a pretty safe bet to guess that Kiko has no revenue whatsoever.  This is not so bad as it keeps us from having to do fancy arithmetic in our valuation calculations.

  1. Google PageRank 7:  Though there’s no advertising revenue, the same update mentioned above goes on to state that Kiko does have a PageRank of 7.  I’m guessing this likely does have value to some people as it takes a fair amount of effort (and time) to build a website with a PageRank of 7.  

  1. Website Traffic:  The listing includes a reasonably recent set of graphs from Google Analytics indicating website traffic.  The listing states that Kiko has been “steady at about 40,000 users a month”.  For a mass-appeal product that actually did something useful, this seems really low.  As a point of comparison, this is less than the traffic OnStartups.com gets in an average month.  Kiko actually provided a useful service whereas all OnStartups.com does is provide semi-interesting content every now and then.  Further, these are the traffic levels garnered when there was no advertising.  So, it’s not like they were irritating their users and actually trying to make money or anything.  The fact that their traffic was “steady” is also a bit troubling.  Isn’t part of the Web 2.0 story that the user-base and traffic levels should be growing?  (Of course, this is likely part of the reason why they are auctioning it off.  If they were doubling the user-base every month, they likely would have stuck with it a little longer)

  1. Lines Of Working Code (LoWC):  Kiko did actually develop and launch a product (with real users).  Therefore, they have LoWC .  In my experience, LoWC is worth considerably more than just LoC.  If Kiko had never actually launched a product (and demonstrated that users could actually use the product and do meaningful things), the valuation process would have gotten much trickier.  The value of each line of code that has not yet proven to be working approaches zero as the size of the code-base grows.   Interesting aside:  Kiko used Ruby On Rails as their framework.  It would be an interesting line of discussion as to whether the value of LoWC is higher or lower based on language/platform choice.  

  1. Free Development Consulting:  The development team (which I am going to guess are the two core founders) is willing to fly out to any location in the U.S. for up to a week to help integrate the product.  By my estimates, this is likely worth at least $8,000.

  1. Registered Users:  I found it interesting that nowhere in the listing did they claim to be selling a pool of registered users (even with the appropriate caveats that users can leave at any time).  Part of the value potential bidders might see in Kiko is an established pool of existing registered users (which clearly Kiko has).  I’m guessing the likely motivation for not stating this explicitly is that they wanted to make it easy for their users to exit/leave (which is admirable) and they couldn’t provide much assurance that post-auctioning the user-base wouldn’t erode considerably.


What do you think?  Did you find any aspect of the auction itself interesting?  Are there other “components of value” that I missed?  If so, please leave a comment.

Posted by Dharmesh Shah on Mon, Aug 21, 2006

COMMENTS

The bit about one week's consulting struck me as one more reason why the Kiko team has gone under. If you think you can get deep integration betwen two applications in one week, you're smoking something.

posted on Monday, August 21, 2006 at 1:46 PM by fly on the wall


I think the value of Kiko could be enhanced by one or more complimentors such as any portals that do not currently have a calendar function built into their site. However, I suspect these prospective bidders would be more inclined to contact Kiko directly to prevent a public bidding war. Thus the value of an eBay placement of the Kiko assets would be free advertising where the media picks up on it (such aswww.onstartup.com). Maybe eBay has a mechanism to protect itself and earn a commission for a sale that results from the eBay auction attempt.
But we may never know the answer to the Kiko valuation question as a result of any end around eBay.

posted on Monday, August 21, 2006 at 2:59 PM by Paul Heimlicher


Seems that some of the larger players that do not have an integrated calendar offering such as Comcast with its newly announced portal intentions would merely look at this from a build vs. buy perspective.

Can two $100k engineers build this in three months? Might be tough within a larger company and thus make sense as a "buy".

posted on Monday, August 21, 2006 at 3:59 PM by Lance Weatherby


Yes, but also factored into the value from a large acquirers perspective is the cost of integrating third-party code. So, though it's expensive for large companies to build vs. buy it is often even more expensive to integrate vs. build.

posted on Monday, August 21, 2006 at 4:05 PM by


They would've done better if they sold it yearlier.
Now no buyer is in a rush to have a calendar. Even if there is a need, there is no rush.
You remember Yahoo buying the ajax mail that they turned into Yahoo Mail's new version? The timing was good and resulted in a pretty good valuation.

posted on Monday, August 21, 2006 at 4:53 PM by Boris Yankov


Maybe you assumed it but what about all the competing offerings. Surely they will have an effect on valuation. Also there is switching cost. There are non monetary costs for users of existing calendaring solutions to switch to a new one. Calendars are often integrated with other services again making the switching cost high. Paul G. said they did not envision Google integrating a calendar solution with gmail. He called it a stray bullet, more like a Sherman tank.

In summary: very competitive market and high switching costs to capture users from competition equates to downward pressure on valuation.

posted on Tuesday, August 22, 2006 at 10:09 AM by Dean Fragnito


I dont know what you are talking about, you are confusing things here. Your earlier articles were good and seemed result of much thoughts and after thoughts.But this one was just some rant....
No wonder, you got only dugg 8 times!!.
Please stick to your core-interest of providing your experience of startup, not to comments. I come here to see if I learn from YOUR experience, not your comments about some other startup.
Sorry for the straight from the gut thoughts. But thats the reason i dont have a blog!

posted on Tuesday, August 22, 2006 at 4:15 PM by dontwanttosaynow


I find the demise of Kiko both a good and a bad sign. Good that they got something for their efforts, bad that a site with no revenue could go so far. I wonder if Kiko could have done well even if Google never released its calendar.

posted on Sunday, September 24, 2006 at 10:02 PM by Shawn


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