Sunday, February 23, 2014

WhatsApp Valuation Model

I finally had a moment to figure out the Whatsapp business model. First year is free and then $0.99 per year thereafter. With 400 Million users, that is about $400M in revenue per year (or per next year). 

They do 18 Billion messages per day. Using Amazon AWS SQS or SNS pricing of $0.50 per Million, that is $9,000 per day of approximate cost, or about $4M of costs per year. I know that is probably a bit light because I am not including data transfer costs of about a Nickel/GB. 

For employee costs, they had about 60 people at an average fully burdened load of $200K is about $11M.

The big cost for WhatsApp are the Apple and Android Store transaction fees of 30% - about $120M.

So, a net income (next) year of ~$260M. 

Put that net at a 73X P/E ratio and it gets you to the $19B valuation.  Comparatively:

  • IBM has a PE of 12
  • Red Hat has a PE of 64
  • Facebook has a PE of 112
  • Amazon has a PE of 580.

Of course it positions Facebook well to address some challenges it has.  The two big ones that come to mind is that the Facebook app is too big now and therefore they need some other brands and apps to get to market if they want to continue to grow.  The second one is that they have set Facebook up to be an advertising driven model (although there are some huge opportunities still to do things like payments and identification). The WhatsApp subscription pricing gives them some diversity in their revenue model moving forward.

Anyway, I'm pretty sure Zuckerberg did not make a huge mistake here.  And I think Facebook will continue to bring new brands to market thru development or acquisition just as Google has.

Thursday, February 13, 2014

Capitalism vs. the Three Legged Stool

Wikipedia defines: "Capitalism is an economic system in which trade, industry and the means of production are controlled by private owners with the goal of making profits in a market economy."

This definition has always bothered me. I prefer a different model where there is equal recognition of the three primary drivers behind the success of a company:

  • Owners
  • Employees
  • Customers
I like to think of it as a three legged stool, where each leg is as important as the other.  One gets too large or small and the stool tips over.

The free market is supposed to take care of Employees and Customers.  Employees because the Owners will create so many jobs that due to supply and demand, employees will receive competitive pay.  Customers because if the owners are not building the right thing, then they can go elsewhere.

As someone who has helped to build about 10 startup companies now, I have seen the power in making these three stakeholders equal partners. 

Employees who are true stakeholders - both financially and in shaping the company - are much more valuable to the other two stakeholders since they have high motivation. In addition, employees who take true responsibility make better decisions and work harder.

Making customers true stakeholders is similarly productive. I have seen Customer Advisory Boards have real and meaningful impact on companies. Customers know their needs the best - employees still have to listen and interpret and make bets on where the customer will be in the future. Being able to have honest dialogs is important, because new ideas stem from these interactions when there is true collaboration. Companies need to charge a fair price to their customers and deliver true value for that price.

There is a requirement from all parties to share the power and have empathy for each other.  That means customers must understand an employee's need to earn a good living, and an owner's need to get a return on invested capital (and time).

As owners, employees and customers, we all share the individual responsibility to make the organizations more equal across these stakeholders. I like the recent commercial on TV about the employer who gives 20-30% of profits to employees

We work hard at RunSignUp to make this true, and it is certainly a competitive weapon that helps elevate our business above the typical pure capitalistic companies in our little market. Hopefully it is an approach more and more businesses take to heart.