Valuating a growth company is an exercise that lies somewhere between faith and science. On one hand, there are some fundamental data points describing the company, and on the other hand, there is the belief in the execution of a future vision that drives the valuation. Since the latter is by far dominating the value of technology and growth companies these days, one attempt to quantify the future potential of consumer-facing tech companies is to place a value on its user base. As there is no one universal answer to the value of a user, how should one proceed when valuating a company based on its user base?
When placing a value based on a company’s user base, it is important to acknowledge that a user is not a user. There are several underlying factors that in sum could be based to calculate the actual value per user from a bottom-up perspective.
The first question to ask oneself is the definition of a user. A non-registered user that casually drops by the platform every once in a while, should have significantly lower value potential than a registered user. Capturing a user registration creates a user identity that both provides valuable user data and with the right consent also a way to interact with the user.
However, basing a user-led valuation on registered users sets in many cases inflated expectations of the actual potential of those users. While there is always some potential to reactivate dormant users with a compelling call to action, there is an inherent risk that registered, non-active users, signed up to test the platform some time in the past and has little to no intention to return as an active user.
This brings us to the holy grail of user valuations, daily active users. Your company’s ability to attract, retain and engage the user base is ultimately the foundation for any user-based valuation.
With that foundation in place, exactly how a company chooses to capitalize on those daily interactions has different value trajectories. An ad-based revenue model will have different characteristics than a transaction-based revenue model or a subscription-based model. In order to get the fundamentals in order, useful questions to ask could be:
- What is the average revenue per user (ARPU) for a given time series (monthly/quarterly/yearly)?
- What is the user growth rate?
- What is the user churn?
- What are user retention/renewal rates?
- What is the switching cost/stickiness of the platform?
- What is the user acquisition cost?
- Are there inherent network effects on the platform?
- What is the underlying cost to serve (operating cost per user)?
- What is the average expected lifetime value of each user?
- What is the market share of total addressable market?
However, it is important to note that these are not static numbers, and the stage of a company in its life cycle is also a factor to take into account. The value of a user in a company’s growth stage does not translate to the value of the same user in a consolidation stage.
Another way of placing a value on each user, is to have a peer group as an anchoring point. All numbers in USD.
|Company||Market cap||Users||Value per user|
|870 000 000 000||2 800 000 000||311|
|53 000 000 000||187 000 000||283|
|Bytedance||250 000 000 000||689 000 000||363|
|Snapchat||92 000 000 000||265 000 000||347|
|45 000 000 000||459 000 000||98|
|Tencent||772 000 000 000||1 200 000 000||643|
|Telegram||35 000 000 000||500 000 000||70|
|Kakao||47 000 000 000||52 000 000||904|
This valuation method has also been applied in the fintech space, and in particular among challenger banks, where companies like Revolut, N26, and Monzo have raised capital based on a user valuation of more than $1000 per user. Looking at incumbent banks, Banco Santander has half the value per customer with a market cap of $70 billion and 144 million customers worldwide. While actually running a profitable business.
Setting a user-based valuation can be a useful way to quantify the future potential for a consumer-facing tech company, but like most things in life, it does not come without downsides. Nothing grows into eternity, and like Netflix shareholders experienced last week, placing too many bets on user growth as a valuation principle may result in negative effects when growth expectations are not met.
As a company matures, it is important to actively shift the narrative of the future equity story towards fundamentals to mitigate the risk of devaluating your company by chasing unobtainable expectations.