Looking at Facebook’s $19 billion acquisition of WhatsApp, I’m getting a sneaking feeling like it’s 1999 all over again. As with the last Internet bubble, consumer-centric tech companies with stratospheric valuations are leading the charge in buying smaller firms with, well, stratospheric valuations. And the metrics being used to gauge acquisition value – the number of users and user growth rates – seem eerily similar to non-financial valuation metrics from last time around (eyeballs, anyone?). That is, when Mary Meeker and Henry Blodget ushered in an era where discounted cash flow analysis was taught only to business school students and had no place in the bubble M&A world.
But how does this relate to WhatsApp? In a story from earlier this week, Reuters reported that “Facebook is paying $42 per user with the deal, dwarfing its own $33 per user cost of acquiring Instagram. By comparison, Japanese e-commerce giant Rakuten just bought messaging service Viber for $3 per user, in a $900 million deal.” As an aside, for those who are curious, the multiple on employees (55 in total for WhatsApp) was $344 million per FTE.
So number of users is now the new “eyeballs” in B2C. But what will the metrics for valuation become in B2B if indeed this bubble migrates to such future IPO candidates as Fieldglass, Coupa, and IQNavigator, not to mention public companies in the sector including SciQuest – and the already atmosphere topping Tungsten/OB10?
Arguably, the metrics by which one will measure B2B procurement, supplier network and marketplace companies this time will be more grounded in financial upside than the somewhat nebulous number of “free users” favored by the B2C social and app companies on the deal side today. Outside of the usual financially centric metrics including but not limited to discounted cash flow (DCF) as well as earning and revenue multiples (and growth multiples of the same), I’d vote for the following if I were trying to understand the potential value of these organizations in a bubble scenario:
- Dollar volume of “non-card” commerce flowing through the application or network (owing to the potential value of new means of trade financing inclusive of both receivables financing and payables financing). The potential upside from a trade financing perspective (a market that in our analysis is well less than 1 percent tapped today) on the B2B application and network side is as much as 200+ basis points per transaction (but even a more conservative 25-75 basis points could show huge revenue potential)
- Volume growth rates in terms of both dollars and number of transactions – a more valuable proxy than “number of customers” or “number of suppliers” because it shows actual application or marketplace usage.
- Rate of large buying organizations added and successfully transacting. Taulia, for example, is absolutely the reigning champion in terms of adding new customer names in the e-invoicing and dynamic discounting area in the past 18 months. And after all, you need large buyers to enable value-added services for suppliers (which can generate new sources of revenue longer-term)
- Number of “active suppliers” or those vendors doing commerce with organizations through an application or network in the past month or quarter. Separating out active from passive suppliers is key. Some networks and application providers claim to have hundreds of thousands of suppliers, but in many cases, the number of truly active vendors is less than 10 percent of the number claimed.
- The privacy and security restrictions that an application, network or marketplace has (or does not have). For example, OB10/Tungsten and Ariba are able to do more with either user specific or aggregate data in the marketplace / network based on a relatively loose user agreement compared with more restrictive covenants in other agreements that do not enable the same sharing of information with either network participants or third parties (all of which could potentially provide value-added services) around the core offerings available today.
- The ongoing sustainability of business models. For example, Fieldglass and IQNavigator, along with their vendor management system (VMS) competitors, have proven out the sustainability of a relatively high supplier-paid volume-based fee model until now. There is industry validation for this model. There is not the same commonality of validation for the value-based fees in the Ariba/SAP network model for indirect spend by comparison; in contrast, Ariba’s competitors based their pricing on alternative models.
There’s no question that B2C valuations are once again silly. And my guess is B2B is next. But the question remains: how we will value organizations when all the tried-and-true methods taught for decades in finance 101 courses goes the way of bad eighties music being played – this time through Pandora, iTunes and Spotify – on the 101 between San Francisco and San Jose.
Wait a minute … the 80s music is back and more alive than ever. In fact, the drivers for last two UberX rides that I took both had XM radio blasting Tears for Fears and INXS from the “80s” station.
Which of course can only mean one thing – the bubble is back.
Jason Busch and Richard Lee, the founders of Spend Matters Group, a Spend Matters affiliate, frequently lecture and advise on M&A strategy and valuation in the B2B sector.
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