For my sins I have been working in and around the web since before the days of boo.com and Lastminute started. I once worked for an Internet Service Provider, long since swallowed up and re-branded, and got excited about valuations of the business based on the numbers of subscribers. I honestly thought that my share option at the time would allow me to retire before I was 30. Of course now I know I will be working until I am 70. It never occurred to many of us that the real value of the business is not how many people use it but how much profit it generates. A couple of years later and the dot com crash happened and valuations crashed, and investments from individuals who should have known better stopped.
A lot has changed since then but valuations of pure-play internet companies have started to rise again. You might think that the Google bid for Groupon, the daily deal website, of $6bn was an incredible figure. However Groupon made a reported $760m in revenue in 2010 which put that number into perspective. Rightmove the property site has recently been valued at £1bn helped by the fact that it made pre-tax profits of £52.2m last year from selling listing on its site to estate agents. Against those numbers you can see where the valuations come from.
However there are other examples which don’t make sense. The online music service Spotify has just managed to get $100m funding to try to compete with Apple’s iTunes service. That funding means that the business is valued at $1bn despite the fact that it is currently loss making. Compare that to HMV the high street and now also online music store, whose market capitalisation is currently $150m or about a seventh of the loss making online only Spotify.
Also last month AOL bought the American news website the Huffington Post for $315m. That is almost the same price as the current valuation for Trinity Mirror. That has 5 national newspapers, including the Daily Mirror, 160 regional newspapers and over 500 websites let alone 6,500 staff. Trinity is not helped by its borrowings of £260m and a pension fund deficit of £161m. By the way that means that Rightmove and its one site is worth 6 times Trinity Mirror according to the City.
As you can tell by the number of $ signs in the column most of these valuations are being driven by American companies. However there now definitely seems to be a trend of upwards valuations of internet companies. This time around however on the whole the lessons from the last bust have been learnt and they are mainly being valued on the cold hard reality of how much cash is being generated by the business. History teaches much and I hope that those who are now responsible for valuing who then were probably at high school look back at the last boom. That may keep the lesson to Boo who rather than Boo hoo.
Tim Youngman is head of digital marketing for Archant follow him on Twitter @timyoungman