WHAT’S IT ABOUT?
Valuing your website’s traffic

KEY TAKEAWAY
Strong traffic is one key metric, but having a solid management team around you is paramount

INSIGHT
A combination of proof of concept, customer engagement, and infrastructure increases your chances of securing investment capital.  

Have Realistic Valuation Expectations

You’ve launched your e-commerce business, you’ve got proof of concept, and things are going well. Now you’re thinking about reaching out to investors. Great. The big question is how much equity are you willing to give up knowing how expensive it is to share a slice of your pie with an investor? You don’t want to underestimate your company’s worth, nor do you want to place a price tag so steep that investors turn their noses.

In now what’s become one of the more famous episodes of ABC’s wildly popular TV show, Shark Tank, the Kang sisters turned down a $30 million dollar buyout from billionaire investor Mark Cuban for their dating app Coffee Meets Bagel. After the show aired, the Kang sisters received dozens of emails referring to them as “crazy”, “greedy” and “stupid”.  That was 3 years ago. Earlier this year, San Francisco based Coffee Meets Bagel raised roughly $7 million in Series B funding according to an SEC filing. That round values the company at around $82 million per Pitchbook data.

Yet for every feel-good story like Coffee Meets Bagel, there are multiple stories of entrepreneurs overvaluing their companies or giving up too much equity. This article focuses on the valuation of an e-commerce business, particularly those in the early stages where traditional valuation methods such as discounted cash flow are not useful.

How Good Is Your Traffic?

Since many startups lack the track record for a proper gauge of fair market value, investors need to turn to other criteria or use a combination of valuation techniques. One such measure is traffic and quality of that traffic. For example, your company may create great content that generated unique visits; however, if all that traffic doesn’t convert into sales, then what’s the point? In essence, investors look for quality of your site’s traffic versus quantity. Investors want to know how much each visitor is worth to your company to determine the quality of your site’s traffic or what’s referred to revenue per user (RPU). For example, it’s safe to say that you have low-quality traffic if your RPU is $0.04 and the comparable average is $0.24.

While having some traffic is better than no traffic, investors are also interested in how diversified is your site’s traffic. A concentration of traffic sources say from Facebook may indicate that your site is not optimized to receive a mix of organic searches. A good resource to use to see how your website stacks up against the competition is www.similarweb.com. You can enter your site address and get a number of stats including total monthly visits and traffic sources.  

Another consideration for potential investors is the cost per click (CPC). Organic generated traffic may not necessarily be any better than if your website pays to generate its traffic. The reason is Facebook and Google continually change their algorithms placing uncertainty around SEO marketing tools which may amount to guesswork as those changes occur.

Repeat customers are always a good thing. Therefore, VCs look to factors such customer acquisition costs and whether that customer base is growing. One good indicator is the churn rate or the annual percentage rate at which customers stop subscribing. A basic churn calculation would look something like this:

 

Source: https://blog.recurly.com/better-way-to-calculate-your-churn-rate

 

A Winning Combination: The Right Traffic and Strong Management

In general, high-quality traffic and customer engagement could lead to a higher valuation. While the appeal of quality traffic, engagement, and low customer acquisition costs are attractive to investors, having good infrastructure and a strong management team is paramount. Take for example the case of Pet Smart’s acquisition of Chewy.com in April 2017. Prior to being acquired, Chewy.com in a short 6 years since its founding, generated $900 million of revenue the year before, boasting 3.8 million customers. Remarkably in 2016, according to 1010data.com, Chewy beat out Amazon as the biggest seller of pet food online for the first time. How did the company do it? Besides having a high touchpoint customer service model that included fast shipping, Chewy built a strong management team by installing Mark Vadon co-founder of Blue Nile and Zulily as its chairman. Given its loyal customer base and backing (the company had already raised $236 million from investors), Pet Smart swooped in and acquired Chewy for $3.35 billion, which at the time surpassed Walmart’s buyout of Jet.com for $3.2 billion.

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