Valuing Start-up Ideas: Getting a Market Valuation
January 19, 2015
Putting a valuation on an unexecuted–or largely unexecuted–idea is usually exceedingly difficult, but there is a bit of roughly 2,200-year-old wisdom that may be helpful to the appraiser tasked with this chore:
“Everything is worth what its purchaser will pay for it.”
— Maxim 847, Publius Syrus
Occam’s Razor implies the simplest feasible valuation method is usually the best one. If your idea is has taken the form of a thing which can immediately be sold, carefully attempting to sell it might be the best way to determine its value. You must be cautious, however; do not to agree to sell your idea, your prototype, etc. unless you are certain the conditions are favorable. Let me illustrate what I mean by providing an example.
A young Australian man named Mathew Carpenter co-owns a company called Sofa Moolah, which bills itself as “is a website devoted to teaching you how to make money online.” In mid-January, 2015, Mr. Carpenter launched a website called ShipYourEnemiesGlitter.com. The website offered its customers the opportunity to anonymously send their enemies an envelope full of glitter, which, upon opening the envelope, will likely spill everywhere and be exceedingly difficult to clean up. The cost of the service was $9.99 per envelope.
According to the information he posted on flippa.com, in the first 24 hours the site was live, Mr. Carpenter was paid $20,502.71 (net receipts, after PayPal fees; gross receipts would have totaled $21,115.36) in revenue representing approximately 2,113 orders. Mr. Carpenter also provided his Google Analytics data through the 16th of January and a PayPal Sales Report. (Carpenter, 2015) “Although the idea is a bit farfetched, it’s caught on in a big way. After being launched on January 12th of this month it has seen over 2,500,000 visitors, received over 415,000 mentions on Facebook & Twitter & has been featured all over the world both online, in print, on the radio, on TV & even on late night talkshows,” including Jimmy Kimmel. (Carpenter, 2015)
Asked why he is selling the business, Mr. Carpenter said:
“I launched this website as a bit of a joke not expecting this level of attention. Heck, I launched this website whilst I was on holiday! For the past few days it has been stressful dealing with all of the media attention & even more so because this was only intended to be a small side project. It’s taken on a life of its own, and I want to watch it continue to grow under a new owner.” (Carpenter, 2015)
The potential to make an enormous amount of money from this business is apparent to anyone with half a brain. “The website makes money every time a user purchases a glitter filled envelope. Each purchase is worth $9.99 AUD. I’ve calculated that the total cost of shipping an envelope filled with the glitter & the A4 letter to most places in the world from Australia ranges anywhere from $2-$4. That leaves $5.99 to $7.99 profit on each order.” (Carpenter, 2015) Presuming a median profit of $6.99 per unit, even if demand were to steadily decline at a rate of 2.5% per day during the first 90 days of operations, one might reasonably expect to earn a net profit of $736,106.97 within the site’s first 90 days of operation. Within the first year, one might reasonably expect to earn a net profit of $820,028.87. Again, that’s with demand in decline!
There really is no reason, however, to expect demand to decline. A comparable website, offering to anonymously send cow, elephant, or gorilla feces to people you dislike, has been in business for roughly seven years and three months. In fact, if demand remained perfectly level, the difference in earnings potential is staggering. Even if demand never increased, as one might reasonably expect it to do, and the site simply earned as much each day as it did its first day, the year-end net profits would be roughly $7,483,489.15. That’s over $7.48 million. If demand increased even half a percentage point each day, the year-end net profits would be roughly $21,218,881.07. That’s over $21.2 million.
As mentioned above, Mr. Carpenter has listed for sale his website on flippa.com, where, as of the time of this writing, it has received 338 bids, the highest of which is $70,800.00. ShipYourEnemiesGlitter.com is a steal at that price, considering one could reasonably expect to earn over 100 times their investment in the first year of operations. Why, then, is the highest bid only $70,800? In a word: Risk.
Still, the auction is not over; when the auction ends, I will update this article with the final price.
EDIT: ShipYourEnemiesGlitter.com sold on January 21, 2015 for $85,000.00. (Carpenter, 2015).
If you could do what Mr. Carpenter did, and offer to sell your idea or business at auction, you would get a reasonably good valuation, assuming you had a sufficiently large and well-informed pool of potential bidders. This is not possible for every business, but for businesses which make most of their money online, through their website, it’s not a bad way to get a decent valuation. Oh, and the best news is flippa.com only charges $20 to list your site for sale. Try getting a professional valuation for that price; you won’t be able to do so. Why is this valuation so good? It’s good because it reflects the actual market price of your business–what a real potential purchaser is willing to pay for it, and, as Publius Syrus said, “Everything is worth what its purchaser will pay for it.”
- Carpenter, M. (2015, January 16). The #1 place to buy and sell websites, domains and apps. Retrieved January 21, 2015, from https://flippa.com/3783970-20-000-in-sales-and-2-5-million-visits-in-4-days-hugely-popular-viral-site
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