The difficult task of valuating web 2.0 products

What if you were asked for your opinion of how to provide a valuation of a web 2.0 product? There are no easy answers and the cases of over-valuation are easy to find. For example the purchase of Skype by e-Bay for $2.6bn in 2005, e-Bay later admitted in 2007 it had overpaid by a clear $1bn.

So what are some of the pointers to help when it comes to your turn to speak at the boardroom pow-wow? It’s a question I asked recently on the ICAEW’s IT Counts social networking community. A couple of starter answers below:

1. Bodycount — use a traditional web measure such as number of visitors.  Downside: Traffic is a great measure, but without a business model it’s not enough. With Skype the number of active users, as opposed to registered users, fell well below expectations.

2. Fast growth potential – the ability of the site to allow users to upload their online address books and link to their own contacts quickly, then create networks among these users. Plus the ease in extending the network to mobile devices. (So helps if it connects easily with a big player like Facebook or Myspace.)

3. Average single user value — work on the basis of what a single user might generate in revenue with simple predictions. Eg: the more time on average a user stays on your site the higher the potential revenue for example.

Maybe I’ll need to make this into a conference session and see what other ideas are out there, for sure you can reduce it to ‘the price is what the market can support’ but there has to be more to help guide valuation?

Or to put in another way ‘Is LinkedIn really worth a cool $1bn?’.