Social capital has proven high value – for Tumblr on down to local startups

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Goodwill hunting

 

The value of social capital, such as Facebook friends and Twitter followers, is fast becoming an important asset for many early-stage companies valuing their businesses in connection with capital raising and merger transactions.

When Yahoo acquired Tumblr for $1.1 billion in the summer of 2013, more than $750 million (nearly 75 percent) of Tumblr’s purchase price was attributed to its “goodwill.” As many were quick to point out, Yahoo had essentially plunked down three-quarters of a billion dollars for the “cool factor.”

Regardless of whether Yahoo’s purchase ultimately proves a sound business decision, the transaction demonstrates how social media assets have come to represent an integral part of a company’s goodwill valuation.

 

Goodwill and social media

 

Business goodwill is a complex and subjective concept. To quote Yahoo following the Tumblr acquisition, “Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.”

Yahoo’s definition of goodwill may appear technical, but it is open-ended enough to capture multiple factors that comprise goodwill valuation, such as a company’s brand name and recognition and, more importantly, its customer base and the quality of customer relations.

By the end of 2014, Tumblr’s micro-blogging platform had managed to capture the attention of 420 million users. Essentially, Yahoo purchased ready-made access to these users. This transaction demonstrates the importance of social media assets and supports the principle that these intangible assets can, in many cases, represent an important aspect, if not the most important aspect, of a company’s pre-money valuation.

 

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Valuing social media assets at the pre-money stage

 

Pre-money valuation refers to the valuation of a company or asset prior to an investment of external capital. In other words, pre-money valuation is the value you will attribute to your startup when shopping for capital investments from venture capitalists and angel investors. VCs and angels will use the pre-money valuation to determine how much equity in your company they will require in return for their investment.

So, how exactly does a startup value its WordPress, Medium, Tumblr, Twitter, Facebook or other social media account and how does this value manifest itself in the context of pre-money valuation? To be sure, valuing social media assets is more art than science, but if your company is seeking an investment of external capital you should immediately begin gathering hard data on all social media accounts. Data capture will ensure that you are prepared to qualify your company’s social media accounts as valuable business assets when courting prospective VCs and angels.

Your company should be able to quantify the following for potential investors regarding your various social media accounts:

  • The number of users or followers attributed to a certain account.
  • The demographics of users or followers ascribed to a certain account.
  • The rate at which new users or followers subscribe to a certain account.
  • Unique user or follower views of each account.
  • The frequency, quantity and quality of interaction with users and followers.
  • The number of users and followers that respond to the content your company publishes to its various social media accounts.
  • The frequency with which users and followers respond to your company’s content.
  • The prevailing tone of your company’s interactions with users and followers through social media: positive or negative?
  • The number of users and followers who initiate interaction with your company through social media accounts and the frequency with which users and followers initiate such interactions.
  • The valuations of comparable companies with comparable social media assets.

 

Valuing a company’s goodwill is a complex and subjective practice, but consistent data can speak loudly in this context, offering hard numbers to support a valuation. Your company’s ability to demonstrate the quality and quantity of interactions with customers or users across a number of social media platforms can drive your valuation and make your company more attractive to investors. It is yet another opportunity to demonstrate real value in the way your company creates and cultivates meaningful dialogue and relationships with its customers and users.

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