YouNoodle: Valuations for dummies

We were talking to a guy about his web site and he claimed it was worth millions of dollars. Since his site has zero profits on very little revenue and low traffic (and is declining in traffic), we thought it was a joke. But he proudly showed us a “YouNoodle”: valuation certificate. They really give a printable certificate complete with a gold seal, suitable for framing, I suppose.

Sure enough, YouNoodle says his site is worth millions. I’d never heard of YouNoodle (for good reason, I guess). It’s a site for early stage startups to get in contact with investors and people who can help the startup. They ask you a few questions about your startup, presumably so that would-be investors can take a look at your startup to see if they’re interested. But they go a step further (too far) and determine your valuation, a real dollar value, in 3 years.

As if the concept for determining future value wasn’t ridiculous enough, the questions they ask are “How do the founders know each other?” and “How much money do you expect to make in the future?”. Those are good questions for potential investors to ask, but you’d have to have absolutely no understanding of business or economics or reality, for that matter, to conclude that those questions actually determine value.

Incidentally, YouNoodle values this blog, which makes no money at all, at $7 million! Is it 1999 all over again?!?

Note the fine print:

bq. YouNoodle’s model is based on rigorous quantitative analysis of historical data and the application of the latest relevant theory.

“Rigorous quantitative analysis” means they asked a few questions and did no analysis at all and “the application of the latest relevant theory” means they used whatever theory they like best at the moment.

And note the even finer print:

bq. You should not rely on Startup Predictor for any financial decision and should always seek
the assistance of a professional for any tax, legal, accounting or investment advice.

In other words, this number is completely fictitious so don’t blame us if you’re stupid enough to believe it and make financial decisions based on it.

The value of a business (even internet businesses!) is determined by two things: profits (not revenue) and the growth of those profits projected into the future. Intangibles like “brand value”, patents, “eyeballs”, reputation, etc. either contribute to the profits today, which makes them valuable, or they don’t, which makes them worthless. Some simple math using those numbers, adding in any tangible assets, tells the owner of the business how much the business is worth to them, i.e., if they had the same amount of money today versus owning the business and earning profits in the future, they’d come out even. A dollar more today and they’re better-off with the cash now; a dollar less and they’re better-off with the business over the years. The projections of future profits and growth rates are guesses, but they should at least be based on realistic numbers.

Of course, the price of everything in a free market is determined by what a buyer is willing to pay. How does a buyer come up with a value? They do the same math assuming they owned the business and were earning the profits over the years. If the buyer’s value is higher (they believe they can do better than the current owner) than the seller’s value, they both should be happy and the buyer should buy it and the seller should sell it. If the buyer’s value is lower than the seller’s value, the buyer should not buy it and the seller should not sell it. That’s how businesses are bought and sold, at least by intelligent and rational people.

While on the topic, the value of a business has absolutely nothing to do with the cost it took to build it. As an example, I was talking to another guy about buying an iPhone app that he made which was an electronic version of the Washington State Ferry schedules. He was selling it but I figured he wasn’t making any money on it because the price was outrageous. His insistence on selling it was depriving everyone of a useful iPhone app for no good reason. My intention was to buy it and give it away for free, so I wasn’t going to pay much for it. After days of beating around the bush about price he claimed that he spent $130,000 building the app (yeah, sure he did) and he needs at least that much back to sell it. That was the end of our conversation. By his logic, I could spend $1 million building a lemonade stand and expect to be paid at least $1 million for my business without selling a single glass of lemonade, as if there were no such thing as “wasted effort”. Fortunately, this story had a happy ending: he decided to stop charging for the app and give it away for free. 🙂

7 thoughts on “YouNoodle: Valuations for dummies”

  1. Hi there,

    thanks for your thoughts and trying younoodle out! interesting post, but just wanted to point out a few things from it:

    1) there is a difference from current valuation and predicted valuation (in 3 years). the valuation for your blog above is the kind of valuation you could expect in 3 years assuming the data you entered for your team is accurate; and is based on the types of valuation that similar teams have managed after starting from the conditions you stated in the questionnaire. This is NOT supposed to be the valuation of your company (or your friend’s company) now.

    2) The model is optimized for high-growth-potential companies (those that are contenders to receive VC backing), and so evaluating a blog as you did is not the best test case. I’d recommend asking friends of yours that are or have worked on companies where they were aiming to create a high-growth company.

    3) “Intangibles like “brand value”, patents, “eyeballs”, reputation, etc. either contribute to the profits today, which makes them valuable, or they don’t, which makes them worthless.”

    It may depend on what you mean by ‘worthless’, but the statement above is incorrect – as non-zero valuations have been placed on non-revenue (usually high-growth potential) companies historically and currently by investors. Such companies are often evaluated before they mature in terms of their revenue potential; and so other factors such as the ones you describe (and others of course) are used to estimate value. Think about the worth of a company as estimated by a non-zero probability that non-zero profits will be generated in the future (discounted appropriately); which implies a non-zero current valuation. The stronger the factors above, the higher the probability and the future potential profits. I think you’ll find that (almost) all public companies in the technology space today at one point (and for most of their early development) had non-zero valuations based on non-revenue factors. Note that in the case of revenue, this is just another factor to consider in the valuation, but where the probability of it occurring (at current time) is 1.

    Anyway, thanks for your thoughts and time spent writing the post.

  2. On Point #1: YouNoodle’s valuation is the valuation in 3 years if the company executes EXACTLY as expected, everything is perfectly understood and nothing else in the industry changes. The odds of that happening for even the most brilliant startups is so unlikely it’s pointless to discuss it and downright absurd to provide an exact dollar figure on it. Saying the startup “could be worth between x and y” is reasonable, but an exact dollar figure is dumb. But I agree with you, the person who cited YouNoodle’s valuation was misusing YouNoodle. I wonder how many others on your site are deluding themselves with crazy-high valuations that are unrealistic.

    On point #2: A business is a business, whether it’s a blog or not. If your math doesn’t work for my blog (which it doesn’t), it doesn’t work for any business.

    On point #3: We’re talking about two different things. A patent for a startup certainly has some value since they can theoretically turn that patent into a business and then into profit, i.e., the patent has yet to be tested for profitability. I was referring to mature companies that have patents and try to argue that those patents provide additional value that doesn’t show up in the profits. If a company has a patent and has been unable to generate profits from the patent, the patent has no monetary value. You could argue that the patent could be sold to someone who could turn it into a profitable business, but the value would have to be near zero unless the original owner was so inept (unlikely) they were not properly exploiting the value of the patent. And patents expire, making them worthless eventually.

  3. [Editor: “thisguy” is the guy I mentioned at the start of the post. Obviously, he’s angry because his low revenue didn’t give him the value he wanted.]

    99.999999999999999% of the world would values Twitter at $0. A tiny number of people are speculating that it could one day be worth something and they’re betting with other people’s money that they’re right. Who’s right is a big question. But consider us part of the group of sane and responsible people who think Twitter is worth nothing. But at least Twitter has something your site doesn’t have: people who use it.

    Yeah, crazy idea valuing companies based on money. That’s so un-dot-com bubble and something only dummies like Warren Buffett do. We need to get back to idiots valuing worthless companies in the millions, that’ll help. Or just make hand-wavey projections based on nothing. And the best idea of all is to get a sales guy who has never run a business in his life to be your “advisors” [sic] who is more interested in selling his business than yours.

    You act like YouNoodle is 100 years old and has been the de facto standard for valuing companies! The reality is that there are tried-and-true methods for valuing companies. Just because you don’t know about them or they don’t result in big money for your site doesn’t mean they’re not sound. Look Joe, even the YouNoodle founder said you misused YouNoodle to value your company.

    Joe, you’d be wise to do actual projections based on realistic goals. The hand-wavey BS your “advisor” was pushing wasn’t even convincing to you.

    But there’s one thing I’m sure of: your business is not worth what you think it is. Had you looked at the spreadsheet we sent you, we were generous in the growth and profit potential, which resulted in a generous valuation. Had we used your actual numbers, the valuation would have come out significantly lower. I realize it may be painful to hear, but rather than blame the messenger you should get to work on it and turn it into a real business that makes real money. Then you may get your desired valuation.

  4. I’m not sure why you’re so angry about this. You might check the color of your parachute. Your unique method of courting business was definitely a factor in the figure presented.

  5. We were courting a hobby, not a business. What’s so unique about a phone call? Were you expecting a dozen roses to arrive at your door? A box of chocolates? We didn’t pamper you in the way you’ve come to be treated by all the buyers knocking on your door, eh? Do you have suggestions for us based on your lengthy experience with acquisitions? Or is it just a lame attempt to insult us because you feel like a fool now?

    We were polite and respectful to you throughout the process, worked to understand your current business and its future potential and we gave you a generous valuation. You’re angry at us because we weren’t willing to make you wealthy for no reason.

    Your figure was pulled out of your ass. If it wasn’t, you could explain it in any of the 3 times we asked. But you couldn’t then and you can’t even now. My guess is that it’s based on the price of a Ferrari that you’ve been eyeing moreso than anything to do with your business.

    I thought we left it that you would prove that you could tap some of that “untapped revenue” you said was so easy to get and if you could, we’d talk again about a higher valuation. I assume your burning the bridge here is an admission that there isn’t any untapped revenue, that you have no intention of making your site into a real business and that you you don’t have the ability even if you did know how to do it. I can’t say I’m surprised, you haven’t done anything with it in almost 10 years (other than almost destroy it, I mean), why will the next 10 be any different?

    Good luck, Joe. And good luck finding the color of your parachute, reading more inane self-help books to help you find your way, with your resume-writing and in finding a job. If you treat prospective employers the way you treated us when they don’t fawn all over you, you’ll need a lot more than luck.

  6. A few hours after “thisguy” came here to insult how we valued his site and to insult us personally, he sent us a lengthy email including an apology for his behavior, to tell us that our number was similar to the number he calculated a year ago and that he understood that our valuation was realistic and reasonable. Very weird.

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