ExitsStartup general interest

The lessons of iLike’s low valuation

By August 20, 2009 9 Comments

As you may have seen it is heavily rumoured that Myspace is about to acquire social network based music site for around $20m (including $6m for employees).  On the face of it that seems like a low valuation for a business with 50m registered users, that is profitable and had offers from multiple buyers, according to Techcrunch.

Reading around all the blogs it seems to me there are two big takeaways here.

1. It is important to build value as well as traffic

Ultimately the true measure of value is net cash flow and it seems that despite being profitable there simply wasn’t much scale to iLike’s business in revenue terms.  I would speculate that is partly because not all their 50m users were very active (it is telling they always quote total registered users not active users) and partly because the inventory they do have doesn’t monetise that well.  Widgets on social networks suffer from the double whammy of limited real estate in an environment where ads perform poorly.

It is worth noting here, as David Pakman of partner at VC firm Venrock points out, that traffic is often a good lead indicator of value, just not always :).

2. Dependence is a weakness

The other big problem for iLike seems to have been that 70-80% of its traffic came from Facebook, making them vulnerable to changes in FB’s terms of service or if FB decided to launch their own music service.  So iLike was dependent for its future on the good will of Facebook, and If there is even a small chance that iLike could have its ioxygen cut off nobody is going to risk paying too much for the company.  This problem is all the more acute when the company you are dependent on hasn’t sorted out its own business model and is somewhat unpredictable.

Note that building a business on the back of another well performing business isn’t an inherently bad idea, but it carries its risks and if it will hurt you on exit unless you partner equivalently with other companies (in this case Myspace, Bebo etc.), have a partner who is very big and stable (there are any number of businesses dependent on Google that have exited successfully, including our former portfolio company buy.at which was acquired by AOL at a healthy price), or somehow make the other business depend on you just as you depend on them (as Photobucket did with Myspace).

The good news that comes from this analysis is that iLike’s fate needn’t be everyone’s fate.  If you are creating genuine value then I think the exit will still come – look at Friendfeed – but if the value isn’t there I guess the game is now well and truly up, but we probably knew that already.