In the previous part
of this column, we briefly looked at some of the trends shaping up in the dotcom world and the re-emergence of interest in portals, especially those with positive cash flow. We also looked at some of the popular revenue generation models adopted by online entities, including revenue from click-throughs, signing up for affiliate
programs and direct advertising by organizations and ad agencies. As I also indicated in the previous column, we will not look at the model of the big portals like Yahoo or Google, but at small niche portals. As a case in point, I will be using some of the insight gained while being associated with GaramChai.com, an informational portal targeting the Indian-American community in the US.
The portal GaramChai.com has several sections, including comprehensive listings of temples, mosques, gurudwaras and other places of worship, listings on shopping, bazaars, art and culture and other regular services and ethnic things that Indians and NRIs in the US would be interested in. Unlike other news or current affair portals, the information on this website is relatively static so the measures of ‘stickiness’ as applicable for a news portal, cannot be applied here.
People looking for information are either knowledgeable about GaramChai.com or find it from links on other portals, or by searching on the Web. The portal ‘market’ is highly fragmented; and with low barriers to entry, anyone with access to the Web can easily
plagiarize content, reshuffle it and present it as their ‘own.This being the case, it is not surprising to find dozens of small players offering a subset of what GaramChai.com has to offer in different segments.
We looked at the sources of revenue earlier in this article. However, that is only half the picture: No business is complete without the income being balanced by expenses. Contrary to popular misconception, even pure online ventures can be expensive (remember the dotcoms burning out of cash?).
Expenses for developing, managing, hosting and advertising an online venture can be an expensive proposition. Even a small or mid-size portal requires at least a few full-time people on the rolls to handle the operational side of things, ranging from responding to requests and queries, to keeping the content fresh and refreshed. Given this income-expense equation, we come to the eternal question of how does one ‘value’ a purely online venture?
Traditional valuation techniques used for assessing the worth of conventional
organizations cannot be used for online ventures. At the same time, online ventures, especially those with positive cash flow (where income is greater than the expenses), are beginning to fall into the same genre of high-tech companies. The caveat is that the ground in the e-commerce and online world is fast shifting; therefore the valuation techniques used in one scenario may not really be the right fit subsequently.
Getting back to the GaramChai.com model as an example. GaramChai.com has partnerships, alliances and click-through agreements with several portals, service providers and
organizations. The source of revenue is varied. Similarly on the expense side, staffing, Web hosting, network access, bandwidth, etc, consume tremendous amount of resources.
A few months ago when there was some interest from an investor, the management of the company responded by attempting a valuation exercise. Though the management was guarded about the specifics, they were able to move ahead with the valuation using commonly accepted techniques. Needless to say, a valuation of 30 or 40 times the P/E was passé. A more modest 15 to 20 times the cash flow was the norm. What this means in layman’s terms is that if the earnings of the portal were about 10,000 dollars a year, the venture would be valued at about 150,000 or 200,000 instead of say half-million dollars or more as it would have been valued during the heady days of the dotcom boom. The caveat here is that the valuation assumes that a similar or better cash flow will ensue in the coming 15 or 20 years. Given the fact that the ‘Internet age’ is less than a decade old, it is hard to
visualize the trends a decade or so from now, so such traditional valuation techniques may not really be apt. Such valuation therefore borders on futuristic predictions.
What does this discussion on dotcoms and valuations mean to start-ups and wannabe entrepreneurs interested in online ventures in 2004? Most entrepreneurs look towards an ‘exit strategy’ even while
conceptualizing their business plans. Trends in valuation of online and dotcom enterprises is probably a good motivator or a trigger to rethink the strategies. Such an exercise can provide clarity to articulate the plans and to evaluate the directions moving forward. The months and years ahead are likely to see scores of new e-business ideas emerge. How many will really make the cut is anyone’s guess. What is certain is that the entrepreneurs who are able to take in the big picture of the changing landscape and work towards innovative solutions are going to retain an edge.
Mohan can be reached at firstname.lastname@example.org.
(The article originally appeared in Express IT People.)
Revenue Sources for Web Portals
- Part I