How is the Financial Crisis Affecting the Values of Social Networking Companies

Social networking companies are probably among the most difficult companies in the economy to value. The primary reasons include:

1. There isn't much data about them
2. There haven't been that many exit transactions for these companies
3. While many financial analysts feel that their business model is suspect and that their valuation multiples are unjustified, acquisitions of these companies have demonstrated very, very high valuation multiples

Take, for example, the case of Facebook. Microsoft acquired a 1.6% stake in the company valuing it at $15B. This represented a 100x EV/Revenue ratio and an astounding estimated 429x EV/EBITDA ratio. When we went to come up with valuations of the world's top social networking sites we were seriously challenged because on the one hand we are equally doubtful that these companies underlying fundamentals are adequate to justify such high valuations but simultaneously we personally believe that Microsoft would probably be willing to buy all of facebook at $15B. This last point ended up trumping the first point--because valuation experts generally agree that "fair value" refers to "the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts." So we believe that Social Networks are generally worth what other companies are willing to pay for them--which despite the crazy financial crisis is still probably quite high. In any case, you can see how valuation ratios for social networks have been harmed by the financial markets here. Median EV/Revenue ratios have fallen from 10x to 3.5x and median EV/EBITDA ratios have fallen from 25x to 12.4x.

Here is our list of Social Network valuations--click on the hyperlink to see the valuations:

1. Facebook: 2008 Revenue--$325M
2. MySpace: 2008 Revenue--$755M
3. Classmates: 2008 Revenue--$91M
   
4. LinkedIn: 2008 Revenue--$65M
   
5. Reunion.com: 2008 Revenue--$60M
6. Bebo.com: 2008 Revenue--$32M
7. Tagged.com: 2008 Revenue--$16M
8. Friendster: 2008 Revenue--$10M

Let us know what you think or simply create your own valuation using your tool if you disagree with our high valuations!