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To: Mick Mørmøny who wrote (310)12/31/2006 11:43:05 AM
From: Mick Mørmøny
   of 348
A New Way to Gauge a Start-Up’s Worth

Published: December 31, 2006

INVESTORS in young, fast-growing companies have a new way to calculate their value without regard to the prices of other companies’ stocks. This is an important advance, because most other appraisal methods for start-ups are based on relative valuation, which — as we saw at the top of the Internet bubble — grossly overvalues a new company when comparable companies in the same industry are also overvalued.

An Early Growth Spurt The new approach is the brainchild of Andrew Metrick, an associate professor of finance at the Wharton School of the University of Pennsylvania. He calls it a “reality check model,” and he introduced it in his new book, “Venture Capital and the Finance of Innovation” (Wiley & Sons, 2006).

Relative valuation is widely used to analyze start-ups because there seems to be no other choice. After all, a brand-new company has little hard financial data to plug into the standard valuation models that analysts use for mature companies. But by using relative valuation — basing stock value on that of others in the industry — a young company’s share price can occasionally become wildly divorced from reality.

In an interview, Professor Metrick acknowledged the dearth of hard data on start-ups. But he also said that this should not be used as an excuse for “anything goes.” By substituting some reasonable assumptions for the data otherwise needed to apply the conventional models, his model provides its reality check.

One important assumption deals with how fast a start-up’s revenue will grow. Investors are especially prone to exaggerating this, because before a start-up goes public its typical growth rate is very high.

To arrive at a realistic assumption for a specific start-up, Professor Metrick looks at the revenue growth rates of all other companies in its industry after they went public. He assumes that the start-up’s revenues will grow faster than those of 75 percent of the comparable initial public offerings — an assumption that gives the start-up a big benefit of the doubt.

Another crucial assumption involves how long a start-up can grow faster than its industry average. In his research, Professor Metrick found that the median start-up does so for five years after going public. Again, to give start-ups the benefit of the doubt, he assumes they can outpace their industry for seven years.

Armed with these and other assumptions, he can calculate the present value of a start-up’s future earnings. This approach, known as the discounted cash flow model, is perhaps the one most widely to value mature companies. He concedes that the number produced by his model is by no means perfect. But because it makes generous assumptions about start-ups’ growth in several crucial ways, he said, it sends a warning signal if the valuation it reaches is significantly less than the market’s.

Consider Riverbed Technology, a data network company that went public in October. Professor Metrick’s model calculates a value for the company of $184 million, or less than 10 percent of its market capitalization of $2 billion. To bet on Riverbed Technology at its current price, you presumably would need to believe that its revenue growth rate will be even higher than his model already assumes, and that it will beat the industry average for far more than the next seven years. Those are high hurdles, Professor Metrick reminds us.

As an example of a new issue that may be more fairly valued, he offers InnerWorkings, which provides printing solutions to corporate clients. His model calculates a value for this company that is nearly double its current market cap of $702 million.

His model is also helpful as a reality check on companies that have been public for a couple of years and that investors may be valuing on the assumption that their high growth rates will continue forever. In such cases, analysts’ estimates of growth are now available, so the model can rely on them.

Consider the conclusion reached by this model when retroactively applied to Cisco Systems in early 2000, just before the Internet bubble burst. At the time, the market valued Cisco as the most profitable public company. If applied to Cisco then, the model would have calculated it was worth only about one-tenth as much.

That’s a remarkable conclusion, because the analysts themselves were then wildly optimistic about Cisco’s future growth. “The model at that time would have shown that the analysts’ growth assumptions, high as they were, were not nearly high enough to justify Cisco’s valuation,” Professor Metrick said. Cisco’s stock, of course, fell to less than $10 a share in 2002 from more than $80 in early 2000.

AND what about Google, which has risen to around $460 a share from an initial offering price of $85 in August 2004? As with Cisco, Professor Metrick fed into his model the consensus of analyst estimates for Google, rather than basing his growth-rate assumptions on an average of other young tech companies. His model values Google at more or less its current price.

But that doesn’t necessarily mean Google is a good investment at the current price, he says. To believe that it is, you presumably have to believe in the consensus growth assumptions of analysts. Still, he added, his model shows that the market is not overvaluing Google anywhere nearly as much as it did Cisco in 2000.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail:

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From: Paul Chiu2/20/2007 4:06:24 PM
   of 348
Hey Liz,

Are you back in GOOG?

Seems like it has constructed a base.


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From: Paul Chiu4/19/2007 9:16:00 PM
   of 348
hey, where is everybody?

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To: Paul Chiu who wrote (315)5/3/2007 6:12:32 PM
From: TimF
   of 348
Subject 53541

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From: Sr K5/15/2007 2:58:23 PM
   of 348

'Backdating' lawsuits go nowhere, for a reason
Commentary: Novellus suit, like earlier one against Xilinx, is dismissed

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From: Sr K5/27/2007 8:59:41 PM
   of 348
In Fierce Competition, Google Finds Novel Ways to Feed Hiring Machine

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To: KeepItSimple who wrote (309)5/27/2007 9:01:37 PM
From: Sr K
   of 348
That's how Grey Goose was marketed.

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From: Sr K5/30/2007 9:17:25 PM
   of 348
OT but related to Google:

First and Long — Very Long
Published: June 3, 2007

Bill Hambrecht is a rich old Wall Street guy who has made his money tilting at windmills and disrupting the establishment. “That’s what I do,” he says. “It’s fun.” Almost a decade ago, at 62, he founded WR Hambrecht + Company, whose fundamental premise is that companies don’t need to use Wall Street investment bankers — and pay their outrageous fees — to go public. Hambrecht + Company has since become so threatening to traditional underwriters that they often refuse to be involved in any I.P.O. in which his firm takes part.

And now, at an age when most people are well into retirement, he has decided to tackle the establishment again. This time, though, the establishment isn’t Wall Street. It’s the National Football League. Bill Hambrecht, you see, is starting up a professional football league. So far, he and his partner, Tim Armstrong, a senior executive at Google, have pledged $2 million each. They’ve hired a C.E.O. and a C.O.O., both of whom cut their teeth at the National Basketball Association. They’ve got a name: the United Football League. And they’ve lined up a wealthy, well-known businessman as their first owner: Mark Cuban, the billionaire who owns the N.B.A.’s Dallas Mavericks. Like Hambrecht, Cuban loves nothing more than confronting the status quo.

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To: Sr K who wrote (320)5/31/2007 12:18:10 AM
From: Lizzie Tudor
   of 348

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To: Lizzie Tudor who wrote (321)6/9/2007 10:48:25 AM
From: Lizzie Tudor
   of 348
I haven't posted on a goog board for a while- I didn't have a GOOG thread bookmarked other than Pauls thread which is not really fundamental, I looked up the GOOG threads and there are about 20. Not sure if people still read this one.

Anyway, GOOG made some changes on June 1 which is affecting click throughs and MFA sites and arbitrage. They are trying to shut down 3rd party sites I think, those sites that used to show up in SERPs for blind queries like "shoes" that had nothing but ads on them.

From WMW:
Based on the first three days of June, I am seriously disappointed. I know it's still early in the month, and with three weak days at its beginning it will probably catch up, but unless a miracle happens, I'm still on track for a bad month.

- EPC is worst since September 2005 (!)
- CPM is slightly better than previous months, but down about 20% compared to last year
- CTR is close to record high (June 2006)
- Site targeted ads ("CPM ads") are close to zero

Let's see how it develops.

#:3358179 4:50 pm on June 4, 2007 (utc 0)

CPM is down slightly, but eCPM is up about $4.00 to a level I haven't seen since the good ol' days of the Big Daddy rollout.

Only 4 days into it, June is looking like the best month since last Fall.

#:3358269 6:13 pm on June 4, 2007 (utc 0)

I think the main indicator to monitor is your earnings per click EPC over a longer period than just few days.

Good point, that too if you have multiple sites then study only the high traffic site, since the traffic changes can affect the EPC as well, across multiple sites it is difficult to understand.

#:3358561 12:24 am on June 5, 2007 (utc 0)

My earnings have been higher than ever before. I have a very small site and last month I earned around $20(really small site lol), so far this month I've earned over $15. I'm getting about 5x more clicks each day than normal, so whatever Google changed I'm very happy about it.

#:3358996 11:32 am on June 5, 2007 (utc 0)

I don't know so far about June (I gave up checking my stats everyday a long time ago).

But for May my income doubled. Same traffic but click value doubled therefore income doubled.

Obviously I'm very happy but why has this happened but I'm cautious and thinking that it might be just a short term thing.

Any ideas or anyone else seen a big increase in the value of their clicks from 1st May onwards?

[edited by: Calculus at 11:32 am (utc) on June 5, 2007]

#:3359007 12:16 pm on June 5, 2007 (utc 0)

No but from june the first its gone up markedly!

#:3359144 2:28 pm on June 5, 2007 (utc 0)

My earnings have increased by 25-30% since the end of May. Also, pages that produced 3 cent clicks are now producing 10 cent clicks, though I don't know if I can chalk that up to the MFA shakeup.

#:3360783 4:26 am on June 7, 2007 (utc 0)

Seeing a nice increase in EPC since start of June. Back to last years levelsafter being dismal from the start of 2007.


#:3361806 5:09 am on June 8, 2007 (utc 0)

CTR, eCPM and ACP (average click price) all up 20%

Same traffic volume as May.

Means I'll get a normal check in the summer and a larger one in the fall. (usually I have a 20% dip)

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