Posted on July 3, 2007
Filed Under Web 2.0 Kool Aid |
The valuations placed on a number of Web 2.0 startups have raised some eyebrows. From rumors that Digg is worth in excess of $250 million to statements that Facebook is on its way to an $8 billion valuation, there is no shortage of hype about the value successful Web 2.0 startups are creating.
I will leave a discussion on the valuations given to “established” Web 2.0 startups like Digg and Facebook for a later post. In this post, I’d like to comment on Geni, which has raised eyebrows by raising $10 million seven weeks after launch in a round that gave the young company a $100 million valuation.
Michael Arrington today reports that after five months, Geni has “5 million profiles” and suggests that the addition of “features that have proven to be successful at creating growth at Facebook and other social networks, suggesting that valuation may not be as crazy as it seems at first blush.”
Is Geni’s valuation as crazy as it appears or is there something to Arrington’s comment? I think the best place to start in analyzing this is with a simple overview of some of the key factors institutional investors consider when valuing a startup:
- The market. How big is the market the company targets?
- Growth strategy. How does the company plan to gain marketshare?
- Competition. How competitive is the market the company targets? Does the company have a sustainable competitive advantage?
- Business model. How will the company make money? Has the business model been validated in any way?
- Financials. How do the economics of the business work? Does the company have revenue? What is the near-term and long-term financial outlook?
- Risks. What risks does the company face?
Traditionally, companies that are well on their way to answering some of these questions with real-world validation command higher valuations. For instance, a company that has validated a business model is probably more appealing than one that is still working on one. A company that has revenues is probably more appealing than one that doesn’t. A company that has established a strong position in a competitive market is probably more appealing than one that hasn’t.
Early-stage technology startups typically have fewer answers than questions, and increased risk because of this tends to result in greater rewards for investors if these startups become successful. Of course, success typically comes in the form of an IPO or acquisition, and therefore valuation takes on an extremely important role in determining the future of the business. Invest at a valuation that exceeds the likely valuation the company could receive in an IPO or acquisition, and problems arise. For instance, a company that raises money at a valuation that exceeds the amount any potential acquirers are willing to pay may thwart what would have otherwise been a successful exit. The venture capitalists who typically fund inherently risky technology startups are well-aware of all this. Give too sweet a deal and you might be shooting everybody in the foot. This is why investors typically invest at higher valuations over multiple rounds, when demonstrable progress in creating value exists and can justify an increasing valuation in each round.
Therefore eyebrows went up when Geni, a startup only seven weeks old, raised $10 million on a $100 million valuation. Is this further confirmation of Bubble 2.0 or did Geni’s investors have a logical reason for doing what appears at first glance to be unthinkable?
So what is Geni?
Geni is a tool for understanding and staying in touch with your family.
Geni lets you create a family tree through our fun simple interface. You can expand your tree by adding relatives’ email addresses. They will be invited to join your tree and can add other relatives. Your tree will continue to grow as relatives invite other relatives.
Each family member has a profile which can be viewed by clicking their name in the tree. This helps family members learn more about each other and stay in touch. Family members can also share photos and work together to build profiles for common ancestors.
Geni is private. Only the people in your family tree can see your tree and your profile. Geni will not share your personal information with third parties. We will not sell your email address or spam you. Users control which communications they would like to receive from us.
Let’s evaluate Geni point-by-point.
Genealogy is a popular hobby and there is a large cottage industry of genealogy-related services. Most revenue in this market appears to be generated through the sale of products and services.
As per its own service description, Geni is relying on the viral effects made famous by services like MySpace and Facebook to grow its service rapidly. Clearly, the fact that it has acquired 5 million profiles in a matter of months indicates that this growth strategy has had some success. Note, however, that profiles do not equate to actual registered users. According to Michael Arrington, when Geni had 2 million profiles it had 100,000 registered users. Therefore it seems logical to conclude that Geni currently has several hundred thousand registered users. This type of growth is not too shabby, however there are a considerable number of other online services that have similar numbers and we do not know how many of these registered users are “active.” Additionally, Geni’s Alexa and charts raise questions about the momentum of Geni’s growth.
Geni finds itself in a competitive market. There are numerous genealogy software packages and numerous online genealogy services. A company called The Generations Network (formerly MyFamily.com, Inc.) owns and operates myfamily.com, ancestry.com and genealogy.com, amongst others. It claims to have a database of more than 4 billion searchable records and 60 million images. In business since 1983 and offering a number of paid services and subscription offerings, it would appear on the surface that The Generations Network is a profitable business and the market leader.
Additionally, it should be considered that social networks such as MySpace and Facebook pose a competitive threat to Geni, as family members do use these to stay connected with each other, even if these services are not family-oriented like Geni.
It appears at this time that Geni’s business model is advertising. I would assume that management and investors consider paid services a future possibility.
Given the fact that Geni appears only to be generating revenue from advertising, at the current time it is most likely very close to being considered a “pre-revenue company.” I am not qualified to assess its future revenue potential, as I obviously do not have intimate details about any future business models, nor do I have financial information for The Generations Network, which would serve as the best comparison. It should be noted, however, that The Generations Network acquires a significant amount of data through means other than user-generated input, and its database is significantly larger than what Geni is likely to have in the foreseeable future.
Geni faces all of the traditional risks of an early-stage technology startup, which are not worth mentioning. The most significant risks specific to Geni, however, include:
- Lack of user retention. Geni at its core is a service that is easy to sign up for, use for a short period of time and then leave never to return again. Clearly, this is why the company has been adding “sticky” features that are commonly found on social networks. Ostensibly the company hopes that these features will help it become “a place for families.” This strategy could potentially work, but one should note that this makes Geni “yet another social network.” Additionally, while genealogy is a popular hobby, the number of people who are actively engaged and passionate about it on a regular basis is probably more limited than those who have a passing interest. for an interesting perspective on the topic.
- Lack of compelling utility. Like most social networking services, Geni’s utility increases the more registered users (and in this case, total profiles), it has. While its current dataset is not a bad start, it is extremely small compared to those offered elsewhere, and many people interested in acquiring family data will not be interested in entering their own data (they would rather purchase a family tree, for instance).
- Poor data quality. It’s no surprise that the accuracy of genealogy data can vary greatly. Services that acquire genealogy data from sources other than user-generated input logically have a more compelling value proposition to paying customers.
- Low defensibility. Geni’s technology does not appear defensible, and established competitors with existing audiences are likely to roll out similar services of their own, if for no other reason than the fact that Web 2.0-style services are hot. The Generations Network has already done so with MyFamily.com.
Taking all this into consideration, I think it’s difficult to argue that seven weeks after its launch, Geni had created a business worth $100 million. It’s difficult to argue that it has created that much value even five months after launch.
When we look at companies that have been acquired recently at or in the vicinity of $100 million, I think Yahoo’s acquisition of Rivals.com serves as a decent example of what $100 million in value might look like in a sane world, even if it is obviously not an apples to apples comparison. At the time of acquisition by Yahoo, Rivals.com was reportedly profitable and had around 185,000 subscribers paying $9.95 per month or $99.95/annually. Despite that, some felt that Yahoo overpaid. What does this say about a company like Geni, whose growth and revenue outlooks have some serious questions? I think it confirms what most of us know as common sense already: you can’t make $100 million in five weeks when you’re starting with nothing.
The most challenging question for Geni and its investors is: how has its astronomical valuation impacted its future? The bar has been set extremely high for any exit, especially given the fact that most venture capitalists are looking for a nice return on their investment (gasp!). Given the analysis above, it seems logical that Geni has a significant amount of work to do before any potential acquirer would ever entertain the possibility of buying the company at such a valuation, let alone its current one. At this stage of the game, there are a lot of questions as to whether it will ever be able to justify a valuation equal to the one its backers have given it. I wish Geni and its investors the best of luck, but I think nothing short of a genie willing to grant them a wish will see this resulting in a happy ending.
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