MySpace as comparable to valuations of Web 2.0

Let's take one of the well known success stories in terms of Web 2.0 exit: MySpace, which was acquired by News Corporation for $580M in July 2005. At that time, the Web 2.0 frenzy was not yet overheated, so analyzing this case can be used as a baseline for later valuations like the investment in Geni earlier this year.

At the time of the buyout MySpace had some 25,000,000 registered users ("Profiles"). This means News Corp paid about 25 bucks per registered user.

This is not cheap; yet it seems that buying MySpace was probably a wise decision by News Corp; the results speak for themselves as you can see in the graphs below.

(Note: the graphs were compiled from publicly available data, and are not formal material released by News Corp / MySpace)

So less than two years ago, the price tag for a site with the strongest brand in its space was set at $25 a user. How does this compare to the estimated $500 per user, as reflected from the $100M valuation of Geni by Charles River as I calculated in this post?

Food for thought.

Geni raised $10M at $100M valuation

So the hot new genealogy ("family tree") site, Geni, succeeded in raising $10M from Charles River Ventures - at an amazing post-money valuation of $100M.
What does that mean? Let's think for a minute. Geni reports that they have some 200,000 registered users, who have creates nearly 2 Million entries in various Family Trees ("Nodes"). When trying to figure out the real value of the company, the only hard figure one can rely on is the number of registered users; the registered users are the ones who create and update the Nodes, but the number of nodes in and as of itself does not really represent the online presence on the site.
So 200K users are valued at $100M - that's $500 per registered user.

There are two ways to try and understand such a number.

1. The lifetime-revenue that Geni will generate from every registered user is $500. How will this revenue be generated? Premium registration - if they choose to implement that - will give at best a couple dozens bucks a year. Assuming a user stays registered and active for 3 years (VERY optimistic), this is still less than $50. The other $450 will have to come, one way or another, from advertising. That's $150 a year. Hello? Is anyone in the industry aware of a way to make $150 a year from a registered through advertising?

2. Since there is no real economic sense to this valuation, another option is using comparable: looking at other companies in the same space and in similar stages which have raised capital recently, figuring out what metrics were used by those investors to decide the value of the companies, and applying the same metrics to the company at hand. For example, if company X was invested at $50M post money with 100,000 registered users, and Geni has 200,000 users - simple arithmetic: Geni is worth $100M post money.

I am going to take some educated guesses at which companies were used as comparable valuations by CRV - in the next posts.

Anyway, the flaw in this simple logic is the herd effect: once a few "respectable" investors set the bar high enough, others will follow suite. And shortly after, the entrepreneurs start to believe these valuations, and the price tags they put on their companies begin to soar. And if some investors hesitate, thinking the valuations are overblown - there will always be someone else standing in line to invest.

Does anyone begin to get a feeling of Deja Vu? A drift of wind from 7 years ago? Is the bubble back?