Basecamp vs. DropSend Valuation Smackdown
Over at Vitamin they are playing the “guess the valuation” game with the seminal Web App, Basecamp. Presumably, the guys at 37signals don’t have Basecamp up for sale, but this is an interesting exercise to work through for anyone who’s ever thought about selling a business of any kind, including a web app.
Valuing a business is a very difficult thing to do. The only true valuation of a business is what someone is willing to pay for it. In this case since Basecamp isn’t for sale, we have to look to other metrics to value it. A common approach is to look at comparables. This means comparing Basecamp to other businesses that are similar that have sold. Ryan suggests some in his post. While they are all recent Web 2.0 era deals, I would argue that MySpace, Weblogs, Inc, Upcoming.org, and YouTube aren’t really appropriate because they are advertising-based business models. Skype is in a different realm altogether. But, MeasureMap, Writely, and Rojo, might be comparables because they are web apps, or services that people would pay for (or not, depending on if Google buys you and re-releases your service for free… hint hint Basecamp).
Although we have presumed valuations for each of those companies, we don’t have the necessary metrics to compare each of them to Basecamp. However, thanks to Ryan’s transparency with the sale of Dropsend, we’ve got a lot of information to compare DropSend and Basecamp. So, let’s get started.
To follow along with our analysis, please open up the Google Spreadsheet here, or see the PDF version here.
DropSend Metrics: We start by building metrics for DropSend based on the public information on BareNakedApp. We break down revenue contribution for each account type, because this is the assumption that we will have to make for Basecamp. We also will use the percentage of accounts that are paid as a metric.
Costs Are Irrelevant: I am not arguing that this is always the case, but it is an assumption for the purpose of this exercise. Development costs are sunk costs. Servers & maintenance are not significant to the valuation because it is going to be heavily based on the value of the intellectual property and moreover the value of the current customers.
Revenue-based Valuation Multiple — For DropSend, we calculate the valuation multiple based on valuation / annual revenue. Revenue is based on 12 x most recent monthly revenue. Some might use trailing 12 months, some might use forward looking, but we are going to keep it simple. The valuation we are assuming to be the $900,000 that Ryan has stated that 3 companies are willing to pay for DropSend. So based on our calculations the valuation multiple is 8.87x.
Extrapolating Account Breakdown for Basecamp. — We know what types of accounts Basecamp has, and we also know what the cost for each one is. Based on Ryan’s comment here, where he and Jason Fried of 37signals are comparing the breakdown of the revenue contribution of each plan, we will extrapolate the breakdown of users over 4 plans with DropSend to 5 plans with Basecamp. Once we do this with Basecamp, we can come up with the revenue contribution for each plan.
Account Conversion — This is a pretty big factor, the number of total accounts that are paid accounts. Both DropSend and Basecamp appear to have a much higher number of users than they do paying customers. Ryan mentions in the Vitamin post that Jason Fried said “Our Basecamp conversion rate is higher than DropSend which was 0.87%, right? I won’t tell you how much higher. Could be just 0.01 higher, but it is higher.” Because its a big unknown to be conservative we will use the Dropsend metric of 0.96% of users are paying customers.
Annual Revenue for Basecamp — Based on the same analysis we did for Dropsend, and the assumptions above, we calculate the annual revenue of Basecamp to be about $5,456,385.
Valuation of Basecamp — Taking the revenue-based valuation multiple we derived for Dropsend and applying it to Basecamp we calculate the valuation of Basecamp to be $48,372,000.
One thing that I always apply to calculations like this that involved a lot of assumptions is whether or not it passes the smell test. If we would have come up with a couple hundred thousand or a number in the billions, I think our metrics might have been off, but $50 million seems like an appropriate valuation. The interesting thing is that this is a number that was tossed around in the comments a few times by other readers on Vitamin.
So, good luck to Ryan with the Dropsend sale. When it sells, and probably for more than the baseline $900,000 that we used for this calculation, that will drive up our valuation for Basecamp. And to the 37signals team, we’re interested to see if there is any action with Basecamp over the next year. I predict that there will be, but with annual revenues where we’ve calculated them to be, they might just want to hang on to their cash cow.
We’d love feedback from our readers on our valuation, and of course if anyone wants to confirm or correct our calculations or assumptions, please feel free.