Nic Brisbourne the London based venture capitalist yesterday blogged about the lessons of iLike's low valuation. The gist of the article was that iLike, a business based around a Facebook app that allows users to share and interact around music, had been sold for the relatively low figure of $20 million. Nic says;
It seems to me there are two big takeaways here.
1. It is important to build value as well as traffic
Ultimately the true measure of value is net cash flow and it seems that despite being profitable there simply wasn't much scale to iLike's business in revenue terms. I would speculate that is partly because not all their 50m users were very active (it is telling they always quote total registered users not active users) and partly because the inventory they do have doesn't monetise that well. Widgets on social networks suffer from the double whammy of limited real estate in an environment where ads perform poorly.
It is worth noting here, as David Pakman of partner at VC firm Venrock points out, that traffic is often a good lead indicator of value, just not always .
2. Dependence is a weakness
The other big problem for iLike seems to have been that 70-80% of its traffic came from Facebook, making them vulnerable to changes in FB's terms of service or if FB decided to launch their own music service. So iLike was dependent for its future on the good will of Facebook, and If there is even a small chance that iLike could have its ioxygen (sic) cut off nobody is going to risk paying too much for the company. This problem is all the more acute when the company you are dependent on hasn't sorted out its own business model and is somewhat unpredictable
These are very valid points for any web-based business to take on board. Nevertheless I'm just not sure they apply in the case of iLike and I commented to that end. (Updated: Nic has commented below with more insight and futher clarifying the background information. Be sure to read that.)
I'm guessing, but I think iLike's founders and investors probably knew the value of the company they were building. That they cashed out a slightly profitable company at $20 million, with other bidders on hand seems to suggest that they got what they were looking for and where not unhappy with the price. It would have been easy for them to move along thinking they'd grow and/or get more down the line.
This however, is a lesson to the tech media, analysts and all those who build copy cat businesses. Hype does not equate to a high valuation. It seems iLike (quite rightly) didn't believe the hype.