Maturity models seem to be all the rage at the moment and as I did not want to be left out I have developed my own maturity model to model the relevance of different value drivers as Internet companies mature.
The evidence for this model come from the following trends from my research:
- Internet companies are becoming more profitable over time.
- For young business models (e.g. Community); non-financial drivers play disproportionate role in valuation in the absence of earnings.
- Mature companies (public companies) are judged by whether they meet revenue and earnings targets.
From this evidence I infer that Internet companies go through phases with varying emphasis on value drivers.
The Internet value driver maturity model shows that younger companies are judged more on traffic, whereas more mature companies are primarily judged on financial metrics.
This suggests why pre-IPO companies can command large valuations without established revenue and furthermore why post-IPO their share price falls if earnings and revenue targets are not met. Post-IPO the market has moved the company along the maturity model and thus changed the criteria on which they are judged.
For example, take Facebook whose IPO market value was high relative to its revenue figures. Since its IPO Facebook’s share price has tumbled around 50% after missing revenue targets. Perhaps becoming a public company is a game-changer in so much as the company is now being judged on its financial performance i.e. it has moved along the Value Driver Maturity Model.