The following recommendations have been drawn from the research targeting a range of stakeholder groups who are involved with publicly listed companies.
Management looking to maximise valuation should concentrate on growing revenues not cutting costs
While cost cutting may have some effect on market value, the data point to revenue as the dominant driver of market value for Internet businesses as a group.
Generating revenue for Internet companies takes time and many firms are heavily loss making until they find ways to monetise their traffic or assets. However by the time a company IPOs it needs to have successfully developed its financial metrics or it will be pressured by the financial markets to do so.
Know your business model and understand its specific drivers
Whilst revenue is the dominant driver of value across the aggregated population I found that not all business models have the same drivers. With this in mind it is essential that managers understand those value drivers that most impact their business model.
Be aware that drivers change based on the maturity of the company
The Value Driver Maturity Model suggests that value drivers move from being dominated by non-financial when a company is young, towards financial drivers as the company matures.
As a business reaches its strategic milestones it must assess whether it has moved along the maturity curve. If it has then it needs to change it focus and this should be reflected in its management-reporting dashboard. If a company fails to recognise that it is now being judged more on financial metrics this may negatively impact its share price.
B2B and Ecommerce companies should concentrate on financials
B2B companies should concentrate on revenue to drive their market value. The data showed the market value of B2B companies is not driven by traffic at all. This is perhaps because the B2B market is smaller and transactions are typically of lower frequency and higher value.
Ecommerce companies are driven by earnings and to a lesser extent revenue, like B2B companies their value drivers are purely financial. Ecommerce companies should focus on improving their profit margins, either through increasing scale or by backward integration along the value chain.
B2C companies should focus on traffic with the long-term focus on revenue
B2C companies are primarily driven by traffic. Therefore the mentality for new companies in these categories is to grow traffic at the expense of earnings. This means a higher degree of external investment will be required to fund the growth phase. This approach implies that breakeven may be later than for traditional businesses, as a revenue model may not be developed until a critical mass of users is established.
Low barriers to entry mean new businesses should be confident about entering the market
I found no relationship between market value and age, which dispels the notion of the ‘first mover advantage’ producing long-lasting competitive advantages for Internet companies. The data shows that there is a good chance that new entrants are able to overcome industry barriers to entry. This is perhaps due to the fast pace of change or because customer switching costs are low.
Venture Capitalists (VCs) should look for ‘home runs’ in the Community, Content and Marketplace categories
Business models vary in their attractiveness with some categories achieving higher median valuations. Most notably Community, Content and Marketplace have the most attractive market values. VC returns have been dominated by a small number of very large winners (Fraser-Sampson, 2010); these home runs can make or break a fund. Therefore VC funds should concentrate on funding companies with the highest-ranking business model to give them the best chance of achieving home runs. However it could be argued that focusing on the most successful categories could potentially mean competing with the most successful companies.
Investors should consider looking at traffic data when analysing opportunities
Investors who invest in Internet companies should consider trends in traffic data especially for Content and Community categories. Especially in early-stage companies the traffic growth trajectory can be indicative of future revenue, assuming that management have a proven revenue model to convert the traffic into profit. Finding appropriate databases of Internet traffic is not easy and each database has its own advantages and disadvantages. However the benefits of utilising traffic data could give investors an edge in picking the best performing stocks.
Non-US firms might reconsider listing on a US stock exchange
The data weakly concluded that non-US firms are not priced as favourably when compared with their US counterparts. This loosely suggests that non-US companies might be better off listing in another geography (such as Europe). However there may be other attractions to listing on the US exchanges that are not factored into the price, such as access to capital, the credibility gained from listing in the US or access to lobby or special interest groups.
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