Basecamp vs. DropSend Valuation Smackdown

Basecamp vs DropsendOver 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Thinkature.com | The Idea Fuel Interview

ThinkatureToday we are pleased to inaugurate a new interview series on the Idea Fuel blog. A few weeks ago, as I was digging in deep on Y Combinator, I mentioned that I thought Thinkature was the coolest of the current crop of Y Combinator companies. Jon Chambers from Thinkature and I traded a few emails back and forth and they agreed to answer some questions for an interview to be posted here. We really appreciate their effort and are excited to share their comments.

Jon Chambers and Drew Harry are Thinkature. In our interview they talk about establishing their own identity outside of Y Combinator, what sources of traffic convert the best, and why Web 2.0 is simply a temporal designation.

1. What is Thinkature?

Thinkature is a collaboration tool that brings the richness of in-person, visual communication to the web by placing instant messaging inside a visual workspace. It runs inside a web browser (with no extensions or plugins) and allows anybody with a connection to the Internet to communicate in real time via chat, by moving objects around in a workspace, and by adding pictures to express complex ideas.

2. Where did the idea for Thinkature begin? Is it something you started for fun, or did you set out to meet a specific need?

Y Combinator had been something we thought about doing since its first summer. We actually submitted an idea to the first session, but got turned down. After that, we continued to let ideas ferment, and submitted two of them to the second round of Y Combinator (Winter, 2005). Paul Graham wasn’t excited about either of our ideas, but wanted us to come in for an interview anyway. We had about 4 days to come up with something new, so we just started brainstorming from scratch. The Thinkature concept came out of us thinking about activities that we did a lot offline that weren’t effectively supported online.

3. Is Thinkature your full-time job? If not, do you hope one day it will be?

Thinkature is Jon’s full time job, but Drew is primarily a student at the MIT Media Lab.

4. If you have more than one person working on Thinkature, can you describe your team for us? How many people do you have? What are your backgrounds? Were you looking for any body in particular (i.e. creatives, hard-core developers, etc.)?

We lived together for our first two years at Olin College, so it was more of a situation of starting with a team and looking for a project. We knew we worked and lived well together, so it made sense to do a startup together. We both do more or less the same things – design, development, testing, community relations, etc. The biggest division is that Drew works mostly on the server-side technology, and Jon does the client. Though, Jon’s been filling in on the server side these days too.

We’re don’t really fit the stereotype of “web startup guys.” Neither of us has a serious computer science background, and we are (for the most part) as interested in understanding how people interact with technology as we are with how, for instance, our database interacts with the web server. We’ve got a diverse background that’s been really helpful for us. Jon’s a mechanical engineer by training and wrote a thesis about how we teach the American Civil War in different parts of the United States. Drew has an electrical engineering background and worked on an anthropology thesis.

5. Thinkature is a Y Combinator company. Did you submit during the winter or summer funding round? How has it changed your life being a Y Combinator funded company?

We were accepted during the second Y Combinator round, but wanted to finish our degree off before starting, so we were really involved in the third Y Combinator round (summer). Y Combinator was most helpful for us because it catalyzed our ideas, focused our energy, and gave us milestones to work towards. They also provided a community of founders to bounce ideas off of, commiserate with, and have dinner with once a week.

There are also some downsides to being a Y Combinator company. We’ve found that people often identify us as a Y Combinator startup before identifying us by our own merits. That’s been making it a little difficult for us to build our own brand, since commentary about us tends to also be about Y Combinator in a way that doesn’t seem to happen with other investors. You can see this in action on the reddit post about Thinkature’s launch. One of the threads is a complaint about Y Combinator, and the only thing the poster had to say about us other than our name was that we’re a Y Combinator company. Part of that is particular to Reddit, but being a Y Combinator company is a very real part of who we are and how people understand us.think-ex.bmp

6. What do the next 6 months look like for you? The next 2 years?

In the short term, our goals are to get Thinkature in front of as many people as possible and understand how they’re using it. From there, we’ll adapt to what our users want. We have a lot of really exciting ideas for improving Thinkature, but we’ll need more people to make the ideas real. We’ll be spending a lot of time in the next few months trying to build our team.

7. What are your most used/most requested features? Did this surprise you? (Did you think people would use Thinkature for one reason, and it turned out they use in a completely new way?)

The Thinkature you can use today is the lowest common denominator of a lot of different use cases we’ve talked about. So our hope was that when we released Thinkature, people would see very different possibilities in it. We’ve been thrilled to see that’s the case. A quick survey of the comments about Thinkature on del.icio.us reveals a wide variety of ways in which people have interpreted Thinkature. We’re thrilled about that. Looking at specific features, we’ve had a lot of requests for better text formatting, some smarter/more drawing features, and exporting.

Another interesting phenomenon is we’ve had a number of requests not to add more features. A lot of feature requests read something like “I’d like to see more line coloring options, but I know it would make the application more complicated, so it may be better just to leave it the way it is.” That’s music to our ears. We’re certainly going to continue to add features, but only when we’re really sure they’re executed well and fit with Thinkature’s overall vision.

8. Do you have any particular marketing strategies that you would like to share? Has something worked well for you?

Our users have had nice things to say about us, and that’s carried us a long way. We’ll be the first to admit that we haven’t devoted much energy to marketing, but it’s been going well for us thus far.

9. Can you share any usage or traffic stats? How quickly are you growing?

We’ve been really pleased with our growth. We’re not seeing enormous traffic, but then we never really expected that. New users are registering consistently, and we’re seeing well above 10% of our unique visitors registering for accounts. We’re seeing lots of users continue to come back day to day. Thinkature is a real part of a significant fraction of our users’ lives, which is more important to us than just getting hits.

There’s one other tidbit we’d like to share. We’ve been obsessively watching referrer logs, and we’ve gotten a lot of traffic from StumbleUpon. About a quarter of our total traffic came from them. The problem is that StumbleUpon traffic is cheap. That is to say that SU users (as far as we can tell) don’t tend to linger very long. We also had a radically lower conversation rate for users coming from StumbleUpon. The flip side of that is that getting written about on TechCrunch wasn’t nearly as good for traffic, but had a radically better conversion rate than traffic from anywhere else.

9. Can you share some obstacles you’ve faced along the way, or are still facing?

The server-side technology we’re using is, we think, fairly innovative. It’s been a real challenge to make lots of the networking things happen (we do things that web browsers were never really meant to do), but it’s also been immensely rewarding to see things come together.

Building large applications in JavaScript is also a fairly new practice. While there are lots of great communities growing, there’s precious little literature about things like best practices in application design and profiling. We’re trying to help that by writing about what we’ve learned in articles like one on profiling Javascript applications. Hopefully this will help build the state of the art in this area.

10. If it were all over tomorrow, what’s your of what accomplishment proudest so far?

The most gratifying part of Thinkature has been making something that people like. It’s an amazing feeling to see people from around the world appreciating something into which you’ve put 6 months of love and effort.

11. How would you define Web 2.0? Are you 2.0?

We feel like “Web 2.0″ is a temporal designation more than anything else. The term includes too many ideas ranging from usability to social software to business models to technologies. It’s become so overloaded that it doesn’t effectively exclude many modern web applications. Asking Flickr if they’re a Web 2.0 application is like asking Smashing Pumpkins if they’re a 90’s band. All the term Web 2.0 really does is describe a web application as being in a particular era. So yes, in the sense that Web 2.0 describes modern applications, we are Web 2.0. But we’re more different than we are similar to iconic sites like del.icio.us, Basecamp and Writely. We are an application that happens to share some technologies with web pages much more than we are a website that happens to behave somewhat like an application. That’s not to disparage more classical web applications – for some kinds of applications the web metaphor is quite appropriate. But for what we wanted to do, it just didn’t make sense. Also, see our longer response to this question on our blog.

12. What site(s) do you visit everyday other than your own? What Web apps/software are you currently using?

Drew: I use del.icio.us religiously to keep track of stuff I’m working on and keep up with friends. Our friends at alwaysBETA introduced me to newshutch.com for RSS reading. It’s not great (it’s got some frustrating encoding issues) but it’s better than Bloglines. I’m a huge Metafilter fan, too. It’s not really a web app, but as communities go it’s pretty excellent. That’s about it for me, other than various Mac apps I use. I’m pretty picky about committing to new sites.

Jon: Del.icio.us is fantastic. It’s also easy to forget that Gmail, which I use daily, is a web app. I aggregate content from a really wide range of sources including NPR, Penny Arcade, Ars Technica, CNN, WorldChanging, Reuters, and a ton of personal blogs.

***

I have personally used my Thinkature account to convey whiteboard-style communications to my team, and it has worked great for that. We really like it, consider ourselves users, and recommend that you check it out. Thanks to Jon and Drew for participating. We appreciate their insights and wish them the best of luck with Thinkature.

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