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We all read on TechCrunch about the huge Internet acquisitions that are seemingly made every week. YouTube sold for over a billion dollars, Bebo sold for $850 million, etc. While those big acquisitions get all the headlines, there’s a very active market in buying and selling smaller websites that doesn’t get nearly as much notice.  For every YouTube that has tens of millions of users, there are hundreds of thousands of websites with smaller, but attractive audiences.

While looking into the market for buying and selling smaller websites (generally with price tags under $1 million) I’ve noticed that there’s a huge discrepancy in valuation metrics that smart investors will take advantage of.

Revenue multiple

With some notable outliers (YouTube being one of them), larger, established websites generally have been valued at anywhere from 3X to 10X annual revenues.  Take the recent acquisition of Pluck, for instance.  Pluck’s reported revenues were $10M a year and the company was sold in March for $75M - 7.5X annual revenue.

Now let’s compare this to revenue multiples found on Sitepoint, one of the largest, most active marketplaces for smaller websites.  According to a recent Sitepoint analysis, sites sold on Sitepoint go from 10X to 24X monthly revenues.  In other words, a revenue multiple of just .83X to 2X annual revenue.  A typical recent sale was the celebrity gossip blog which sold in July for $90,000 - a multiple of only 8.6X monthly revenue (ie .71X annual revenues), which was listed at $10,500.

Cost per user

The disparity in valuation metrics of large vs. small website acquisitions becomes even more glaring when you look at the cost (or sales price) per user.  For sites without much revenue, price per user can often be a more accurate gauge of a site’s value than revenue multiple.

Let’s first look at some large website examples:

eBay acquired StumbleUpon for $75M last May.  At the time, StumbleUpon had 1.4 million unique users per month, so the price per user was $53.57.

Discovery Networks acquired for $250M last October.  At the time, HowStuffWorks had 3.9 million unique users per month, so the price per user was $64.1.

If one looks at a number of larger acquisitions, the price per user ranges anywhere from $20 to over $200.

Smaller websites go for much, much less.  An analysis I did of 27 recent sales on Sitepoint reveals that the average price per user was just $0.34 - 58 to 580 times less than the range for large websites.  Of those 27 sales, only 2 sites were sold at a valuation of more than $1 per user.  Going back to our CelebParasite example, that site was sold at a price per user of just $0.11.

Now one can certainly argue that the value of a HowStuffWorks user is worth more than a CelebParasite user, but are they really 58 times more valuable?

Future posts will explore various ways of taking advantage of these valuation discrepancies.