It can be hard to understand corporate acquisitions, especially when they are as dramatic as this one. Facebook bought WhatsApp for $19 billion. Like most deals of this kind, it’s hard to judge whether the price makes sense. So I won’t try to address it specifically. But I do think that it's a great moment to talk about what drives value in companies today.
There’s clearly value in WhatsApp. Google made an earlier offer of $10 billion. Many speculate that Facebook had to buy the company to ensure that Google didn't get it.
Both companies were after the 450 million WhatsApp users. The success of all three of these companies is heavily dependent on their users. This kind of relationship capital is one of the big four categories of intangible capital, the other three being human, structural and strategic.
WhatsApp actually already has strategic capital in the form of a business model where they get paid (only a dollar and only after one year but that’s more than Facebook makes from their users). I actually like this because it puts the company in less of a dilemma than many other web companies who have to find a way to extract as much value as possible from their users without driving them away. (Another alternative would be to offer equity to users. This still sounds crazy today but I'm convinced that more inclusive financial models will come in companies with models heavily dependent on free users).
Human capital is critical to any company like this even though at 55 employees, WhatsApp is a great illustration of the leverage that can be gained from structural capital, the underlying software and data in their platform. Until recently the best discussion to my mind of this leverage was Paul Romer’s discussions of New Growth Theory. But right now I’m reading The Second Machine Age and I’m loving the authors' explanation of how the right algorithm can be replicated over and over again.
Getting the right algorithm is the holy grail of our time. It’s the starting point for everyone, including the tech giants. But none of them can succeed without all four forms of capital:
- people to develop the ideas and keep them growing (human)
- technology/processes/software to make the idea repeatable (structural)
- users and customers to co-create (relationship)
- and the right business model to ensure the sustainability and profitability of the system (strategic)
Why do we call this capital? Because they are all economic assets. I can assure you that WhatsApp spent significant sums on all of them. But the accumulated investment isn’t recorded in traditional accounting.
But most people know the assets are there. And most people deal with all these elements intuitively. And if you are a runaway success like WhatsApp, you might not need a more structured approach like we advocate with ICounting—identifying and measuring the key intangibles driving the success of an organization.
Of course, most companies don’t achieve these kinds of dramatic results. And they could use a little extra help to figure out their model and explain it to potential partners and funders.
What do you think? Does the IC perspective help shed light on these value drivers? Would IC information help the markets make better decisions (not just for mega-deals like WhatsApp but also mainstream companies)?
Thanks Mary for a thoughtful answer- I felt you would rise to the challenge, if not from Zuckerberg then from me!
The interesting piece is the value you can extract from each user, today that is one dollar per subscriber, the user base is huge and growing by a million a week I think. They are not going to put advertising in the mix (so far totally resisted) and show little intent on pushing for a subscription model. Same as Facebook continues on a no price model. We are having our models of evaluation ripped up completely and extractive models must be totally different. I think spending $19billion on gut feel would be something, it has to be more within the hidden drivers that needs extracting. Still scratching my head on this and getting plenty of splinters!
That's a great question Paul.
I don't think that the answer is another form of capital. It's a question of how do you measure the capital (see the bottom of our ICounts Canvas--the success of your IC system or factory drives valuation and reputation).
ICounting focuses on identifying and measuring the intangibles that drive success. In my post I identified a few of the intangibles of WhatsApp but you're right, I didn't address the measurement.
Intangibles can be measured using financial, quantitative and/or qualitative means. The purchase price is financial. The number of users is quantitative. You can make a calculation of how much value you can extract from each user and that justifies a price. But looking at a purely extractive model is obviously dangerous when the only thing that keeps a user engaged is that they want to be there. If they feel used or abused, they'll leave.
So an equally important question (probably more important question in the long run) is whether or not you are creating value for users and other key stakeholders. Romer's theory basically says that an intangible knowledge asset has value as long as it continues to solve a problem for a user. It's hard to do that by using inside-out financial or quantitative measures because they are produced from the perspective of the company, not the stakeholders.
That's why we're spending most of our time on outside-in measurement under the theory that the quickest and most accurate way to determine whether a company is creating value for its stakeholders is to ask them.
So if Zuckerberg had called me, I would have made an ICounts Canvas for WhatsApp. And I would tap stakeholders to assess how each of the key intangibles compares with those of the company's peers using the ICounts Graph platform. This would tell him how the company compares with its peers and why.
This doesn't give the numerical answer for the financial valuation. But it addresses many of the hidden drivers and assumptions behind the numbers. I learned to do financial projections and valuations as a young lender when spreadsheets were first created. And I've worked in and around them my whole career. I can tell you with utter confidence that a lot of the modelling is done based on someone's gut feel. Valuation will always be both art and science. But in this case, it's a lot more art than it has to be.
Adding the science of stakeholder assessment is a valuable addition to the conversation.
Did Zuckerberg already know all this? We know that he has good intuition. The question for everyone is why would you rely on your own gut when you have a whole network of knowledgeable stakeholders out there who have more direct experience than you do?
I like the thinking behind this Mary to begin to appreciate valuation in new ways of 'seeing' value. Your article begs a question though: Imagine Mark Zuckerberg gave you a call sometime back and said "Hi Mary, look we want you to make a valuation of WhatsApp for us as we are considering the price we need to pay."
Where and how would you (attempt) to set about this to give one considered assessment based on ICounting. I find it hard to make any form of evaluation of a price even with the magic of the right algorithim or what ever from the New Growth Theory. Are we missing a new subset of capitals here- ones based on Customer Capital?