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)?