“When it comes to valuation, making money is a real obstacle” | FT Alphaville

“When it comes to valuation, making money is a real obstacle”

Twitter generated yet more media attention on Thursday, as the WSJ’s Deal Journal blog broke news of a fresh-round of fundraising that values the microblogging service at around $1bn.

We shan’t add to the ink and pixels spilt on that particular venture. Instead, at FT Alphaville we thought we’d highlight another tech company which disclosed an apparent multi-billion-dollar valuation on Thursday.

Sort of.

37signals, developer of web applications designed in the spirit of getting things done, issued a press release announcing a “bold VC investment” that pushed its valuation into the stratosphere. No one rushed to write the story, which is not all that surprising given the maths behind that valuation:

CHICAGO-September 24, 2009-37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.

Founder Jason Fried informed his employees about the new deal at a recent company-wide meeting. The financing round was led by Yardstick Capital and Institutionalized Venture Partners. 

We particularly liked this next bit, which poked fun at Twitter’s current all-hype no-revenue model:

In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”

Proof that 37signals is now a $100 billion dollar company.

A $100 billion value for 37signals is “not outlandish,” says Aanandamayee Bhatnagar, a finance professor and valuation guru at Grenada State’s Schnook School of Business. Bhatnagar points to a leaked, confidential corporate strategy plan that projects 37signals will attract twelve billion users by the end of 2013.

How will the company overcome the fact that there are only 6.8 billion people alive today? “Why limit users to people?” said Bhatnagar. 

We will also be adopting 37signals valuation model for if ever we decide to IPO the Long Room:

In order to determine the valuation of companies, Bhatnagar typically applies the following formula: [(Twitter followers x Facebook fans) + (# of employees x 1000)] x (RSS subscribers + daily page views) + (monthly burn rate x Google’s stock price)2 and then doubles if it they use Ruby on Rails or if the CEO has run a business into the ground before. Bhatnagar admits the math is mostly a guess but points out that “the press eats it up.” 

And a timely reminder that dot comedy is alive and well:

“37signals will lead the new global movement filled with imaginary assumptions on growth and monetization potential,” he continued. “We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store. Also, everything we make will include a compass.” 

(H/T @felixsalmon)

Related links:
Which Is Worth More, Twitter Or LinkedIn? – peHUB
Takeover bid for mymugpunter.com!!!!!!!!!! – FT Alphaville
Is Facebook really worth $10bn? – WSJ Digits blog