Ask HN: How to do proper valuation of a web appliation?

A web application's worth is the price at which a buyer and seller mutually agree to sell it. That isn't the answer you want, but it is correct. There are a variety of factors which can increase or decrease that number:

1) Is the person selling it unsavvy about business? Just like engineers suck at salary negotiations and end up working for $45k, if you suck at negotiating sales price, that has an outsized impact on value relative to any objective factor.

2) Does it solve a strategic need for the acquiring company? For example, if you're Google, it isn't maximally relevant to you that an acquisition target "only" has 10k users, because you're going to put Google Muscle behind it and distribution is trivial to you. If it solves a problem for, e.g., AdWords adoption in a particular vertical, like say local, valuation is utterly unconnected to current revenue/users/etc. (A foreign telecommunications firm put in a fairly generous offer for Appointment Reminder when it had no customers and no revenue, with the intention of slotting it straight into their product lineups.)

3) Failing the strategic acquisition factor, some web apps (typically ones you won't read about in the newspaper) are sold as turnkey businesses. Valuations are generally based on a multiple of the last year's profits, with the multiple sensitive to the amount of risk, etc. If I sold BCC on Flippa, for example, I could reasonably expect to get ~$25k for it: a wee bit less than 1X last year's profits. $50k would be pushing it. Nobody in their right mind would pay $100k for it if they were just intended on keeping it running as it is.

4) Are there multiple prospects to play against each other? Bidding wars raise prices, sometimes very significantly.

5) Is the app in a "rich" vertical? There are occasionally examples of heavily undermonetized web sites bought for anomalously high sums of money. Some SEO friends of mine love taking people's hobby projects and bolting on effective monetization. If there is an obvious route to this, then the fact that current revenues are terribly might not necessarily predict a 1 * $TERRIBLE sales price.

6) How risky is the web app's current position? Is it highly dependent on a single source of traffic (cough Google)? Is it highly dependent on a single source of traffic and has it gotten that traffic through grey hat tactics which could be discovered at any time via manual or automated review? Is it in a declining field? Is it in a rapidly evolving field where competition could reasonably be expected to eat its lunch?

7) What are the upkeep expenses, including fair market salaries for employees for any skills needed? Just because my time is free to me doesn't mean the Rails programmers and SEOs that the company grabbing any of my sites will need are also free.

This isn't what the OP is asking about (Correct me if I'm wrong, OP). He's referring to valuation of the project in the sense that Google is worth $200b, not how much to charge customers of the application.

As for your strategy for deciding how much to charge (which is a different problem, again), there are two problems I see:

1. Users don't like when prices are gradually being hiked. There are subconscious effects like number-fixation (where people are attached to the first numbers they see), which causes them to perceive future prices as excessive, and there are conscious effects like the disdain of price hikes.

2. This strategy maximizes short-term revenue. There are other considerations which are more important, like profit (revenues minus costs)--with costs that are not purely fixed, maximizing revenue will not maximize how much money you make ultimately. Another consideration is the long term--charging less may cause faster adoption, which may be better for the long term.

You never want to be completely myopic in pricing unless you don't think there's a future to your app and you want to extract as much money as possible.

Yeah, right. I'm not asking about pricing strategy for a web based product but how to determine how much my web application is worth if I want to sell it. For example, sites like threewords.me isn't generating any revenue but still it has been sold at some price. How to determine the selling price of such web app?

Let me clarify my question through an example site everyone here knows - threewords.me. The site became popular and got sold even though it had zero revenue. While selling such sites, how to determine a proper selling price? What affects the valuation of such sites - page views, number of active users, niche concept, it's usefulness for the target buyer etc?

I have never sold (or bought) a web app before, but I have had to value various different types of assets due to my job. The most common valuation technique would be to use the Discounted Cash Flow model. In short, you project your pre-tax cash flow for say the next 10 years, and discount them at the required return which the investors are looking for. This rate is determined by a multitude of factors, such as the stability of your business model, target market, etc.

Then at the end of your projection, you simulate a sale of your business by 'capping' it at a certain rate. Then you add this terminal value to the sum of all the discounted cash flows calculated above, you have the total value for your business.

Of course in hi-tech sector things fluctuate too much too quickly. But the model should be the same, you just have to adjust your discount rate and terminal capitalization rate to account for those fluctuations.