Social networks have value but are difficult to value. How do you place a value on Facebook? Or Twitter? These sites have little or no monetization and yet they are worth millions for having a highly engaged audience.
In doing some research to write about business valuations for Venture Hype, I stumbled across an older blog about social network valuation, written by Avi Muchnick, the creator of Worth1000.com. I’ve seen the occasional Worth1000 image here or there and they were humorous, but I confess that I never really gave it much thought. But after reading Muchnick’s blog, I have become a big fan of the entrepreneur.
In his blog (written in December 2006 but still relevant today), Muchnick describes the challenge of valuing a non-monetized social network and he presents an idea — which he calls Orbital Theory — that can help to discover a dollar value to the network. He describes social network users as similar to celestial bodies in orbit around a core. With that concept in mind, Muchnick outlines “5 tenets of Orbital Value”:
- Every user of a website has a unique mass, measurable by their gravity (how many other users they attract towards themselves).
- The larger a user’s mass, the stronger their personal gravity.
- Users with larger mass pull users with smaller mass into their orbit.
- Once in a site’s orbit, a user is now a measurable part of the website. His mass is a measurable part of a self-contained system.
- The more often a user returns to a site (the more loyal they are), the tighter and faster their orbit is.
So a valuation of the network, Muchnick says, is derived from the number of orbiting bodies but also the mass and speed of the orbiting bodies.
That’s brilliant and I would suggest that Muchnick’s idea is even more relevant today with the massive Twitter adoption we’re seeing. It is also a useful tool for new social networks that want to gain popularity but aren’t sure where to start.