Valuation Lunacy
Posted by Rick Ellis on March 21, 2008 Permalink
It never ceases to amaze me how astoundingly overvalued online companies with no revenue model are worth, simply because they have a large captive audience. In Silicone Valley economics (silly-conomics?), the number of visitors seems to be the single most important determinant of worth. The VC motto should be “You got traffic? We got money!”.
Paul pointed out today that a Facebook widget called RockYou is rumored to be valued at $400 million. Derek Jones said it best in our group email:
$400 mill for a widget...that is used on a social networking site that has made billions without ever proving it has a sustainable business model. It’s not even the site itself, it’s an app for a specific site. I could probably repeat that sentence with different wording for another hour and not be any less amazed.
This lunacy hits home for me because we’ve recently undergone our own company valuation. We’re in the process of building a stock plan for our employees. In order to do that we hired a valuation firm to determine our worth.
There are several ways to valuate a company. The firm we hired used the “income approach” to create a valuation model that forecasted our projected cash flow against our historic results and future assumptions. They then compared EllisLab as an investment against a range of traditional investment instruments, did a bunch of number crunching, came up with a capitalization rate, and ultimately our worth, as a multiple of our earnings.
The easiest way to express the worth of a company is as a multiple of revenue. As a point of reference, most companies fall somewhere between a multiple of 2 and 10. In other words, if your company makes one million a year, and you’re valued at “2 times revenue” you’re worth 2 million. Anything over 5 is considered quite good. 10 or more is usually a home run.
With high-tech companies or startups, however, much higher ratios are common, even though the odds are quite small that the buyer will ever recoup their investment. At that level, companies are being bought for strategic purposes, not economic.
MySQL, for example, was valuated at 20 times earnings, selling for $1 billion despite revenue of only $50 Million. Even more astounding, Facebook was valuated at 100 times revenue, or $15 billion, by Microsoft. That has to rank among the highest valuations ever. Clearly a purely strategic move for MS.
Personally, I’m very happy with our multiple ratio, even though it’s in the single digit range, since our goal was a true, realistic worth for internal stock purposes. I’d like to think that if we ever did sell the company we could command a much higher value (not that we have even the remotest interest in that at this point), although given that site popularity seems to trump all other concerns, we will likely never have the traffic and user numbers to put us into the land of luny valuations, despite having built a profitable and fast growing company without ever taking a penny in funding.
The high-stakes world of funding and acquisitions seems a lot like a real-life version of Monopoly. Roll the dice, maybe you’ll get lucky and hit Park Place. A few more rolls, maybe you’ll control the whole board. And just like the board game, most people who play lose.
Tear Duct Plugs
Posted by Rick Ellis on March 20, 2008 Permalink
I had Lasik eye surgery a couple months ago, and although my vision is pretty good now, I’m still dealing with a little blurriness at distance, which my doctor attributes to my chronically dry eyes.
When they cut the flap in your eye to do the procedure it severs the nerves which inform your brain to keep your eyes moist. Eventually the nerves reconnect, but it takes nearly a year. Since the procedure I’ve been using artificial tears so frequently that I’m considering buying stock in the companies that produce it.
So today I’m at a follow up appointment and my doctor tells me that my eyes are so dry they look like those of a 90 year old man.
“Gee thanks”, I say with feigned sincerity, “I have you to thank”.
“I’m going to plug your tear ducts”, he informs me, “so your eyes will stay more moist”.
“What?!”, I exclaim! “I could swear I heard you say you’re going to plug my tear ducts!”.
“Yes”, he replies, “I’m going to insert silicone plugs into the holes, blocking your tears from draining”.
“Plugs”, I repeat slowly, “into my tear duct… the holes in my eyelids?!!!”.
“Uh huh”, he mumbles as he begins unwrapping the package, “it will keep your eyes more moist. They’ll heal faster”.
And so he did. While my mouth was hanging open in amazement, he grabbed the grommets with his tweezers, shined a magnification light at me, and slipped the little buggers into the holes.
Hours later I’m still in shock that I have rubber grommets in my tear ducts. That’s just so, so wrong…
Why I Started Blogging Again
Posted by Rick Ellis on March 20, 2008 Permalink
Ever notice that auto mechanics tend to drive really neglected cars? I guess if you spend all day working on other people’s vehicles, the last thing you want to do is work on your own car.
Since I started this company I’ve been a lot like that. I’ve spent so much time building software that enables people publish online, I’ve had little time or interest in doing my own publishing.
Writing takes a certain energy, your mind has to be engaged and active, thinking about topics, jotting down ideas, working through drafts. When I was writing code all day I just didn’t have any mental energy left to apply toward that process.
Now that I’ve stepped away from code, I’m finding a real desire to explore the written medium again. I’ve also discovered something: I haven’t found my voice. I don’t have a good sense yet for who I am as a writer.
The most important thing about writing is not that it lets you share your perspective, but that it gives you one. I’ve missed out on that while I had my head buried in code. That’s why it feels so good to finally be writing it again. Particularly at this time in my life, when my role and focus at EllisLab has been changing and evolving. The mental process will help me sort through things, explore, and hopefully find a clearer path.
I don’t want this blog to be full of pretense, of me acting like I have life and everything else figured out, because I don’t. I’ve spent the past six years shooting from the hip, just trying to do the best I could. Along the way, hopefully I’ve learned a thing or two, but the truth is, I’m still new at this.
As I think about what I want to accomplish with my writing, mostly I want to create a window that let’s people observe someone trying to figure out how to grow a little company that makes cool stuff in order to create a better life for people.
If you have an exit strategy, you suck
Posted by Rick Ellis on March 18, 2008 Permalink
If from the moment you start your business you are already thinking about how to bail out filthy rich:
- You probably will not succeed.
- Your focus will be on the wrong things.
- You will make bad decisions for all the wrong reasons.
- You will suck.
Blogging Saved the Internet
Posted by Rick Ellis on March 18, 2008 Permalink
It seems forever ago that the internet bubble burst in the late 1990’s. For those who study crowd phenomena there is a classic case study here, in which otherwise calm and rational individuals collectively lost their minds.
Charles Mackay, in 1841, wrote a famous book called Extraordinary Delusions and the Madness of Crowds, in which he analyzed crowd behavior. That book is still cited today, usually in relation to investments and markets. One of the strongest human motivators is the fear of missing out on something big, which precisely describes the lunacy of the 1990’s. Scads of companies with no revenue model, offering no compelling product, going public, while the optimistic mass invested their life savings into them. Crazy.
An entire book could be written on the internet bubble, but from my perspective the biggest problem with the internet in the 1990’s was that it was boring. Being a geek at the time, I was mesmerized by the internet. But what made it interesting to me was the technology—the promise this new communication medium held. Most people, however, were not geeks, and they just didn’t understand it.
I recall a friend of mine at the time asking what I saw in the internet. He thought it was utterly dull. “No”, I argued, “you just don’t get it!”, which of course he didn’t. Most people didn’t. All they saw was an endless collection of static web pages that never changed, with the exception of that dreaded <blink> tag, loading slowly at 56K. The internet was little more then endless brochures. Who reads brochures? No one, really.
There were some dynamic sites at the time, but these were large companies like newspapers that could afford expensive content management systems. And of course there were websites trying to sell stuff. Mostly, though, the web was a dull, lifeless place.
What changed all that? Blogs. When blogs began emerging the web became a conversation. Communities began emerging, as people with similar interests began congregating to dialog with one another. I truly believe that blogging was the single biggest factor in changing people’s interest in and perception of the web.
I vividly recall the first time I encountered a blog. What a clever idea, I thought, to allow people to comment and add to the discourse! When I realized that site was powered by a free tool called Grey Matter, I literally spent all night long exploring it, and bouncing from one blog to another, mesmerized by the possibilities. I was so captivated by this new medium that I soon began thinking about developing my own software. For me, personal publishing tools were like the advent of the personal computer: Revolutionary. They changed the world.
On Competition
Posted by Rick Ellis on March 14, 2008 Permalink
It’s ironic that we treat our business competitors as adversaries, yet we have more in common with them then differences. They experience many of the same challenges we do, they work with the same tools, they create products that serve the same market, and their customers are much the same as ours. If we didn’t view them as opponents, but rather embraced them as people who love the same things we do, we would have a basis for a great friendship. That’ll never happen, of course, business being what it is.
I think competition is in our DNA. From the time the first caveman challenged his buddy to outrun the Tyrannosaurus humans have been driven to beat each other. Nearly every society has valued competition and idolized the victor, so it’s a natural impulse in business today.
Users get caught up in it too. This seems particularly true of bloggers, who love to root for the publishing app they use, and against the rest. Users seem to take joy in any bad news that affects the “bad” software, and take glee in the success of the “good” software. They forget, it seems, that companies are really just groups of humans with dreams and aspirations.
I’m pretty competitive by nature, so I’m certainly guilty of this too. But I do think that it’s possible to win without someone necessarily losing. The market for our products is big enough for lots of success stories. Plus, choices are good for everyone, as users have more to pick from and companies are pushed to innovate.
When I first started developing pMachine Pro back in 2001 there were only two personal publishing tools on the market. Blogger, who invented the genre, and GreyMatter, written by the enigmatic and brilliant Noah Grey. When I finally released pMachine Pro in January of 2002 it was within a few months of the emergence of Movable Type and b2 (which would become WordPress years later).
Those three tools (pMachine, MT, and b2) are what I consider 2nd generation blogging tools, with a direct linage to the first two. We didn’t invent the genre, but we got into the fray well before most people had ever heard of blogging, and early enough that we became relevant and successful.
Today, ExpressionEngine (the successor to pMachine) is more a content management system then a blogging tool, but it’s roots, operational paradigm, and success can be traced back to blogging. I like to think of ExpressionEngine as a blogging tool that grew up.
These days I don’t view the other products I mentioned as direct competitors due to the evolution and trajectory of ExpressionEngine, but I used to view them as such, particularly in the early pMachine days. In fact, during my first few years in business, I saw them as true adversaries, to be reviled and do battle against. Today, thankfully, I feel much more nostalgia then animus, particularly since it’s those other tools that pushed me to work harder and be more innovative.
Now there are dozens, hundreds, actually, of publishing tools. It’s a thick field, rife with competition. All of us, however, are part of a communication revolution that has changed the world. Personally, I feel proud that I was part of the early wave of tools that literally changed how we build websites today.
I’m too pragmatic to believe that those of us in the publishing software field will become chummy beer buddies, but we do have a heck of a lot more in common with each other then we do differences. Collectively we’ve achieved remarkable things. There is a lot to celebrate there.
ExpressionEngine 2.0 Sneak Preview
Posted by Rick Ellis on March 13, 2008 Permalink
At SXSW in Austin last week (March 8th) we revealed details about ExpressionEngine 2.0, our exciting upcoming new version. For those of you who were not able to attend, we have created a page that shows a screencast of the new control panel, and describes some of the changes taking place:
ExpressionEngine 2.0 Sneak Preview
We hope you are as excited about the changes as we are!
What do you think about everyday?
Posted by Rick Ellis on March 12, 2008 Permalink
My seven year old son, once he figured out that having money enabled him buy things, became obsessed with finding loose change. Nearly every time we go somewhere—errands, restaurants, shopping—he manages to find coins. It’s uncanny just how frequently he’s successful, and how fast the small change adds up to enough money to buy something meaningful for himself.
His secret? Simple, he’s always looking. He peers under counters, scans parking lots, looks in bushes, sweeps his hands under vending machines, pokes his fingers into coin returns, crawls under cars, and he’s always right there asking if he can have my change when I’m emptying my pockets. He’s a coin collecting machine with 99% uptime!
I’ve often thought that if people approached their goals with the same determination as my son does, they would be wildly successful. Many of us have goals and aspirations, but without putting them into our direct consciousness every moment, they are simply far off dreams that rely mostly on luck to happen. I’m reminded of a saying I heard years ago, although I don’t remember who said it:
You become what you think about all day long.
If we want to really achieve something, we can learn a lot from a seven year old who has never read books on setting goals, or attended success workshops, or watched motivational videos. He simply intuitively understands that the secret to success is to focus on your goal. Every moment.
How do you distinguish yourself from your competitors?
Posted by Rick Ellis on March 11, 2008 Permalink
For those of us who develop software there is a tendency to focus primarily on features. We’re geeks, we love features, so we assume that’s where we should focus most of our energy.
But features are not the primary reason customers buy a product, and more importantly, features are very easily copied by competitors. We add a great new feature, our competitors soon add it. They add a cool new widget, we soon add it. Over time this interchange produces products that share so many similarities that consumers find it difficult to distinguish which application is better or even different.
You don’t have to be in software to suffer this phenomenon. Most businesses, even service companies, fall into this trap. How do you distinguish one web design firm from another when both of them produce equally great sites? Both firms offer compelling designs, they both write standards-compliant code, they both offer similar services, and their pricing is competitive. So how can one web design firm stand apart from another? Let me throw out a concept I’ve been chewing on recently:
You can only offer an advantage to your customers if what you do is not easily copied by your competitors.
If what you do is easy to imitate you’re going to have a very difficult time distinguishing yourself. For software companies, you’ll never gain a competitive advantage focussing primarily on features. Yes, of course you have to develop a capable product, so features are important in that they determine what a user can do with your software, but this is secondary to focussing on your strengths; defining and building attributes that let you stand alone in your class.
Although I’ve only recently begun to think deeply about this issue for our company, here are a few things that I believe distinguish us from our competitors and are difficult to imitate:
- EllisLab, as a company, is highly accessible to our customers. There are no access barriers.
- EllisLab is committed to growing organically, in a natural, sustainable manner. We do not believe it is in the best interest of our customers to try to grow unnaturally fast.
- ExpressionEngine is the only publishing platform that has the ease of use of a blogging tool yet allows the power and control of a full-featured content management system.
- ExpressionEngine is the only PHP publishing platform that is 100% transparent, allowing any site design to be incorporated into it, without any need to interact with PHP.
- ExpressionEngine has the fastest, most committed, technical support of any publishing product on the market.
- ExpressionEngine has the best security record of any product in its class.
- ExpressionEngine releases new “builds” faster then any other product in its market. These ensure that the software is incredibly bug free and secure.
- CodeIgniter is the only web application framework on the market that runs on any version of PHP, in any hosted environment, and is thoroughly documented from top to bottom in a tutorial style format.
- Our communities are among the most helpful and civil of any on the internet. We work very hard to keep the riff-raff out and the tone and quality of communication at a very high level. This requires constant vigilance and participation, and is not something that is easy to copy. It has taken us years to build our community.
- EngineHosting is the only hosting company designed from the ground up for the particular needs of people hosting dynamic, database-driven websites.
- EngineHosting is the only hosting company offering affordable plans that runs load-balanced, process-separate clusters. Even our cheapest plans are incredibly scalable.
If you are in business, how do you distinguish yourself from your competitors? What do you do that can not be imitated? And more importantly, are you communicating those things with your audience?
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See you at SXSW!
Posted by Rick Ellis on March 05, 2008 Permalink
The South by Southwest Conference is this weekend in Austin, TX (March 8th). We are very excited to be there this year, showcasing EE 2.0 and hosting various events. We look forward to meeting all our friends, customers, and colleagues, and giving away all the t-shirts we had made. For more information please see our SXSW page.
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What does the CEO do, anyway?
Posted by Rick Ellis on March 05, 2008 Permalink
Note: This is the first post in our new EllisLab blog, a venue in which I, and other members of our team, will communicate as candidly and openly as possible.
About five years ago I gave myself the title of CEO, even though I had only a cursory idea of what that meant. It didn’t matter, anyway, because I was so engrossed in my day-to-day activities that I was too busy to even think about such things. In those days the company was mostly me, with a little part-time help, so to say I was busy was an understatement.
Over the ensuing years we’ve grown like crazy, and along with that growth, like pealing an onion, I’ve been able to delegate tasks that used to be mine. Finally, last year, I was able to shed the last major area of responsibility: Software development. After six years of writing prodigious amounts of code, and nearly burning out in the process, I finally had a capable team in place—one that could actually do it better then I could. Ironically, while I now had the time to focus fully on my role of CEO, a funny thing happened: I had no idea what I was supposed to do. In fact, I felt like I had worked myself out of a job.
My role had always been clearly defined, more by circumstance then planning. When I first launched my little company I did everything. As we grew, even though I was able to delegate many of my responsibilities, there still wasn’t a moment in any day that I didn’t have something pressing to do. Yet now I felt like there was nothing for me to do except sign the paychecks every month. Nearly all of the major areas of responsibility that once had been mine had seemingly vanished, leaving a void that I wasn’t sure how to fill.
I’m not sure I should be so candid, but I spent a few months actually feeling a little depressed. It was as if my life no longer had purpose. I had worked so hard to build the company, and now it felt like I wasn’t needed anymore. All the challenges that I had worked so hard for—building a compelling product, finding its market for it, growing our team—had been met, so what was my purpose now?
There was plenty to do, of course, but I wasn’t able to see it because I hadn’t come to embrace the role of CEO or understand its purpose. I’ve always exhibited leadership, of course, and have made good decisions regarding our products, customers, and staff, but these decisions always seemed ancillary to my primary work as lead programmer, they were not my main focus, and as such, I undervalued the importance of those decisions and didn’t see that there was really a job there.
Fortunately, after feeling down for a while, it occurred to me that maybe I needed to re-calibrate myself. Instead of feeling like I didn’t have a role anymore, perhaps it was time to redefine my role, learn what being a CEO really meant, and set out to meet some new challenges. I’ve always been goal driven, so maybe it was time to define and fulfill a new trajectory for EllisLab.
Since that epiphany I’ve felt totally re-energized and excited about our future, and although I’m still learning as I go, I’ve begun to see much more clearly what my purpose is. Today, I see my job as fivefold:
1. Strategy, direction, and vision. Where is EllisLab going, and how are we going to get there? Back when I was programing every day, I didn’t have time to think about much beyond the next release or two. Today, it’s imperative that we develop both short-term and long-term goals, and map out how we intend to fulfill those goals.
For me, the broader strategic vision revolves around a single concept: EllisLab, as an enduring internet brand. Right now we are predominately a one product company (technically we have two products, but we don’t profit directly from one of them). Historically, single product companies don’t fare as well as multi-product ones, so It’s critical that we broaden our range of products and services over the coming years.
2. Developing teams and building our culture. Every company has a culture, and they are built from the top down. It sounds a little immodest, so I’m uncomfortable saying it, but EllisLab’s culture is a reflection primarily of me and my values. I’m the one that has always made the hiring decisions, so our team embodies the qualities that I deem important.
I’ve always felt that, as a hiring strategy, it’s much better to find people who are generally brilliant, who share similar values, and fit the culture, over people who are specifically qualified. Skills can be taught, human attributes, values, and personality can’t. For that reason, everyone who has joined our team has emerged via our community. We have never recruited externally.
So far, this strategy is working beautifully, although as our company grows, it becomes more critical for me to become more of a coach, or psychologist—someone who ensures that personalities mesh, that each person feels fulfilled, is productive, sees a future with us, buys into our vision, communicates with the right tone and approach, etc.
By the way, culture is one of the many reasons we’ve never accepted outside funding. Even adding one new staff member can bring integration challenges. Cultures are delicate things that must be nurtured. Companies that go on rapid hiring sprees tend to have crappy cultures.
3. Financial management. I don’t have an MBA and I’ve never been a CFO. This is really my first shot at managing the financial growth of a company, so I’m mindful of the fact that I need to get it right. Fortunately, as a company that develops virtual products with no manufacturing or distribution costs, our business model is quite simple. Still, as our company increases in size, the financial stakes get higher, and the need for transparency, security, and confidence in management becomes more critical both to our staff and our customers.
4. Product conceptualization. I’ve always been good at conceptualizing new product ideas. I love the challenge of envisioning a new application, and working through the design challenges. I’ve been through that creative process three times now, with pMachine Pro, ExpressionEngine, and CodeIgniter. Even though I’m no longer directly involved in development (other then strategically), I intend to help develop and push new ideas forward, build teams around them, and hopefully see them succeed.
5. Communication. I probably should have put this one first on the list, since every aspect of my role requires communication. This is an area in which I’ve often struggled. It’s ironic that I build software the lets people communicate, yet I’m probably the world’s worse blogger. It’s not in my nature to seek the limelight or to be out front, so it’s often difficult for me to put myself in that position, but it’s vital that I become more visible and communicative externally, and that I build strong internal channels.
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