What is your mobile app worth? The challenges of valuation
By almost any measure, Mooniz is a successful mobile app. The color-matching game has been downloaded 1.5 million times from the Apple (NASDAQ:AAPL) App Store, it has multiple four or five-star ratings from users and an updated version was recently launched for the iPad. It has even been successful at monetization: it costs 99 cents to have the gumball-shaped critters navigate their way through various challenges, and some people are even spending money on in-app purchases for virtual currency. It's hard to put a value on success, but developer Yoni Zvik thinks the game is priceless.
Apptopia is a marketplace for brokering mobile app acquisitions.
"From a developer point of view, it's kind of our baby. It's a process of working about 18 hours a day for the first three months in a living room," said Yvik, who co-founded the company that created Mooniz. "As a developer you're not that objective. You don't think that your baby is cheap."
How to determine a fair price
At some point, however, many developers may find themselves in a situation where they want to sell their app, or someone approaches them to acquire it. In other cases, they may even want to acquire the developer's company itself. Figuring out whether to accept that first offer, or how to price an app if putting it on the market, is not a skill set widely taught to developers. That's why Zvik, who now runs special projects at Apptopia, is helping to create a way to assist other app makers in determining what their product might be worth.
Launched earlier this year, Apptopia is a marketplace for brokering mobile app acquisitions, connecting buyers and sellers and working with app stores to transfer the source code or other pieces of intellectual property. The firm keeps about eight percent of the transaction price. In July, Apptopia closed a round of seed funding lead by entrepreneur Mark Cuban, among others.
Apptopia hopes to accelerate its growth by offering an online assessment tool to determine the financial valuation for any mobile app.
According to Zvik, Apptopia is hoping to accelerate its growth by offering an online assessment tool called MyAppValue which uses a proprietary algorithm to determine the financial valuation for any mobile app. To prove it works, Apptopia took some of the most downloaded apps such as Temple Run, Cut The Rope, Tiny Wings, Flipboard and JetPack Joyride and ran it through My AppValue.com. Apptopia was able to determine accurate valuations for each app and also predicted what their revenues would be for the next six months, Zvik said.
"We had a lot of people asking the same questions: 'Can you valuate my app?'" Zvik said. "No one knows how much they should get paid... most of them think that it's worth more than it is."
MyAppValue.com will look at an app's number of downloads, projected monetization, analytics via Flurry accounts and ratings from users, among other metrics. It will be free to use for at least six months, and Apptopia may later offer a subscription plan, though the business model hasn't been finalized yet. Zvik said the idea, however, is to kick-start a process whereby developers continue to use the tool to refine their app's valuation.
"We have a list of about 60 recommendations on how to improve downloads, revenue etc.," he said. For example, in-app purchases are often considered a great source of monetization, but Apptopia may recommend a developer only promote them on the third, fourth and 19th session. "Today your app is worth $10,000, but then you want to improve your app to get better rates to be worth more than [it is] right now. You can come back after one week, two weeks. You can check every day."
M&A potential for apps in 2013
Of course, in some cases it won't merely be the apps that are acquired, but the developers themselves. Kii Capital, a venture capital firm based in Silicon Valley specializing in funding consumer mobile apps, is expecting many large organizations to take a "defensive" approach to acquisitions in 2013, according to managing director Christof Wittig. Unless there's long-term value in the developer's company, however, acquiring the app might be enough.
"Based on the sheer number of mobile apps this will be the likely outcome for most of them," he said. "We see app companies which create really large audiences at zero marketing dollars and often start to become much smarter in monetization, yielding $100M returns and above." That's well beyond what acquiring a developer shop outright would return to investors, he added.
Rajeev Chand, managing director at San Francisco-based investment bank Rutberg and Co., isn't so sure. He said most of the significant transactions will be outright M&As. "I firmly believe that there are going to be five Instagrams over the next five years," he said, referring to Facebook's acquisition of the photo sharing service earlier this year. "Mobile is a bigger hole for incumbent corporations than the Internet was. It bridges the physical world. We see acquirers being very active."
Zvik: Selling an app may be a good way for devs to get their feet wet.
Though it probably sounds like a nice problem to have, developers may be confronted with a choice of selling off their work or going to work for a larger organization. Even in the early days, Chand says developers can start thinking about the exit strategy that makes the most sense to them.
"As an entrepreneur, are you just looking to make money, or do you want change the world? That's an important, self-reflecting question," he said. "The best wisdom that I've heard on this is if you're evaluating raising money or an early exit opportunity, find an M&A valuation that's roughly two years ahead of where you are today. That's an M&A valuation worth considering."
It all starts with a successful product, Wittig added. "You need to build large and retained audiences, which use the app as part of their daily life," he said. "This creates massive shareholder value, valued at anywhere between $1-$30 per user."
Zvik suggested that selling an app may be a good way for developers to get their feet wet in the negotiation of such transactions. Some of the apps on Apptopia are selling for as little as $500, but others have garnered $10,000 or more. Some of the buyers are publishers that want to expand their app portfolio, but others are developers that want to use acquired apps as a way of cross-promoting their own apps.
"Today it's one of the best tactics to market your app, because the competition is so hard," he said. "Some are looking for apps for traffic, or apps with potential that didn't take off before. Others are small entrepreneurs who want to start their first business, to be part of the gold rush."
Just as long as developers realize that, even in a frenzied market for mobile apps, not all of them will be worth their weight in gold.