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Buying Time

posted Feb 25, 2012, 8:32 AM by Vishal Jain   [ updated Feb 25, 2012, 9:00 AM ]
It's about time RC launched it's blog, so without wasting time introducing myself, i'll dive right into the goods.

When we valuate companies in the hard goods space, or in the physical services space, it is easy to visualize their value. For instance, if I were a private equity firm considering the purchase of a company like Pepsi or Coca-Cola (before they were worth over $90B), i could easily see the monetary value associated with the contagion of the physically packaged corn syrup formulation. Likewise, if i were a healthcare-focused venture capital firm considering a small to mid-size surgical center with real doctors, real equipment, and real patients.

But when we evaluate the worth of a website, we don't have that simple of a time visualizing the value. After all, most websites don't sell anything to their consumers. And while it's true that many advertisers are willing to pay for space on websites that have the right consumer audience, that approach to a valuation seems to place us in a space where we create our own world, with it's own economy, in a virtual space that is disconnected from the physical world.

What i suggest instead, is that we consider valuing a company based on the physical way humans interact with it. Let me explain. When you think of Facebook, what is the first image that pops into your mind? For me, it is that blue header, and the actual website layout. As a consumer, that is my experience with the site, so it's perfectly understandable that it reflects my immediate visual association with the word Facebook. But as an investor, i argue the symbol that comes to mind ought to be different. The first picture that comes to our mind, as investors, when we think of Facebook, ought to be an image of a person sitting in front of a computer. Because that is how the physical world is being affected by the company.

Enter the title of this blog post, "Buying Time". In the context of what a consumer does during their day -- wake up, eat breakfast, go to work, sleep, etc. - they also spend a significant amount of time sitting in front of a computer, or crouched in front of their mobile phone, playing on the internet. And with respect to the total amount of time in a day (3600 seconds/hour * 24 hours), a certain proportion of that consumers time is spent in this physical position. The amount of time an online business can convince a person to stay in this position, is roughly proportional to their value. In other words, investing in a online business is the equivalent of buying time.

It's immediately apparent that the value of a website then follows from the ability to advertise to that individual while they are spending time sitting down in front of a machine. But the easiest way to value a company for it's advertising revenue potential is to simply think about how much time it will steal from all the other things a person wants to do during their day. In other words, every second i spend sitting back in my chair and clicking around on Google or Youtube or Facebook, is a second i could be walking to a store and buying Coca-Cola, watching TV and seeing an advertisement for toothpaste, or cooking potatoes. And that measure of time is, in my opinion, the best yardstick of a company's value.