Using social media to valuate a start- up

Recent research, such as the research done by Luo, X., Jie, Z., and Duan, W  (2013), indicates that Social Media can help product changes in the stock value of businesses. In this post I aim to analyze whether such effects could also be used in the valuation of start-ups which have not yet gone through their IPO (initial public offering).  Valuating start-ups is extremely difficult for initial investors which means Social Media might be an interesting extension of their tool set.

Luo, X, Jie, Z and Duan indicate several ways in which Social Media might influence stock prices:

1. Discussion of products can give indications of customer satisfaction.
2. Customers’ brand awareness can be inferred from how often the brand is mentioned.
3. Companies’ own Social Media use indicates how internet capable a company is.
4. Investors who participate on Social Media give indications of their own behavior. Considering that stock prices are comprised from the collective behavior of investors, investors behavior is directly linked to stock prices.
5. Negative blogs can directly harm a companies’ productivity.

With regards to startups most of the aforementioned causal relationships hold, or manifest even more strongly than with regards of existing firms. Due to the relatively small size of online presence of a startup, it would also be easier for investors to analyze the available Social Media sources with regards to one firm. Therefore the biggest problem with this method found by Luo et al. does not exist to the same extends with regards to start-ups.

One of the aforementioned five relationships does not hold for start-ups, namely relationship four: ‘Investors who participate on Social Media give indications of their own behavior. Considering that stock prices are comprised from the collective behavior of investors, investors’ behavior is directly linked to stock prices.’
A firm that has no stocks cannot be influenced by the changing attitudes of current investors. When one invests in a start-up, one expects a longer horizon before being able to trade ones’ share. This horizon is usually somewhere between two and five years. This longer horizon makes a firms’ valuation less susceptible to the volatility of the market.

How do the other aspects hold?

Customer satisfaction can still be glanced from Social Media interaction of customers. Due to the smaller size of the firm there might be less customer interaction though, which means that the sample of customers might be so small that this indication could be meaningless. However, a startup is more likely to use Social Media as its only form of customer support which could increase customer engagement on Social Media, therefore creating a relatively greater sample size with regards to population. In this case Social Media would be even more credible in establishing customer satisfaction.

Brand awareness can be measured through Social Media more easily and more effectively for startups. Less mentions of a brand online means that an investor could aggregate information manually within a short time period. Especially with innovative products an investor could similarly obtain information about the relative brand awareness for direct competitors.

The companies own internet capability is more impactful for start-ups than for existing companies. It has been indicated before that startups are more likely to use internet as their main customer support tool. Similarly Social Media will most likely be at the core of their marketing strategy. An analysis of a companies’ Social Media strategy can be very indicative of how a company approaches customers. Furthermore an analysis of comments can show how (many) people respond to their marketing strategy.

Finally negative blogs should be especially harmful to a startup due to the increased likelihood that potential customers stumble upon them during pre-purchase research. Therefore it is more indicative of the value of a firm.

It should be noted that all these conclusions are theory-based analysis rather than fact-based research. Statistical analysis should be completed before any of the aforementioned statements can be taken as facts.

*Luo, X., Jie, Z., and Duan, W. 2013. Social Media and Firm Equity Value. Information Systems Research 24(1) 146-163.