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Valuing platform businesses

A client of mine asked my views on how to value a platform business he is building. Since it's a fun blast from the past (remember when everyone wanted to be a platform?!), I thought I'd share the method we use.
In simple terms, there are two questions you need to answer:
  1. What’s the business model of the platforms that you’re considering rolling up?
  2. Where is value retained in the platform?

Question 1 is a weighting factor, which in combination with Question 2 gives you the standalone value for the platform. There are three predominant platform business models:
  1. Trade, in which the value is in identifying and rendering liquid otherwise underexploited assets
  2. Co-creation, in which the value is in identifying and rendering trustworthy and productivity collaborators who could have otherwise not have found each other
  3. Outcome, in which the platform enables the assembly of data or assets from multiple sources and thus enables the platform owner to monetize the combination by delivering an outcome that would have been otherwise impossible

Each model uses a number of different value mechanisms. A successful platform has all five of them, but will usually excel at only one or two. Success is dependent on the alignment of the mixture of mechanisms with the business model. Value mechanisms build value through:
  1. Participant equity, measured via the absolute and relative number of producers and consumers on the platform
  2. Network equity, measured via the number of connections on the platform, the quality of those connections (e.g. between producers and consumers > consumers and the platform) and the volume of ‘items’ available for purchase relative to the number of participants
  3. Trust equity, measured via the number of positively-rated connections on the platform
  4. Algorithm equity, measured via the success of the platform in creating new connections between participants
  5. Loyalty equity, measured via retention rates and proportion of consumer spend passing through the platform
So the value of the platform is the weighted sum of the equities, each of which carries a dollar value based on their relative competitive position in the market. Simple... if you like math :).
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