As we’re working towards starting a guild and in advisory conversations with product company founders, a recurring topic is valuation. What’s a WordPress product business worth?

My hypothesis is that WordPress product businesses are consistently undervalued.

Why? I see three key reasons:

1. Misaligned Monetization – Many of the product company founders I’ve spoken with choose, by default, to mimic existing monetization strategies and pricing. The net effect for many is products end up being underpriced relative to their value and the models themselves hurt the financial potential (and thus sustainability) of the business behind the product. End users look at some of these underpriced products and say “that’s too cheap, it can’t be good” and so on.
2. Limited Distribution – While we enjoy the benefits and tradeoffs of a decentralized ecosystem, a real-world impact for product founders is that getting a product in front of the right audience within WordPress is hard. Calculating a realistic addressable market is complex at best, if even possible for most.
3. Inexperienced Leadership – Many of the product businesses that have grown up in the WordPress ecosystem were created by technical founders, who often have limited business experience. They become great in one or two areas and a growing business needs more.

I see these three reasons show up consistently in most of the conversations I have with WordPress product founders and the net effect is that many of these businesses are hidden gems. Their financials, even with misaligned monetization are often positive and their leaders are willing to learn. They’re far from success, though, because most of their target audience just doesn’t know they exist.

All that leads to undervalued product businesses, which becomes painfully clear when raising money to support growth or acquisition.

Valuation Basics

According to Aswath Damodaran, who I’ve been learning from, there are only three approaches to valuation:

1. Discounted Cash Flow – Where we estimate the value of business on four factors: existing cash flows, expected growth, discount rate, liquidation value (the value when sold).
2. Relative Valuation – Where we pick a group of businesses (called “comparables”) and tell a story. The relative valuation process starts by defining a multiple based on comparables, describing the multiple, analyzing the multiple, and controlling for differences. You care about the fundamentals and you’re incorporating the price of similar businesses to help you, hopefully, make better assessments.
3. Contingent Claim Valuation (or “Option Pricing”) – A hybrid that starts with a discounted cash flow valuation and is based on the idea that the value of a business may be greater than the present value of expected cash flows, if the cash flows are contingent on the occurrence or non-occurrence of an event.

For a deeper dive on the topic, I recommend Aswath’s online class (free on YouTube). In the WordPress ecosystem, each of these approaches are relevant in different circumstances and choosing an approach depends on a range of factors.

Valuations in WordPress

Acquisitions and investments in WordPress have been picking up speed over the past few years. Post Status’ acquisition tracker, for example, has 26 entries for 2022 so far.

Over the past few months, I’ve been talking with more and more product founders interested in either investment or acquisition and the topic of valuation continues to surface.

Which of the valuation approaches should we use and how do we apply a given approach in practice?

In my experience so far, because of misaligned monetization, limited distribution, and inexperienced leadership, applying a value with confidence that respects both the current reality and potential of a WordPress product business requires extra work.

For most product businesses in the WordPress ecosystem, a discounted cash flow approach is probably the right method, particularly given the overall depressed values of other product businesses that would otherwise be your comparables. The options approach is worth considering for new bets, particularly those raising money for businesses aligned with upcoming changes in the WordPress ecosystem.

The Valuation Challenge

If a founder applies the discounted cash flow approach to a typical WordPress product business that’s affected by the three problems we’ve referenced, they’re going to get a business that’s undervalued and most founders seem to know it.

For investors or acquirers, this is great. If they can address the problems, they’re positioned to see significant returns on their investments.

For the founders themselves, though, it’s not great. In my conversations I’m consistently hearing this sense of feeling undervalued and unclarity on what to do about it.

When a founder accepts a discounted cash flow valuation or a relative valuation (likely to other businesses experiencing the same three problems) with those three problems working against the business, they’re selling the business short of its potential which both hurts the founder and probably hurts the business.

If a founder doesn’t accept it, though, they’re in a position to try and persuade investors or acquirers of a higher value based on potential that they may or may not have influence over.

Guidance for Founders

If you’re looking for investors or a good home for your product business, my guidance is to start by addressing the three problems.

On the monetization front, review my guide to monetizing an ecosystem plugin. Talk with other founders. Don’t just assume that the pricing you see on a product website is working. Ask for candid feedback on what has worked and hasn’t worked. Choose a business model that aligns value for you and your customers.

On the distribution front, work on growing through strategic partnerships. Take a look at the talk I gave at WordCamp Europe and my framework for strategic partnerships.

And on the experience front, look for shortcuts you can take by leveraging existing systems and processes. I recommend you read the book Traction, by Gino Wickman. Find other founders you can connect with and share experiences.

Want more help? Reach out and let me know. This type of work is most of what I’m doing these days and whether as just a fellow member of the community or as a consultant, investor, or acquirer I’d love to be of help.

Special thanks to Adam Weeks, Amanda Macumber, Anna Maria Radu, Kelley Muro, and Kevin Ohashi for their early feedback.