Musings of a West Texas Business Venture

Why DropSend is not worth $1 million

Recently, Carson Systems announced that they were selling DropSend on the open market. Good for them. They worked hard, spent around $45,000 on the application, and it's been live for a year. They've had some really good press, and Ryan's leveraged some of his media contacts over at Signal vs. Noise, and other places, and they've amassed about 57,000 users.

According to the numbers they've recently posted, they're growing at about 8.6%, compounded monthly, and are making about $9,200 in gross revenue every month (now). Ryan tells me that they've had steady linear growth, for several months, at around 8.6%. They're also paying around $2,000 a month in expenses. However, they're doing very well for a site that cost about $45,000 to make.

Ryan feels that a "conservative" estimate for their growth in 1 year is a monthly gross of $21,500. That's assuming almost linear growth, and would mean that they'd have made about $200,000 next year. The following year would be around $560,000, and the third year over $1,500,000 using his numbers. By year five, using his logic, the application would be doing over $1 million each month.

[Using that logic, it's absolutely worth $1 million.]

Obviously, one cannot assume that DropSend will continue growing, unmetered and unchecked, for years on end. I don't think you can assume that it will do that for another full year.

What does DropSend have going for it?

1. It's the most talked about file sending application around. Ryan's made it to the front-page of most of the major blogs, and has authored many articles about the product. This is resulting in a lot of new users, with a total of 57,000 users thus far.

2. The interface just works. It's a great interface, it's easy to use, and is cross-platform compatible. Windows and Mac have native interfaces, and everyone else can use a web interface.

3. It does one thing, and one thing well.

4. Maintenance and hardware are fairly low cost. With only $2,000 per month being spent on upgrades, bugs, and bandwidth / hosting (DropSend owns their own servers), there's still a lot of cash free (as a percentage) to bring home as profit.

5. There are 57,000 users, and only about 1% are paying users. Which means there's a lot of possibilities with advertising revenues (for the free accounts), or cross-marketing capabilities. Of course, they haven't leveraged this at all, so it has unknown capabilities.

What does DropSend not have going for it?

1. Any large player (Google, Yahoo, MSN, Amazon) could enter the market easily, and would be a deadly competitor. For instance, Google already offers more than 2GB of data storage through GMail. If it offered a native upload interface through GMail, I would imagine DropSend would simply die.

2. The product is simple. Because it's so good at doing the one thing, and only the one thing, the product is basically a commodity. Over the past year, more than a dozen competitors have appeared. A really good programmer could probably mimic the entire interface and functionality in just a few months.

3. Little or no advertising has been done for the product. This is paid advertising. Carson Systems has gotten a lot of unpaid advertising in the form of blog postings, press releases, etc... However, it's unknown what the costs would be to advertise for the software, and compete with all of the competitors.

4. It's not sustainable as a stand alone product. For the price ($1 million) that Carson Systems is asking, a conservative person would expect the software to be making at least low six-figures a year in net revenue. Traditional "bankable" multipliers are between 1-2X gross, and 3-5X net. So, a buyer should expect to pay between $140,000 and $460,000, between 1/2 and 1/10 of the asking price. A company (or person) purchasing this product would have to be willing to work for nothing for 5 - 10 years to pay of the debt of purchasing it.

5. The 57,000 users is not really correct. Yes, they actually have 57,000 users. However, the system makes a new account for users who download a file, and then never use it again. Only 1% are paying users. Which means that the remaining 99% are either using the free account, and sending low volumes of small files, or they are people who signed up only once for one or two files that were sent to them. The real question is: What percentage of the 99% are active "Free" users?

So who would buy such a product?

I've been thinking about this, and I'm not sure what type of company would buy DropSend. The cash flow is not in the product to sustain itself. In fact, Ryan explains that fact himself. He claims that it should be bundled with a larger player. Although that seems reasonable, I would think that a larger player who wants file uploading and sending capabilities could certainly build their own "DropSend" for well under the asking price.

It will be interesting to see who scoops them up. Ryan says they have 3 interested parties. I wish Carson Systems well. The lucky winner has a lot of work on their hands.

posted by Anthony Presley @ 7:12 PM