VENTURE CAPITAL
Valuing the Next Billion Dollar Search Engine — DuckDuckGo
Please keep in mind that everything below is based on limited publicly available information.
Thesis: DuckDuckGo (“DDG”)(https://duckduckgo.com/) will reach a valuation of at least $1B despite Google’s dominance in search. It was last valued at $160M in late 2018.
I predict at least a 5x gain, and up to 30x increase from its rumored valuation of $160M in late 2018. I want to emphasize that DDG does not have to become the next Google — this investment is suitable for a series B or C investment for a good risk adjusted return.
DDG is a search engine focused on user privacy, founded in 2008.
- DDG has been growing at an annualized 60% a year in search volume for the past ten years.
2. Already profitable.
DDG has been profitable since 2014. Revenue comes from ads that users can opt out of, as well as non-tracking affiliate partnerships with sites like Amazon. This means revenue from Amazon when users click on an Amazon result, as well as from ads clicked from search results. Thus, we can assume linear growth in revenue to search volume.
3. Large room to grow: DDG has a 0.18% global market share versus Google’s 77%.
DDG is so small relative to Google that it can keep growing at its current rate and it would not be a blip on Google. People naturally point to Google as the competitor, but DDG’s core user group of privacy-valuing individuals is too small for Google to bother shifting their business model. Furthermore, Google’s business model is based on using people’s data, which makes it hard for them to copy DDG’s privacy features. Even if Google does enter this market, users would not trust the Google brand for a privacy-oriented product. Those who care about privacy know that Google’s incognito browsing is not very private at all (Why should I use DuckDuckGo while Google in incognito does the same thing?).
4. Industry tailwind in privacy focus.
Facebook’s shift towards user privacy shows how important an issue this is becoming.
5. Strong CEO with proven track record.
CEO Gabriel Weinberg started his first company while an undergraduate studying physics at MIT. After graduating, he programmed and built his first profitable startup The Names Database, which sold to United Online for $10M in cash. With his newfound wealth, he started DDG and has been operating it for the past ten years, with exponential growth. He understands the technical architecture of building a search engine, having built the initial MVP himself.
He also understands the business side of running a startup. He has written a book called Traction: How Any Startup Can Experience Explosive Customer Growth. His thesis is that in every stage of a startup, there is one traction method that trumps all else. As a startup gains users, the traction initiative that moves the needle is different. Weinberg goes through 20+ different traction methods (email marketing, SEO, events, partnerships, etc) and a framework on how to test quickly and zone in on the best traction method at each stage of the company’s growth. One just has to see his 10-year track record in growing DDG to see his expertise on growth.
Back-of-the-Envelope Valuation
Growth at 30% a year (half of current growth rate) for the next five years would lead to estimated revenue of $150M.
At 24 million searches a day, DDG was reported to have annual revenues of $25M. Today, they receive 40M searches a day. Assuming linear growth in revenues with search volume, a reasonable assumption based on DDG’s business model, it would reach $150M revenue in five years at 30% annual growth.
Assuming the conservative 30% growth rate with a 20% profit margin and 25x P/E ratio results in a $740M valuation in five years.
A more bullish case would be maintaining the historical 50% growth rate, a 25% profit margin, and margin expansion to 35x P/E ratio which translates to a valuation of $2.6B. Keep in mind that the average S&P P/E ratio today is 20–25x. Even with a discount for private companies, a 35x P/E ratio for a company growing at 50%-60% is extremely conservative.
Drivers of Growth
Faster Search, Better Features
Millennials and younger people growing up in the computer age are more savvy about privacy on the internet. Because the search engine still serves a very niche population, the majority of their growth is yet to come. I foresee this happening when they implement 1) quick view tools like NBA scores, weather, map, etc. and 2) search speed gets faster.
Tailwind in Demographic Shift
In addition, consider that Yahoo and Bing each have 5–6% of North American search market share without any product advantage versus Google. Their market share comes primarily due to being pre-installed on devices. As the world demographic shifts towards a more tech-savvy population in the coming decades, the average adult will know to switch to a better search engine, unlike today. This is a tailwind for both Google and DDG. Among Google’s competitors in North America, DDG is the only search engine with a differentiated product that Google cannot replicate. Both Google and DDG will take market share from Yahoo and Bing.
Risks
- People don’t care that much about privacy
- Product is inferior to Google
- Incumbents will copy the privacy feature
Risk #1: This is an acceptable risk in that we don’t need that many people to care about privacy for DDG to still reach a large valuation. Even at a billion dollar valuation, DDG would only be 0.15% the size of Google. And at that point it would still have only around a 3% North America search market share, allowing Bing and Yahoo to continue maintaining a 3–4% market share even if all of DDG’s search gains was taken directly from those two.
In other words, All can co-exist with DDG still reaching a billion dollar valuation.
Risk #2: The most common complaint I hear about the product is that 1) it is slower than Google, and 2) it doesn’t display instant summary data for various searches, for example NBA results or the weather. These are problems I experience myself with DDG, and what prevents me from using it as my default search engine in all my devices. I believe that this is something that the DDG team is working on. Given what I know about the CEO and his approach on tackling growth, my guess would be that he is prioritizing on the most important features related to privacy first.
Risk #3: As mentioned earlier, there are many barriers for an incumbent like Google in copying the privacy features of DDG. To reiterate, 1) it is too small a market for Google to care, 2) Google’s won’t change its entire suite of products and business model that relies on possessing user data 3) privacy savvy users would have a hard time trusting Google for this.
Some may say, what if a company like Apple copies it and utilizes its large distribution network to beat DDG? This is missing the point of startups. Y-Combinator’s Sam Altman has said startups have advantages over larger incumbents in three ways, one of which is the ability to go all-in on a platform shift. Privacy-oriented search is a new platform, and moreover Apple is not in the business of creating search engines.
Funding
DDG raised $13M in VC funding, a $3M seed round from Union Square Ventures in 2011 and a $10M round in late 2018. Assuming the investor took an equity stake of between 5% and 20%, that would lead to a post-money valuation of between $50M and $200M. Pitchbook data suggests $160M post-money.
Conclusion
DDG is a great search engine with clean user interface that is already profitable. More importantly, its 10-year annualized search volume growth of 60% speaks for itself. Despite this growth, there is plenty of market share to capture from incumbents Yahoo and Bing, supported by a shifting demographic tailwind that is savvier about internet privacy. This will slowly play out over the next few decades, giving DDG room to grow into a much larger valuation without having to compete with Google. Finally, the CEO has a proven track record with company building. I believe that the company should reach a $1B+ valuation given its growth, margins, and market. I would be surprised if it were not getting acquisition offers already, given the shifting focus towards privacy in big tech.
