Is Waze the Next Tumblr?

Micro-blogging site, tumblr’s recent acquisition by Yahoo has sparked more interest in other start-ups which command such lofty valuations and are under consideration by other technology giants as potential acquisitions. One such player is social traffic and navigation app maker, Waze.

Waze’s Financials
Waze was founded in 2007 by co-founders Uri Levine, Ehud Shabtai, and Amir Shinar in Israel and was initially called Linqmap. It is a social networking app that gets drivers to sign up and connects them with each other to share information regarding traffic conditions and other road data. The app is available as a free download for iOS, Android, Symbian and Windows Mobile. The company has operations based out of Israel and Palo Alto, California.

Waze lets their users sign up for free and become a part of the crowdsourced information process by using the app either passively and letting the app share information with other users or more actively contributing details such as accident areas, detours, road closures and other hazards along the way. The app provides real-time traffic information to their community of drivers and has added new features such as the ability to provide gas rate details. The service helps fellow drivers identify the most economical gas station.

By July 2012, Waze had doubled their user base over a six-month period to more than 20 million users. Overall, last year, they reported 36 million drivers across 110 countries sharing more than 90 million road traffic and incident reports. Recent news suggests that Waze has expanded their user base to over 45 million users worldwide. Of those, though, only 12 million-13 million are monthly active users.

Like many of its contemporaries, Waze has yet to develop a strong revenue model. A few years ago, Waze tried to earn revenues by selling their crowdsourced traffic reports. However, the move did not generate much interest. Since then, Waze has been experimenting with revenue models and last November, finally, decided to launch ads. Waze users now see ads of restaurants, hotels, and other locations on their routes. Waze plans to improve ad revenues by leveraging demographic information of users available through social networking services such as Facebook. Ad revenues are still at a nascent stage for Waze. They do realize that pushing too many ads to drivers will scare them away, and Waze needs to maintain a fine balance of optimal advertising.

Despite the absence of revenues, Waze has managed to raise $67 million in venture funding from investors, including BlueRun Ventures, Magma Venture Partners, Vertex Venture Capital, Kleiner Perkins Caufield & Byers and Li Ka-shing. Their last round held in October 2011, helped them raise $30 million of these funds and pegged their valuation at $200 million.

Their weak monetization model has also not stopped them from becoming an attractive target to several technology giants. Earlier this year, it was rumored that Apple was looking to buy Waze for an estimated $750 million. The deal did not finally materialize, and some attributed the failure of the merger to a price tag of $1 billion demanded by Waze investors. The merger talks may have fallen through, but Waze continues to partner with Apple to provide data for Apple’s mapping software. The financial terms of their partnership with Apple are not publicly disclosed.

More recently, Facebook has expressed interest in acquiring Waze. The market is abuzz with news that the social networking player wants to acquire Waze at a price of over $1 billion. The acquisition may bode well for Facebook’s mobile growth and may also help Facebook attract more ad revenues by enhancing local search results and localized ads. However, this is speculative, since Waze has no history of monetization, and Facebook may or may not have the technology to monetize this asset.

Facebook has established a precedent of going for billion-dollar acquisitions despite limited monetization capabilities with the acquisition of Instagram. Whether they will go ahead with the acquisition of Waze will be revealed in the coming days. But if they do acquire Waze, Facebook too will have to ensure that they monetize the localized search results extensively to ensure they get the returns on their investments.

Otherwise, I just don’t see the point of all this money sloshing around, turning Silicon Valley, yet again, into a speculative madhouse!