I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble? Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? (And I don't mean with the plan to turn it into an IPO and get rich/get out quick)
A billion dollars for a survey website with no clear sustainable competitive advantage?
Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that...
Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each?
That's not the bet investors are making. They're betting more on IPOs than acquisitions, and they're betting that the entire portfolio will end up net ahead, not that each individual company will. And indeed it would be extremely unlikely for a group of 40 startups not to end up with a power law distribution of exit valuations.
Same game, different names. Here's Jim Cramer in 2000.
"You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
OK. Here goes. Write them down -- no handouts here!: 724 Solutions (SVNX), Ariba (ARBA), Digital Island (ISLD), Exodus (EXDS), InfoSpace.com (INSP), Inktomi (INKT), Mercury Interactive (MERQ), Sonera (SNRA), VeriSign (VRSN) and Veritas Software (VRTS)."
Of course it's a bubble. I think most of these will burst, but some of them will withstand it.
One thing to remember: it's in the best of interest of everyone involved in a bubble to deny there's a bubble. These investors who say "it's different this time" have no credibility.
> I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble?
Is this actually a controversial statement? I don't think so. Startups can be fueled by passion but ultimately are about making money. I sort of assumed most folks here were here to try to cash in on the bubble before it's over.
It's not surprising. Much of the stock market is chasing an all time high.
The Fed has got bubbles roaring all over the place, from corporate debt to treasuries to stocks to a new brewing real estate bubble to student loans (they directly fund / make possible all of it).
Also, a billion dollars is now worth maybe half what it was in 1998 (some would argue a lot less than that, eg when run against gold, silver, oil, and other dollar based commodities).
These start-ups should appraise their businesses as objectively as possible, and consider selling before this latest bubble explodes.
The cheap money piper will be paid sooner than later.
Also, there's a billion dollars and then there is a billion dollars. A billion dollars of oil is a valuable commodity. A billion dollars of start-up stock is not necessarily such a great thing unless you can find someone willing to buy all of it, right now.
What's missing in this article is the impact of liquidation preference on valuation. The billion dollar valuation that a VC invests at is simply the price they have to pay to get in the deal. For fast-growing startups competition is fierce, so valuations often become dizzyingly large.
The best case scenario is that the startup turns out to be the next Google and everybody gets rich. The worst case (and more common) scenario is that reality hits and the startup sells for $500M instead of $10B. As long as the invested capital is less than $500M, the VC will be getting all of their money back.
The valuations at which VCs invest are not unconstrained though. The valuations at which they invest have to be on average a lower bound on eventual exit valuations, or they'll at best break even, and a VC firm that does no better than break even in one fund will have a hard time raising its next one.
E.g. if a VC fund invested in 10 companies at a valuation of a billion each, and 9 tanked while one ended up being worth 20 billion, they'd fairly happy. But all 10 can't tank. It has to work out on average.
I'm not familiar with all the startups mentioned, but I have to say this: I think Pinterest will be a several billion dollar company and either IPO (likely) or get acquired by Amazon (maybe). If I could buy the stock a decent price, I would.
I say this based on (a) my own experience seeing it drive traffic to some recent consumer projects and (b) seeing how every woman in my life (from my 18-year-old daughter to my 62-year-old mother in-law) uses it as a giant shopping list for their lives.
Something is worth exactly what someone else is willing to pay for it. But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. Makes for interesting reading though.
The procurement cost of a B-2 bomber was $929m in 1997 dollars (roughly $1.3bn today) so in a way, Pinterest is worth slightly less than a single plane ;-)
“Mobile disrupts personal computers, a market worth billions. Cloud disrupts computer servers and data storage, billions of dollars more. Social may be one of those rare things that is totally new.”
Isn't this logic flawed? It assumes there is a zero-sum game (with the exception of social), but the valuations are assuming that it's not a zero sum game (hence record high PE ratios for cloud computing). There's a difference between stealing market share and creating new ones.
Simple explanation: Investors are desperate for yield.
E.g., Current yields for 10-year Treasuries are about 2%, which in real terms is effectively zero given that inflation is tracking just below 2%.
So any asset that generates steady cash flow (e.g., Apple stock), or is considered to have the potential to generate future cash flow, will be hugely overpriced.
Your 4 points at the end are all true (and true in general), but Facebook's valuation on SecondMarket was not a stretch-- in the IPO they sold 425M shares at $38.
[+] [-] incongruity|13 years ago|reply
A billion dollars for a survey website with no clear sustainable competitive advantage?
Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that...
Just my daily dose of skepticism...
[+] [-] pg|13 years ago|reply
That's not the bet investors are making. They're betting more on IPOs than acquisitions, and they're betting that the entire portfolio will end up net ahead, not that each individual company will. And indeed it would be extremely unlikely for a group of 40 startups not to end up with a power law distribution of exit valuations.
[+] [-] bitcartel|13 years ago|reply
"You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
OK. Here goes. Write them down -- no handouts here!: 724 Solutions (SVNX), Ariba (ARBA), Digital Island (ISLD), Exodus (EXDS), InfoSpace.com (INSP), Inktomi (INKT), Mercury Interactive (MERQ), Sonera (SNRA), VeriSign (VRSN) and Veritas Software (VRTS)."
http://www.thestreet.com/story/891820/the-winners-of-the-new...
[+] [-] joonix|13 years ago|reply
One thing to remember: it's in the best of interest of everyone involved in a bubble to deny there's a bubble. These investors who say "it's different this time" have no credibility.
[+] [-] timcederman|13 years ago|reply
[+] [-] badgar|13 years ago|reply
Is this actually a controversial statement? I don't think so. Startups can be fueled by passion but ultimately are about making money. I sort of assumed most folks here were here to try to cash in on the bubble before it's over.
[+] [-] adventured|13 years ago|reply
The Fed has got bubbles roaring all over the place, from corporate debt to treasuries to stocks to a new brewing real estate bubble to student loans (they directly fund / make possible all of it).
Also, a billion dollars is now worth maybe half what it was in 1998 (some would argue a lot less than that, eg when run against gold, silver, oil, and other dollar based commodities).
These start-ups should appraise their businesses as objectively as possible, and consider selling before this latest bubble explodes.
The cheap money piper will be paid sooner than later.
[+] [-] bitcartel|13 years ago|reply
[+] [-] bluedanieru|13 years ago|reply
[+] [-] schraeds|13 years ago|reply
[deleted]
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] therealarmen|13 years ago|reply
The best case scenario is that the startup turns out to be the next Google and everybody gets rich. The worst case (and more common) scenario is that reality hits and the startup sells for $500M instead of $10B. As long as the invested capital is less than $500M, the VC will be getting all of their money back.
[+] [-] pg|13 years ago|reply
E.g. if a VC fund invested in 10 companies at a valuation of a billion each, and 9 tanked while one ended up being worth 20 billion, they'd fairly happy. But all 10 can't tank. It has to work out on average.
[+] [-] callmeed|13 years ago|reply
I say this based on (a) my own experience seeing it drive traffic to some recent consumer projects and (b) seeing how every woman in my life (from my 18-year-old daughter to my 62-year-old mother in-law) uses it as a giant shopping list for their lives.
[+] [-] dave_sullivan|13 years ago|reply
[+] [-] muzz|13 years ago|reply
No, it means exactly that. How else do you think valuation is computed?
[+] [-] sagancarl|13 years ago|reply
American Airlines' annual revenue: $22 billion UCLA endowment position (assets minus liabilities): $1.7 billion 500 MWe coal plant: $0.650 billion Airbus A380: $0.400 billion F-22 Raptor unit cost: $0.150 billion Falcon 9 space rocket: $0.050 billion MRI machine: $0.001 billion
So, pinterest is worth more than a coal plant but a bit less than UCLA's endowment.
A fun list to read: http://en.wikipedia.org/wiki/List_of_megaprojects
[+] [-] petercooper|13 years ago|reply
[+] [-] mbesto|13 years ago|reply
Isn't this logic flawed? It assumes there is a zero-sum game (with the exception of social), but the valuations are assuming that it's not a zero sum game (hence record high PE ratios for cloud computing). There's a difference between stealing market share and creating new ones.
[+] [-] jbarham|13 years ago|reply
E.g., Current yields for 10-year Treasuries are about 2%, which in real terms is effectively zero given that inflation is tracking just below 2%.
So any asset that generates steady cash flow (e.g., Apple stock), or is considered to have the potential to generate future cash flow, will be hugely overpriced.
[+] [-] npguy|13 years ago|reply
http://statspotting.com/2011/03/the-truth-about-facebooks-va...
[+] [-] muzz|13 years ago|reply
[+] [-] vccafe|13 years ago|reply
[+] [-] timrpeterson|13 years ago|reply
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