
The Watney Rule for Startups and the Return to the ‘Old Normal’ - btrautsc
https://medium.com/@firstround/the-watney-rule-for-startups-and-the-return-to-the-old-normal-cba75583365e#.p3b8um9m4
======
rsp1984
From the article:

 _... When the public stock price of marketplace lenders (like LendingClub and
OnDeck Capital) dropped, it somehow (magically) had little effect on the
valuations of private marketplace lenders. This was a new — and scary
phenomenon. It was as if promising baseball players in the minor leagues were
suddenly able to earn a higher salary than veteran all-star players in the
major leagues. Perhaps this was partially driven by the limited supply of
promising high growth companies — which created an auction-type dynamic in
which Greater Fool Theory drove prices. Or perhaps it was due to the fact that
public companies trade every day (on good news and bad news), whereas private
companies control when they trade (so they were able to have far more control
of their valuation by only trading on good news)._

This piece irritates me. The author (who clearly should know what's going on)
is acting surprised, as if they did not see this coming. I can't believe he or
she is not just stating the true reason that public and private market
valuations have drifted apart:

It's that private market investments are on _much_ different terms than public
market investments. Usually private market investors are given liquidation
preferences and more, none of which a public market investor can ask for. When
a public company goes down, the investors lose money right away. When a
private company goes down the investors lose money only if the company is
worth less than the invested money (the company value including what's left of
the invested money!)).

I would not even call private market valuations "valuations". They are more
like a valuation cap. Investors make money if the company sells for more than
the cap.

~~~
titanomachy
> Investors make money if the company sells for more than the cap.

Actually, the investors with the highest liquidation preference could make a
lot of money even if the company sells for much less than the cap.

------
Animats
From the article: _" According to the WSJ, of the 48 venture-funded U.S. tech
companies that went public since 2014, 35 now trade below their initial public
offering prices."_

The venture market has been running on the "greater fool" approach, assuming
that stage N investors will be bailed out by stage N+1 investors. Instead, the
last private equity stage is left holding the bag. Look at Twitter's
numbers.[1] Twitter still isn't profitable, which is incredible considering
the simplicity of the business.

From the startup perspective, the trouble with becoming profitable is that
you're then evaluated as an operating company. Investors look at GAAP
earnings, not growth or EBITDA ("earnings before all the bad stuff") numbers.
Operating companies are usually valued around 10x earnings. (Apple is around
11 right now). On that basis, many of the "unicorns" have negative valuations.
If you're stable and profitable but not hugely profitable, you can't get
another round of funding.

[1]
[http://financials.morningstar.com/ratios/r.html?t=TWTR](http://financials.morningstar.com/ratios/r.html?t=TWTR)

~~~
danieltillett
If you are stable and profitable why do you need another round of funding?

~~~
Animats
To expand. You have the thing working, customers are happy, and,
traditionally, that's when you grow the company.

------
tarr11
Previous HN discussion on a similar topic [1] from Heidi Roizen's "How to Stay
Alive" [2]

[1]
[https://news.ycombinator.com/item?id=11111753](https://news.ycombinator.com/item?id=11111753)

[2] [http://heidiroizen.tumblr.com/post/139377970205/dear-
startup...](http://heidiroizen.tumblr.com/post/139377970205/dear-startups-
heres-how-to-stay-alive)

