
Investors think Snapchat is worth $4 billion. That’s insane. - Libertatea
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/31/investors-think-snapchat-is-worth-4-billion-thats-insane/
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epa
These start ups get massive investment, IPO for retarded valuations, and all
the venture firms/owners cash out leaving the market and institutional
investors holding the rest. Slowly these companies die.. but the original
people have already made their money and are on to something else. Classic.
For instance, is there any sane reason why a website like rapgenius.com needs
to IPO to raise public funds? The answer is no, they IPO in order to get a
liquid market to sell their shares in.

~~~
michaelochurch
Nailed it.

~~~
vdaniuk
If by "nailed" you mean "reduced a probability of rational discourse by
trolling" then sure, he nailed it.

~~~
michaelochurch
You're reacting more to his tone than his content.

He's right about how VC-istan works. There's this new engine of extreme
productivity that no one understands well; those with early access loot it
(getting into private financing rounds where prices are set on the golf
course; using VC connections to be air-drop executives) and the public
(including Bay Area engineers) eats the bill through failed companies and
sudden job-loss, an innavigable career ladder, financial crashes due to
overvalued stocks (pump-and-dump), and exorbitant housing prices just to have
a chip and a chair.

He might be damning his credibility by using "retarded" in such a way, but
he's on to the meat of the problem.

~~~
vdaniuk
Well, I naively continue to expect rationality and solutions on HN including
the solution to these VC shenanigans.

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octotoad
Here's how I like to view these 'valuations': I am certainly a 'nerd', 'geek',
'tech-head'; whatever sort of label you want to throw at me. I am also the
furthest you could get from somebody who has half a clue about stocks,
mergers, IPOs etc.

Forget about the hype, the amount of users, the "mindshare", the paradigm-
shifting omg-teh-adsense-ponies. To a 'regular joe' like myself, all I think
when I hear anything about these sorts of companies is this: Do they currently
make money from the service they provide? If so, for how long will this be a
viable revenue stream? If not, does anybody realistically expect this
situation to magically change at some future date?

As others have pointed out, this kind of investment prospect is often an easy
way to make a quick buck for people in the know/money. I do understand this.

What I don't understand is how there can be such a lack of retrospective
caution exercised by so many people who may have a hand to play in the outcome
of these IPOs.

Despite not having the slightest clue about stock markets and financial
investments, when it comes to these 'Web 2.0' companies, I do know a viable
business model when I see one.

How the hell do all these people involved in the artificial inflation of the
value of these companies not think back to what happened with the first
web/tech bubble of the late '90s and early '00s?

I'm an uneducated oaf in the tail end of my 20's and even I can recall the
ridiculous shit that went on back then. How can people with so much more
technical and financial wisdom seriously think services like these are worth
so much?

~~~
tixocloud
This definitely feels like the 21st century gold rush where everyone's just
rushing in before it's too late just in case that hot tech startup becomes the
next Google. I don't know if wisdom can overpower the greed that people have.

~~~
vdaniuk
Gold rush is a zero-sum game with unsustainable business model, while startups
are not any of these things. I feel that such comparisons are misplaced and do
not provide useful abstractions to effeciently reason about startups.

~~~
tixocloud
Fair enough that gold is a zero sum game and perhaps gold rush might be the
wrong terminology to use. What I really was referring to was the fact that
many investors just jump on the bandwagon to avoid missing out on the next big
thing. Even when the business model is unclear.

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confluence
Only $200 million was raised this round for 5% of the company. All that means
is that 5% of SnapChat is worth $200 million to a very small number of people.
It does not mean that the other 95% is worth $3.8 billion, nor that the other
95% worth of value actually exists.

Funding rounds are just deposits on houses. I can put down $40K for 5% of a
house today, and choose to never pay the rest if someone gives me that option,
implicitly valuing the house at $800K. But when the time comes to actually
sell, it doesn't mean that I'll get $40K back. It just means that at the point
of my deposit, the value of acquiring the option to acquiring the house was
worth $40K.

That's all. Valuations are bullshit.

~~~
headgasket
Very wise words.

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pg
While I have no idea what information investors are basing their decisions on,
it's probably some evidence that Snapchat is starting to replace Facebook
among some bellwether set of users. That could be a reasonable bet, depending
on what the evidence is. But I don't know what the evidence is, and without it
there is no way I can estimate what Snapchat's valuation should be.

(Hint: and neither can _The Washington Post_ or any of you.)

~~~
mikeryan
I'm torn on this, I didn't think Instagram was worth 1B until my 16 year old
niece told me the only things she used was Twitter and Instagram.

If you tell me Snapchat is what all the kids are using I'm going to give it
some leeway - though I still think there's a lot of greater fool investing
going on.

My biggest concern with these services is the seemingly fickle nature of their
audience. Even if they're able to turn the service into something profitable -
how long can they maintain it?

~~~
hangonhn
I actually use this strategy. Because I mentor high school students, I
sometimes ask them what they use the most. Facebook is not on that list.
Instagram and Tumblr for sure and maybe SnapChat. That's not to say that FB is
out. Sometimes the best way to reach them is via FB messages.

The good thing about teenagers is that: 1\. they're trendy or try to be 2\.
have short attention span

If you can get a teenager to understand and like your product, you have a good
chance of going viral, popular, or whatever it is kids call it these days.

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junto
Part of the argument here for the valuation is that teens are leaving Facebook
and moving over to services like SnapChat and Instagram.

Maybe I'm missing something, but do teens really have that much disposable
income? Do they click on / respond to online ads?

Surely older people are a much more valuable target market? When I look at my
parents, they are much more likely to be duped into buying something through
clicking on ads. Most of the time my parents don't even realise they are
clicking on an ad.

Sometimes I think this tech market is aiming as the wrong segments.

~~~
jroseattle
No, but those teens are going to transition into adults, with (hopefully) some
disposable income at that time. Don't know if it justifies the valuation, but
certainly being a default in a large market is worth something to somebody.

~~~
taude
And they'll transition into the next big thing, too, just as quickly as they
transitioned onto Snap-Chat?

There can probably be made a good argument that younger generations don't have
brand-affinity like older people. Younger people are being raised to move
quickly from thing-to-thing? (I don't really know, but it sounds like someone
should research this.) I cite some personal experience of younger family
members who used to use Facebook when they were in college and when it was a
college-only-thing. Now they don't use it anymore.

~~~
jroseattle
Excellent point, and I think that's the bet -- capture their attention _long_
enough to keep them around. Hard to imagine, but someone has to be thinking
about that problem.

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ig1
To quote Paul Graham: "Just as trying to think up startup ideas tends to
produce bad ones, working on things that could be dismissed as "toys" often
produces good ones. When something is described as a toy, that means it has
everything an idea needs except being important. It's cool; users love it; it
just doesn't matter. But if you're living in the future and you build
something cool that users love, it may matter more than outsiders think."

To put into context, how much do you think a telco company with 26 million US
customers is worth ?

If Snapchat is displacing text and calls as the medium of transient
communication of the next generation, it could feasibly end up being worth a
substantial amount.

(My personal opinion is that it's over-valued; but it's important that someone
makes the reasoned counter-argument)

~~~
uptown
"To put into context, how much do you think a telco company with 26 million US
customers is worth ? If Snapchat is displacing text and calls as the medium of
transient communication of the next generation, it could feasibly end up being
worth a substantial amount."

But things aren't as "sticky" as they used to be. You used to have to rent
your phone from the telco, and you had no alternative providers. Today, users
can drop their telco carrier and switch to a variety of alternatives - bring
their number with them, or switch to VOIP altogether and keep similar
functionality without a noticeable loss of functionality. The same is true for
the app of the moment. Maybe it'll be hot for awhile, but the barrier to
entering the marketplace is so dramatically reduced that it's difficult to see
the same type of longevity from today's companies that you've seen from the
previous generation of big businesses.

~~~
taude
You captured my sentiments better than I could above.

Virtually no barriers to switch apps + young generations being raised in an
environment of reduced fear when switching.

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brickcap
It could be true but how come snap chat is worth so much and not what's app.
Is it because they have actual revenue model while snapchat's value is
speculative?

I don't really understand how valuations work. I read somewhere that they
intend to make money by flash sales which I think is a really good idea for
low priced products but it is not clear if they will make the money off
transaction or allowing the product to be sold on their market place.

It would be great if investors could shed some light on what they think is so
valuable about the company in which they are investing so much.

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coldcode
I predict in the long run they should have taken the $1B from Facebook. Yes
they have users, but where in future will revenue come from? Startups like
this come in two kinds, one that can become a standalone business (think Apple
or Microsoft or Google) and the other an IPO or sellout business (like Youtube
or Instagram) that eventually makes sense to a buyer as a piece of their
revenue puzzle. For the former you need products that people buy and the
latter you need buzz that attracts buyers. For the latter any excitement
increases the chance that someone will eventually buy it. To me Twitter is the
latter kind but it's still trying to be the first.

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jroseattle
Valuation conversations always remind me of something George Carlin once said:
"ever notice that everyone who drives slower than you is an asshole, but
everyone who drives faster than you is a maniac?"

I call it the Water Level Theory. It is that subconscious assumption that our
personal thresholds for risk tolerance and boundaries of acceptability are the
standard, and everything else is classified accordingly. It is in a similar
vein to the notion of "one man's trash is another man's treasure."

As for Snapchat, I hope they're worth $4 billion. It gives me hope for my
dozen or so crazy ideas being worth only a few hundred million each. :-)

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bake
While I think the Snapchat approach may be a major tenant of online
communication going forward (just like in the offline world, there is a great
amount that need be communicated but not published), an idea itself is not
where the value lies for investors. It's about execution and, for investors,
monetization. I think Snapchat will be seen as the nexus of a major change in
digital communication, but I'm not sure whether it's Google or Alta Vista.

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mutant
Does no one remember the late 90's bubble?

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alanbyrne
Here I am as co-founder of a SaaS company that has actual customers, pays 3 of
us a salary and still makes profit and I almost feel like a failure because
no-one has valued my hard work at millions of dollars, let alone billions.

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hvass
Wouldn't you as an investor/owner/marketer for a network-effect platform try
to get as much media attention as possible? I think hyping up your startup in
the billions range is the perfect way to do so.

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verelo
To put it in perspective, they could spend that money /differently/.
Blackberry is worth just a touch over $4 billion

[http://i.imgur.com/QcXiC9E.png](http://i.imgur.com/QcXiC9E.png)

~~~
bigdubs
Where do you think Blackberry is going though? I would wager it'll be worth
less than 4bn in 2 years time, where-as investors are banking that Snapchat
will be worth more.

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iamshs
On one hand I think this is disproportionate amount of value, but on other I
think investors with lot of money are not really that stupid and see some sort
of value in this.

~~~
Rimpinths
Economist Joseph Lawrence of Princeton University in 1929: “The consensus
judgment of the millions whose valuations function on that admirable market,
the Stock Exchange, is that stocks are not at present over-valued. Where is
that group of men with the all-embracing wisdom which will entitle them to
veto the judgment of this intelligent multitude?”

Alan Greenspan in 1999: "To anticipate a bubble about to burst requires the
forecast of a plunge in the prices of assets previously set by the judgments
of millions of investors, many of whom are highly knowledgeable about the
prospects for the specific investments that make up our broad price indices of
stocks and other assets."

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jonaldomo
HN who is going to pick this company up? Facebook, Twitter, Yahoo, Google or
Microsoft?

~~~
McDermot
Spiegel turned down Facebook already and they have tens of millions of cash
with a license to burn. A buddy of mine that went to Stanford with him
recently quit his Wall St job to help them work on monetization schemes. No
chance they sell in the foreseeable future.

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dotcoma
Insane, tilting on the criminal side.

~~~
fennecfoxen
Rich people throwing their money away on hare-brained schemes to make more
money by paying software engineers - insane, maybe, but this is borderline
_criminal_ now? What are we, the Bolsheviks? :P

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michaelochurch
These bubbles (housing, social web) are ways for rich people to give money to
each other. But it's a zero-sum game (true value-creators like engineers are
second-class citizens in the contemporary VC-funded world; they can't even buy
houses) so someone is losing.

The lower-middle-class gets strip-mined. The upper-middle-class gets
entertainment (cf. Valleywag) to make stagnation bearable.

For more on the underlying change, read here:
[http://michaelochurch.wordpress.com/2013/10/31/vc-
istan-4-si...](http://michaelochurch.wordpress.com/2013/10/31/vc-
istan-4-silicon-valleys-tea-party/)

