
Growing Numbers of Start-Ups Are Worth a Billion Dollars - jayzee
http://www.nytimes.com/2013/02/05/technology/growing-numbers-of-start-ups-are-worth-a-billion-dollars.html?hpw&_r=1&
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incongruity
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...

Just my daily dose of skepticism...

~~~
pg
_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.

~~~
lifeisstillgood
But the statement "40 companies worth 1 bn+ each" implies that the clever
people think each company is a really sellable at 1 bn

Otherwise should we change the definition of "valuation" ?

Edit: it is difficult not to sound snarky on this subject. If a respected
investor's first reaction is to see beyond the individual companies and into
the whole (and I agree tech startups will produce billions of value in The
next five years) that's good - but it reflects a jargon problem perhaps - if
the sophisticated investor sees a group of billion dollar valuations and
thinks I will invest in them all and come out ahead it is a different thought
process to the layman - that a valuation of a billion means it is worth that
much.

While we should allow for a degree of sophistication investing in startups, it
is still a stretch of jargon to make Humpty Dumpty proud

~~~
Patient0
To say that each of the 40 companies will be worth at least 1 billion is
indeed unlikely.

But all that is required for the investors to be "rational" is for the total
value of all 40 companies to exceed 40 billion.

So if two companies end up worth 25 billion each and the rest are worthless,
that'll still have made it all worthwhile (assuming as an investor you
diversified across all 40 companies).

In this scenario, we could rationally say that "each of the 40 companies had a
5% chance (2 out of 40) of being worth 25 billion dollars, which made them
worth 25/20 = 1.25 billion dollars each".

~~~
lifeisstillgood
But that is _not_ what a common dictionary reading of "40 companies all with a
valuation of over 1billion" _means_.

Yes, that is how a sophisticated investor (who has _all_ 40 companies in their
portfolio) will see it.

It is not what a layperson will read - and that is likely to be a problem -
jargon should not conflict with natural interpretation, it should complement
it.

------
adventured
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.

~~~
bitcartel
Money supply has rocketed since 2008:
<http://research.stlouisfed.org/fred2/series/BASE/>

~~~
lasonrisa
You cannot discuss thee money supply without discussing the money velocity.

The money velocity has tanked:
<http://research.stlouisfed.org/fred2/series/M1V>
<http://research.stlouisfed.org/fred2/series/M2V>

~~~
marvin
Hey, this is off topic, but I am no economist and I am curious. I've heard
your argument before, and it seems really obvious that this must be the reason
we don't have a lot of inflation.

But what is stopping all the money that has been printed from at one point
entering the economy and causing inflation? From the previous chart, I read
that the amount of money in the US economy has more than quadrupled. Is this a
correct interpretation?

~~~
bitcartel
Most of the money is passed between central banks and technically insolvent[1]
banks, helping them repair their balance sheet and dispose of toxic assets.

[http://dailybail.com/home/chart-of-the-day-feds-balance-
shee...](http://dailybail.com/home/chart-of-the-day-feds-balance-sheet-hits-
new-record-3-trilli.html)

Some of the money seeps into the economy and may be inflating stocks and other
assets. For example, banks are given loans at zero interest[2] and they can
use that money for whatever, e.g. proprietary trading, bonds/treasuries, etc.

Perhaps some of that money finds its way into investment funds and eventually
tech start-ups?

[1] [http://www.ritholtz.com/blog/2012/02/fasb-sells-out-
unsurpri...](http://www.ritholtz.com/blog/2012/02/fasb-sells-out-unsurprising-
results-follow/)

[2]
[http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e7...](http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3)
[http://www.bloomberg.com/news/2011-12-23/fed-s-once-
secret-d...](http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-
compiled-by-bloomberg-released-to-public.html)

~~~
marvin
Will this money be removed from the economy at some point? How?

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therealarmen
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.

~~~
pg
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.

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callmeed
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.

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dave_sullivan
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.

~~~
muzz
> 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.

No, it means exactly that. How else do you think valuation is computed?

~~~
bryanh
I might _really_ want to invest in you, so I'll blow the valuation up. I might
even be the only person willing to pay that price. But that doesn't mean I
want to _buy_ you outright at the valuation.

~~~
pg
In practice that doesn't happen. In these late-stage rounds, there is not
usually a single investor willing to pay way more than other investors. And
even if there were, the company would think twice before selling at that
price, because it would just set them up for their next round or IPO to be a
down round, which would not be good.

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sagancarl
What is a billion? A few things worth so much:

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
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 ;-)

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mbesto
_“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.

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jbarham
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.

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npguy
Almost two years back, we had written some points on facebook's secondmarket
valuation, which we think is relevant to the discussion here -

[http://statspotting.com/2011/03/the-truth-about-facebooks-
va...](http://statspotting.com/2011/03/the-truth-about-facebooks-valuation-
numbers/)

~~~
muzz
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.

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vccafe
Evernote, MobileIron, Pure Storage, Marketo, DDS and SurveyMonkey... what do
they have in common?

