
Wizards of bullshit: How Forbes turned $6.5 million into $20 billion - joshuacc
http://37signals.com/svn/posts/2966-wizards-of-bullshit-how-forbes-turned-65-million-into-20-billion
======
jamiequint
Just more linkbait from 37signals. This article is being really pedantic by
only focusing on the last transaction.

Facebook sales on SecondMarket have been hovering around the $70BN range since
6 months ago (1) so there is clearly enough interest in a private market
auction to place it there.

Calling this "Grossly Irresponsible" is laughable. Facebook's stated revenue
and earnings are ahead of Google's pre-IPO numbers, probably enough to justify
the 3x valuation (Google IPO'd at around $25BN IIRC) they will seek in their
offering.

1\. [http://techcrunch.com/2011/01/27/facebook-shares-dip-7-in-
mo...](http://techcrunch.com/2011/01/27/facebook-shares-dip-7-in-most-recent-
secondmarket-auction/)

~~~
AJ007
Not to mention that this is the exact same math used to determine the market
capitalizations of all companies.

Linkbait gets you links, it also destroys your credibility. Which, by the way,
is the reason I read hacker news and not any of the other numerous
alternatives.

~~~
kmfrk
HN (front page) is still very susceptible to linkbait, though - Techcrunch are
particularly good at "gaming" HN.

I wonder if people on this site have always been so weary of 37signals, or if
the company's reputation has just slowly eroded with all the meagre diatribes.

~~~
edw
The 37signals folks are interesting: as product designers and product
managers, I have the utmost respect for them. As observers of the VC scene,
their opinions and observations are often useless. That said, if you don't
want to go the VC route and instead want to have a go at building a successful
business without outside financing, I think _Getting Real_ and _Rework_ are
must-reads.

Genius is rarely universal. William Shockley invented the transistor — yes, a
gross oversimplification — but was an advocate of eugenics. Henry Ford and
Charles Lindbergh? Nazi sympathizers. No, I don't think Jason Fried, DHH, and
co. are monsters, but these high-profile examples show that skill, talent, or
insight in one area do not necessarily transfer to others. Not everyone is a
Leonardo da Vinci.

~~~
codeup
You could have found other examples than supporters of eugenics and nazi
sympathizers to argue that "genius is rarely universal".

Instead you make hair-raising comparisons and close by writing: "I don't think
Jason Fried, DHH, and co. are monsters, but".

This is a low form of an ad-hominem attack.

------
byrneseyeview
Which is more compelling: "I don't think the last price this asset traded at
is realistic" or "What's the best way to short Facebook?"

The funny part of this is that GSV has bought FB at a discount to the
prevailing price over the last few weeks. Here's an interview about how they
got such a low price:

[http://finance.fortune.cnn.com/2011/06/27/how-gsv-got-
facebo...](http://finance.fortune.cnn.com/2011/06/27/how-gsv-got-facebook-at-
only-70-billion/)

It's fine to say that FB is overvalued. You can definitely make the case for
that. But _every financial asset_ is valued based on recent trades. This trade
is down from the last few. So the argument here is flimsy.

(By the way, if you're an accredited investor and you're interested in
shorting FB, please contact me--email's in the profile. I've been kicking
around an idea for how this might be done.)

~~~
breck
Out of curiosity, why short FB?

To me, shorting a single equity seems really risky. Even if you think the
current Facebook product and business is overvalued, Mark Zuckerberg and
company have an incredible track record of making smart pivots and growing the
company.

Betting against the current business might be somewhat smart, but betting
against that team? That sounds really risky to me. They could take the company
anywhere and are clearly committed to doing just that. I'd put them in the
same league as Jobs, Bezos, et cetera. And shorting Amazon or Apple anytime in
the past decade would have proved disastrous.

~~~
dxbydt
Shorting an equity != Betting against the team. Also, Shorting an equity !=
Really risky.

Shorting a vector of spots is just taking their dot product with a set of
negative weights. After a time increment has elapsed, you switch the sign of
the weights and do it all over again. Purely arithmetic operation, has nothing
to do with team, company, risk etc etc.

In plain English - there are tons of securities whose short interest is quite
high, every single day. You short cause you believe the spot is high. Once the
spot is at a reasonable level you go long. If the trade sours you close out &
eat your loss.

~~~
breck
I have no idea what any of this means. To me, if you short a stock, and the
price goes up, you lose money. And there's no limit to your potential losses,
so you could lose a whole ton of money.

~~~
dxbydt
um... ok. Mathematically it helps if you don't think in naive terms as stock,
company, team, risk, price etc. First of all, there are no stocks. A stock is
just a call at zero strike with infinite maturity. So you short a stock,
you're just going short an instrument at some weight. The weight is the number
of stocks you short. So you short 5 shares of google, the spot right now is
497 and the weight is minus five. So you do this with a bunch of equities (
google, apple, linkedin etc ). Then you obviously get a vector of spots and a
vector of negative weights. The money you make is simply the inverse of the
dot product of both vectors. What do you do with that money ? Obviously you
don't sit on it. You buy protection on upside and speculate on downside
simultaneously. ie. You buy X OTM calls on goog, say at 550 strike the OTM
call is 70 cents so you buy that. Then you speculate on the downside ie buy
say Y 485 weekly put at 70 cents.

So if your bet is right, the Y puts make money, the X calls lose money, and
overall you come out winner. You wait until google is say 487 and then buy
back your shares making 10 buck per share plus the money off your Y puts minus
the money from the X calls. So thats just another dot product ie. C = 5 times
10 + Y times a - X times b.

Now say the trade goes south. Then you lose on the put, lose on the short, but
make money on the X calls, so the dot product looks like above but with
different weights. In either case, you can only lose a fixed sum worstcase (
so you statement " there's no limit to your potential losses" is definitely
false ). So maximizing the money is then a constrained linear optimization
problem. In a polynomial vector space, you can find X & Y quite easily using
Dantzig. ( <http://en.wikipedia.org/wiki/Simplex_algorithm> )

HTH.

~~~
18pfsmt
Embarrassingly enough, I'm not smart enough to parse your comment for
correctness. If I were, I would be building a product to model that exact
understanding of the market if it is, indeed, accurate.

EDIT: grammar

------
martinkallstrom
0.01% is actually a much larger transaction than market cap is normally
computed on. The last trade at anyone time in a company can be as small as a
single share. Of course you can object to this, but it makes no sense just
pointing out a single case like this.

Regarding the estimation of the personal wealth of Zuck-whats-his-face: since
the wealth of the rest of the bunch of billionaires he's compared to is
estimated roughly by extrapolating the last transactions on the mass of equity
they own, it would be unfair to not do the same with his.

Forbes calling MZ's holdings a "mostly paper fortune" is in fact themselves
questioning the underpinnings of the valuation mechanics. I think they are
keeping their heads fairly leveled.

~~~
dhh
The last transaction is a reasonable way to access market cap when a
reasonable number of the shares are out in the open for free trading. 2/3s of
Google shares are floating, so what the last trades happened at determine the
worth to a reasonable approximation. When just a tiny, tiny sliver of the
shares are floating freely, these transactions are a terrible way to access
the grand worth of the company.

You don't need to extrapolate much further from the 0.01% of the shares bought
in this transaction to see how ridiculous that is. That's how 37signals became
a $100B company with a $1 investment following the same template.

~~~
hugh3
_You don't need to extrapolate much further from the 0.01% of the shares
bought in this transaction to see how ridiculous that is. That's how 37signals
became a $100B company with a $1 investment following the same template_

Extrapolating to the one-dollar case is extrapolating too far. Whoever bought
0.01% of facebook, they were investing real money which they didn't want to
lose.

... or were they? If the buyer were already a big facebook shareholder I
suppose they might just be trying to build up the company's on-paper valuation
prior to the float. Does GSV own a chunk of facebook already?

------
goldmab
I think some of you are misunderstanding the idea DHH is advocating. This is
just part of 37signals' campaign to recognize profit as the primary measure of
business success, as opposed to valuation.

It's more of a common sense understanding of business, and it involves less
hand waving. Pretend you know nothing about stock markets. How do you become
rich from running a business? Simple: take in a lot more money than you spend.
If you don't do that, any secondary estimates of your "wealth" are in danger
of collapsing.

~~~
prostoalex
Except the process of raising money, which is where the valuation question
comes up, is usually happening during the moments you don't have any
profitability.

------
g123g
I think it is actually a good point. Because there is very little liquidity
for facebook stock at the moment and no way to short the stock, it is very
easy for 2 or 3 investors to collude and just for $6.5 million, increase the
stake of other investors by billions of dollars.

This is also what happens in real estate markets in some cities in India. 2 or
3 property brokers (real estate agents) will come together to buy a plot of
land at double the existing price and create a lot of hype in newspapers
around that. And with a small investment they increase the value of their
portfolio many fold. Something like this can be happening here also as FB is
still not public.

------
useflyer
not to go all CFA-ninja on the article, but the valuation paid for a minority
stake is less than that for a controlling stake...this is most often
demonstrated with acquisitions (you can buy a few shares at mkt, or the whole
thing for far higher), PE, and premiums between voting and non-voting shares

I love 37s, but this is pure hyperbole and totally backwards

------
thematt
I think this is more a symptom of the low volume and liquidity, not
necessarily Forbes's math. There are public stocks trading on the major
exchanges that have extremely low volume, but the last trade is still the last
trade and as a result they tend to fluctuate wide day-to-day.

This is consistent with how the market capitalization of every company is
calculated.

------
gojomo
DHH had the same complaint when private transactions valued Facebook at $30B
as he does now, when they value Facebook at $70B. See:

[http://37signals.com/svn/posts/2585-facebook-is-not-
worth-33...](http://37signals.com/svn/posts/2585-facebook-is-not-
worth-33000000000)

DHH can write my web framework but I wouldn't let him manage my money.

------
retube
> So the relatively modest investment of $6.5M snowballs into a $20 billion
> creation of “wealth”

I don't understand. What's this $20bn number? Where did that come come? They
bought 0.01% for $6.5m. Unless the stock has traded again at a higher
valuation, the paper value of their stake is still $6.5m. And... so what?

~~~
michael_dorfman
The paper value of their stake is still 6.5M. The paper value of Facebook as a
whole (the market cap) is now 20B higher than it was prior to that trade, if
you take that share price as the new share value, which is what Forbes did,
and what 37signals objects to.

~~~
retube
Ah ok got it, cheers.

------
clarky07
Many people strongly believe that Facebook will IPO at 100 billion or more.
Valuing it at 70 based on the most recent large transaction seems perfectly
reasonable to me.

I don't think it makes sense for it to be valued that highly, but that is not
the same as saying it isn't valued that highly. It clearly is.

------
rufibarbatus
The valuation is a bit back of envelope, which might be considered grossly
irresponsible at your discretion — other comments in this page seem to support
the share price range, I honestly don't know. But the concept is correct:
market cap = total shares * share price.

What's slightly disturbing is how they extrapolated _that_ into a valuation of
Mr Zuckerberg's personal wealth. (Then again, the need to gauge and rank
people's personal wealth is a bit beyond me TBH.)

------
ryanisinallofus
The fact that we can even debate these numbers means that Facebook or it's
investors are breaking the law and should be investigated.

Private companies are not allowed to publicly broadcast their share price for
exactly this reason. Until something hits an open market market you really
don't know exactly what something is worth.

------
paulnelligan
Great article, it really puts it in perspective.

As an afterthought, does anyone have any good information on how to _sensibly_
value a product or company ?

~~~
retube
Actually I don't understand why this valuation is being considered null/void.
It _is_ a simple issue of "extrapolation". (whether the stock is over-priced
is a separate issue).

If this firm spent 6.5m on 0.01% of common stock, and assuming there is no
other value tied up in the deal - i.e. it's a simple share purchase - then yes
that values the firm at $70bn or whatever. The investor is expecting to get
his money back, he hopes the firm will IPO at this value or higher.

This is a separate issue to the actual valuation. You (and me) might well
consider such a valuation absurd. But that's where it's trading. C'est la vie.

Edit: ah ok, I got his argument - he's saying that a 0.01% trade is too small
a trade to value facebook as a whole with. He could be right (altho $6.5m is
not to sneezed at). But a $50m trade _would_ give confidence around a
valuation ;)

~~~
bad_user

         It _is_ a simple issue of "extrapolation". 
        (whether the stock is over-priced is a separate issue).
    

I agree, but that's not how "extrapolation" should work.

Considering how kick-ass and promising Google was before its IPO and what
Facebook is right now, it's clearly an overpriced company, especially in the
context of the current economic recession which is far from over and might
even bring further surprises down the road (Greece, Spain, Portugal
defaulting, etc...)

Based on this valuation, Facebook (pre-IPO) right now is in the same league as
Google and Apple, which is absurd.

Of course, markets aren't always rational. That's why we have bubbles and
economic recessions. What can I say; most people dream about investing $1 and
getting $3000 back.

------
jvandenbroeck
So true, these valutations are crazy @DHH really writes things that make sense
about this stuff;

Also an interesting/funny read: [http://37signals.com/svn/posts/1941-press-
release-37signals-...](http://37signals.com/svn/posts/1941-press-
release-37signals-valuation-tops-100-billion-after-bold-vc-investment)

------
gojomo
I'd love to see a similar DHH takedown of Groupon's valuation. And then Jason
Fried, Groupon advisor and former corporate director, could refute it!

~~~
dhh
I wrote a much more detailed takedown of Groupon's evaluation, in fact. You
can find it here: [http://shortlogic.com/post/6142108636/groupon-ipo-pass-on-
th...](http://shortlogic.com/post/6142108636/groupon-ipo-pass-on-this-deal)

If this stuff is your flavor, I also wrote one on Pandora:
[http://shortlogic.com/post/6586713689/pandora-should-be-
trad...](http://shortlogic.com/post/6586713689/pandora-should-be-trading-
at-2-share-tops)

Enjoy!

~~~
gojomo
Thanks, I forgot about that. It should be at 37signals! :)

I agree with you on Groupon as much as I disagree on Facebook. Groupon has a
nice gimmick that's easy to copy and has been fueled by novelty and
unsustainable incentives – and in my personal experience, even some outright
corporate dishonesty.

Facebook has strong lock-in effects and unique targeting capabilities. On any
screen in any net cafe worldwide, you're likely to see many people using
Facebook. It was worth more then $30B last year when you dismissed that
valuation based on a 3% investment, it has a good chance of being worth more
than the $70B suggested by multiple small private transactions today.

------
badusername
BS.

