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A company with a modest valuation can survive by doing one thing and doing it well.

A company with a very large valuation needs either very large sales figures OR large growth potential. Dropbox is squarely in the second category, which is why they need to keep expanding.

Surely if the company isn't "living up to it's valuation" that's a problem for the people who erroneously valued it at that level, not for the company?

In the abstract yes. But if the company essentially borrowed money from people on the basis of that high valuation, then its a problem. And that's what they've done. Actually, they literally did just borrow money, according to the headline, although I was thinking more of the equity raise process where although there isn't a literal loan, the investors have an expectation that they will get their money back (*N, where N >> 1) at some point.

That's not how investing works. People don't invest because they think a company is worth X, they invest because they think it will be worth X at some point in the future adjusted for the risk of not being worth X. Further, they don't necessarily buy stock from the company.

In other words startups have a small chance of being worth a much larger X, and Exxon has a very large chance of being worth a slightly larger X. If you need zero risk buy government bonds not stock.

Um, it certainly is how investing works. They think the company will be worth >X in the future ( >>X in the case of pre-IPO investing).

Stock and Bonds are very different things. A bond is an agreement with a company to hand back X amount of money at time Y. Stock is an agreement to share in future profits.

Importantly, when you buy stock from a someone other than the company then the price you pay has little to do with the company. But, again my point is risk is an inherent part of the process. If you invest in a startup and they use all of that money to buy government bonds and then fold in five years you would be pissed because they avoided risking your capital.

I think you are talking past each other because you are not talking about the same party when asserting whether there is or isn't a problem. It's true that the investors don't have a problem if Dropbox fails to live up to its valuation. Venture capitalists expect that most of their investments will fail. But a company that has accepted venture capital is beholden to its investors and will almost certainly have a problem if it fails to live up to their expectations. Remember that investors are part owners, and get to make decisions about how the company should be run. The more dissatisfied they become, the more drastic the changes they will demand.

Hah. It becomes a problem for it's users. When they are chasing quarterlies and the focus shifts from providing a good experience to making numbers, you'll feel it. Most companies DNA is pretty baked in by the time they offer publicly.

Evernote is a good example of that.

The people who erroneously valued it are shareholders in the company, the company exists to benefit its shareholders, ergo (the shareholders would say) it's a problem for the company.

Basically people jumped on Dropbox to make money out of Dropbox's success. If Dropbox remain conservative and just continue to do remote storage/syncing well then those people won't get [as much] free money.

Those people aren't investing they're speculating. They're not there primarily to see Dropbox succeed they're shareholders because they want to get rich from other people's work.

So yes that's a problem for the company. Ultimately this model of "investment" can kill a business that is technically succeeding because the speculators don't see a high enough return. That's also a problem for society as it creates instability and prevents technologically successful companies from prospering long term.

At least that's one narrative that appears to fit well with my observations.

On the other hand if the speculators also reward people doing the work, they incentivize lots of them to do that work. Hence startup economy, where many companies blatantly lie that they care about users, where in fact those companies are only vehicles for the founders to get a good exit.

If investors have to risk money in order to [potentially] earn money, that doesn't sound so "free" to me.

Free as in no time or labor spent by themselves. At least that is what I think he meant

It turns out being an institutional investor is a fulltime job. It's quite ridiculous for GP to believe otherwise.

Be that as it may, this is pedantic quibbling outside of the point the GGP post author was actually trying to make: speculative pressure by investors (lazy or otherwise) conflicts with the aim of stable long-term equilibrium doing +/- one thing well.

If you actually care about building a sustainable business, not Unicorns and moonshots and other things investors want you to become and do, don't take investment, or at least not much.

Plenty of investors are risking other people's money, though. Venture capitalists themselves are prime examples of this.

So what? That's literally their jobs. In fact, both parties entered into that contract knowingly with the expectation that it will be mutually beneficial.

How is that money "free"?

"When you owe the bank $1000, you're in trouble. When you owe the bank $1,000,000,000 the bank is in trouble"

Similar mechanics apply to having a large valuation, no?

I recall this being something pointed out in "Silicon Valley" where an offer/valuation was way over the top and would leave the team in this same kind of situation. Dropbox had to accept the offer, so they did agree to the terms that put themselves where they are now.

They can survive, but from an investment standpoint they need to be able to expand and grow for it to make sense.

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