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
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.
You're betting that the limited amount of money that you put into startup will tie you over until the next funding round or until you hit positive cash flow. Runway is a race between the burn rate and growth metrics. You're betting that the fuse you lit is going to blow and not fizzle when it gets to zero.
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.
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."
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.)
My thought was exactly this. People are saying Snapchat is just another stupid overnight social app, but they are failing to see that this actually has some great potential. Facebooks problem is you publish things and they are there forever for anyone to see, but Snapchat is a little clever in the sense that you can publish events for 24 hours and then they disappear. Your friends are still in the know about what you're doing, and then it's gone. I would make a bet that there aren't a lot of significant friends of others that need to see something more than once or that go back looking for an event.
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?
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.
The trendy nature of these business is a negative on valuation in my book. Sure, it'll grow a bit. And then the next new thing will come along. It likely is really profitable for those investing early on and founders.
As an employee at a company like this, I'd worry about all the hard-work having a pay-off four years down the road when options vest, etc...
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.
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.
Do you really want to know why rapgenius needs IPO money or are you just using it as a rhetorical vessel to justify use of such inflamatory lexis as "retarded" and "classic"?
I have no hopes on influencing your opinion but want to provide my version of the explanation. Surely it is only an opinion, I have no authority on the subject.
Rapgenius needs to IPO to massively scale in text annotation business providing context and meaning to texts that are far away from rap. Immense value can be gained if RapGenius or NewsGenius will provide a platform to annonate, verify and explain complicated news articles, scientific studies, techical documentation, anything that requires metadata for better understanding. This feat was tried by many and all of them failed, including Google, remember Sidewiki?
Rapgenius has a leg to stand on -- working annotation platform. If they are able to branch into other areas that are more appealing to mass market, the possibilities of growth are immense.
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.
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)
The difference being, surely, that Snapchat has 26million users, not 26million customers.
That said, it may very well be worth $4billion, or north thereof. The article concedes that it's difficult to speculate from the outside (and thus labels it "insane"), but fails to concede the simple point that it may be entirely justified.
"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.
>> To put into context, how much do you think a telco company with 26 million US customers is worth?
26 million free users vs 26 million customers paying $50-100 a month is apples and oranges.
On the other hand, from the article: "As long as I can sell it to someone else for more in six months, who cares what it's really worth?" It might be argued that it's "really worth" whatever you can sell it for. It's not crazy to buy a baseball card for $100 if you can sell it for $150. Why is stock different, except that it's more volatile?
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.
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.
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.
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.
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.
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?
The problem is that your real worth, and your potential worth are two different things. Facebook/Tencent finds their users and especially their youth valuable. Factoring that into their value, they think they're worth 4 billion.
That said, that's far too high of a real worth for this company, illustrating how a prospective buyer can really drive up your companies pricetag. It may factor in real revenues and growth potential, but this price is largely market speculation. Very risky, but apparently worth it for some big players. My advice to the little guy is to stay out of it cause if one thing goes wrong the whole price could come tumbling down.
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.
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.
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.
Consider the lifetime of the company. Record an estimate of all the profits and losses the company will ever make over that lifetime. Discount each number for risk, inflation, and opportunity cost (because money is more valuable if you have it now and invest it in something profitable than if you wait 10 years - you should probably discount at least 4% a year, which is about what the average inflation-adjusted market return is).
This number is the appropriate value of the company.
Naturally, there's a lot of guesstimates going into here with the profits-and-losses / risk, even for big stable companies. The high price of Snapchat means that someone with money believes that Snapchat will generate a lot of revenue, or that they will be bought out. It's quite possible they're totally crazy, or that they've wrong about the risk.
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.
Teenagers are prime audience for brand advertising. Fashion, makeup, clothing, drinks - brands want to get them young while they are still impressionable.
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.
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.
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.
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. :-)
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.
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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[ 4.1 ms ] story [ 40.0 ms ] threadFunding 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.
You're betting that the limited amount of money that you put into startup will tie you over until the next funding round or until you hit positive cash flow. Runway is a race between the burn rate and growth metrics. You're betting that the fuse you lit is going to blow and not fizzle when it gets to zero.
Everything else is probably narrative fallacy.
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."
(Hint: and neither can The Washington Post or any of you.)
This nicely fills the gap of sharing vs history.
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?
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.
As an employee at a company like this, I'd worry about all the hard-work having a pay-off four years down the road when options vest, etc...
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.
I have no hopes on influencing your opinion but want to provide my version of the explanation. Surely it is only an opinion, I have no authority on the subject.
Rapgenius needs to IPO to massively scale in text annotation business providing context and meaning to texts that are far away from rap. Immense value can be gained if RapGenius or NewsGenius will provide a platform to annonate, verify and explain complicated news articles, scientific studies, techical documentation, anything that requires metadata for better understanding. This feat was tried by many and all of them failed, including Google, remember Sidewiki?
Rapgenius has a leg to stand on -- working annotation platform. If they are able to branch into other areas that are more appealing to mass market, the possibilities of growth are immense.
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)
That said, it may very well be worth $4billion, or north thereof. The article concedes that it's difficult to speculate from the outside (and thus labels it "insane"), but fails to concede the simple point that it may be entirely justified.
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.
Virtually no barriers to switch apps + young generations being raised in an environment of reduced fear when switching.
26 million free users vs 26 million customers paying $50-100 a month is apples and oranges.
On the other hand, from the article: "As long as I can sell it to someone else for more in six months, who cares what it's really worth?" It might be argued that it's "really worth" whatever you can sell it for. It's not crazy to buy a baseball card for $100 if you can sell it for $150. Why is stock different, except that it's more volatile?
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://i.imgur.com/QcXiC9E.png
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.
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?
That said, that's far too high of a real worth for this company, illustrating how a prospective buyer can really drive up your companies pricetag. It may factor in real revenues and growth potential, but this price is largely market speculation. Very risky, but apparently worth it for some big players. My advice to the little guy is to stay out of it cause if one thing goes wrong the whole price could come tumbling down.
Consider the lifetime of the company. Record an estimate of all the profits and losses the company will ever make over that lifetime. Discount each number for risk, inflation, and opportunity cost (because money is more valuable if you have it now and invest it in something profitable than if you wait 10 years - you should probably discount at least 4% a year, which is about what the average inflation-adjusted market return is).
This number is the appropriate value of the company.
Naturally, there's a lot of guesstimates going into here with the profits-and-losses / risk, even for big stable companies. The high price of Snapchat means that someone with money believes that Snapchat will generate a lot of revenue, or that they will be bought out. It's quite possible they're totally crazy, or that they've wrong about the risk.
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.
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.
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. :-)