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This really resonated with me: > There is often a sound reason to sell but, if the transaction is a fair one, the reason is not so that the seller can become w

This really resonated with me: > There is often a sound reason to sell but, if the transaction is a fair one, the reason is not so that the seller can become wealthier. It's a challenging statement in a world where pre-revenue startups can sell for $xM, and instructive about how the rest of the world works.

wayn3 10y ago
Assuming that your business has to make money to be of value is no different from assuming that your car has to make money to be of value.
barrkel 10y ago
Selling is a route to liquidity. Capital value is usually based on discounted (net present value) future income. To spend that future income you need to wait (& work) for it to arrive; or you can sell the future income stream today. To the degree that wealth means being able to spend money, selling capital can make you wealthy, but it just materialises something that was probabilistic. So I don't really see the challenge. Pre-revenue just means higher risk and a bigger discount.
- sandworm101 10y ago
  It is more complicated these days. The asset is more than future revenue. The value of an asset is, at least partially, detached from the rights it embodies. A stock's present value is also based on it's likely future value, which is in turn based on market forces and geopolitic. A stock's price can go up only because another's goes down. An asset can increase in value because regs change or banks decide it can be more leveraged. Such forces are needed to explain why many invest in apparantly negative interest/growth, something that seem irrational if capital assets are valued purely on future earnings.
  - sverige 10y ago
    >A stock's price can go up only because another's goes down. Ah, the zero-sum game deception. That only works in the short term, else the world economies wouldn't be able to support a population that is double what it was 30 or 40 years ago. That doesn't mean I disagree with the statement that capital assets are not valued purely on future earnings.
  - xapata 10y ago
    > up ... because another's goes down This is very unusual. Typically stocks in the same industry are highly correlated.
  - valuearb 10y ago
    No, all assets are valued on future cash flows. The fact that some assets have future cash flows that are extremely difficult to predict does not mean they aren't be valued on someones crazy estimate of them. A company with negative growth rates still has a value (not sure what negative interest means in this context). An example is liquidations, which can be very profitable investments. "A stock's present value is also based on it's likely future value, which is in turn based on market forces and geopolitic". The more I read your post the more I think you confuse price and value. Lets say I find a stock trading at 5x earnings, with a good moat, and earnings growing at only 5% a year, so it obviously looks like a bargain. But lets also assume I have a magic ball that can tell me a stocks future, and it says this company will never trade for anything but 5x earnings. I'm still buying it, not only am I getting a 20% a year return on my investment (as my imputed share of profits), but that return is going to grow over time. At some point they will either buy back stock, increasing my share of their profits, or pay me my profits in dividends. In the meantime I can let the value grow, even in this "slow growth" business.
    - deleted 10y ago
      [deleted]
Alex3917 10y ago
It's not inconsistent with how pre-revenue startups are valued. If you have a startup that's expected to make $100M over the next 10 years and you sell it for $80M, then if your expectations were correct you've given up $20M. This is true even if the startup has earned $0 to date.
- bwilliams18 10y ago
  Don't forget about the time-value of money. If in 10 years the company is worth 100,000,000 it's only worth 67,000,000 today (assuming 4% interest and monthly compounding)
- sjg007 10y ago
  Seems like a bad idea to spend 80 to earn 20.
  - hammock 10y ago
    Spend 80 to earn 100, man
    - stagbeetle 10y ago
      Net 20.
  - whack 10y ago
    You must really hate investing in stocks/bonds/real-estate then.
  - jnordwick 10y ago
    I hear ya. 25% returns aren't really worth it. I'll do you a favor and take all of them off your hands for you though.
- bbcbasic 10y ago
  The startup will probably 'make' (profit I assume?) < 0 over 10 years as it will all be reinvested. But it will have a future value based on the potential future future future cash flows.

wayn3 10y ago

Assuming that your business has to make money to be of value is no different from assuming that your car has to make money to be of value.

barrkel 10y ago

Selling is a route to liquidity. Capital value is usually based on discounted (net present value) future income. To spend that future income you need to wait (& work) for it to arrive; or you can sell the future income stream today. To the degree that wealth means being able to spend money, selling capital can make you wealthy, but it just materialises something that was probabilistic. So I don't really see the challenge. Pre-revenue just means higher risk and a bigger discount.

sandworm101 10y ago
It is more complicated these days. The asset is more than future revenue. The value of an asset is, at least partially, detached from the rights it embodies. A stock's present value is also based on it's likely future value, which is in turn based on market forces and geopolitic. A stock's price can go up only because another's goes down. An asset can increase in value because regs change or banks decide it can be more leveraged. Such forces are needed to explain why many invest in apparantly negative interest/growth, something that seem irrational if capital assets are valued purely on future earnings.
- sverige 10y ago
  >A stock's price can go up only because another's goes down. Ah, the zero-sum game deception. That only works in the short term, else the world economies wouldn't be able to support a population that is double what it was 30 or 40 years ago. That doesn't mean I disagree with the statement that capital assets are not valued purely on future earnings.
- xapata 10y ago
  > up ... because another's goes down This is very unusual. Typically stocks in the same industry are highly correlated.
- valuearb 10y ago
  No, all assets are valued on future cash flows. The fact that some assets have future cash flows that are extremely difficult to predict does not mean they aren't be valued on someones crazy estimate of them. A company with negative growth rates still has a value (not sure what negative interest means in this context). An example is liquidations, which can be very profitable investments. "A stock's present value is also based on it's likely future value, which is in turn based on market forces and geopolitic". The more I read your post the more I think you confuse price and value. Lets say I find a stock trading at 5x earnings, with a good moat, and earnings growing at only 5% a year, so it obviously looks like a bargain. But lets also assume I have a magic ball that can tell me a stocks future, and it says this company will never trade for anything but 5x earnings. I'm still buying it, not only am I getting a 20% a year return on my investment (as my imputed share of profits), but that return is going to grow over time. At some point they will either buy back stock, increasing my share of their profits, or pay me my profits in dividends. In the meantime I can let the value grow, even in this "slow growth" business.
  - deleted 10y ago
    [deleted]

Alex3917 10y ago

It's not inconsistent with how pre-revenue startups are valued. If you have a startup that's expected to make $100M over the next 10 years and you sell it for $80M, then if your expectations were correct you've given up $20M. This is true even if the startup has earned $0 to date.

bwilliams18 10y ago
Don't forget about the time-value of money. If in 10 years the company is worth 100,000,000 it's only worth 67,000,000 today (assuming 4% interest and monthly compounding)
sjg007 10y ago
Seems like a bad idea to spend 80 to earn 20.
- hammock 10y ago
  Spend 80 to earn 100, man
  - stagbeetle 10y ago
    Net 20.
- whack 10y ago
  You must really hate investing in stocks/bonds/real-estate then.
- jnordwick 10y ago
  I hear ya. 25% returns aren't really worth it. I'll do you a favor and take all of them off your hands for you though.
bbcbasic 10y ago
The startup will probably 'make' (profit I assume?) < 0 over 10 years as it will all be reinvested. But it will have a future value based on the potential future future future cash flows.