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To quote Marc Andreessen: "A few common fallacies about valuation of public and private technology companies: First, ask any MBA how to value tech companies, s

To quote Marc Andreessen: "A few common fallacies about valuation of public and private technology companies: First, ask any MBA how to value tech companies, she'll say "discounted cash flow, just like any other company!" Problem: For new & rapidly growing tech companies, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses. You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions. Related to fact that tech co's don't have stable products like soup or brick companies; future cash flows will come from future products. Instead, smart tech investor thinks about: A future product roadmap/opportunity, B bottoms-up market size & growth, C talent and skill of team. Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen. Finance people find this appalling, but investors who do this well can make a lot of money. Spreadsheet investing is often disastrous. Doesn't mean cash flow doesn't matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash."

11thEarlOfMar 9y ago
> Instead, smart tech investor thinks about: A future product roadmap/opportunity, B bottoms-up market size & growth, C talent and skill of team. Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen. This thinking is what led me to buy GOOG(5x), TSLA(12x), NFLX(7x), YELP (ouch) and LC (oucher). I am buying what I believe the company will become, not what the company is. It's risky, and only a portion of my portfolio goes into these high-risk investments. Much of the rest is in mutual funds. MBAs might do a little better in income investing for dividends. It's a totally different view, but investors need to understand that as well when it comes time to transition from growth to income stocks.
- weston 9y ago
  You could also invest in the Vanguard Information Technology ETF (VGT) fund, which is an ETF of 365 tech stocks.
JumpCrisscross 9y ago
> ask any MBA how to value tech companies, she'll say "discounted cash flow, just like any other company" No she won't. Discounted-cash flow methods have been around since the 1500s [1]. We've had the time to figure out it's good for predictable cash flows and bad for everything else. I used to be tolerant of (non-financial) Silicon Valley's anti-intellectualism towards economics and finance. Sort of like the Graham-Dodd speculator-investor line [2], I thought it was a handy, if comically-simple, rhetorical device. I've become more suspicious. It seems like an easy way to deter reasoned economic discussion. For growing companies without earnings, you work out from production capacity (for existing markets) or down from the expected customer base (for new markets). Nobody finds this appalling. Few venture investors use spreadsheets to make decisions, though many use checklists or spreadsheets to idiot test valuations, i.e. understand what assumptions must pan out for their thesis to hold. [1] https://poseidon01.ssrn.com/delivery.php?ID=537100100007025084085031105020076000103051006034026016025071110086085001000005068074121007006025119120053086122002088079101069112050061043086003082115081127078073054037032065087027001020022064027065124065116073103087113095007110027124120101001117002&EXT=pdf https://poseidon01.ssrn.com/delivery.php?ID=5371001000070250... [2] https://blogs.cfainstitute.org/investor/2013/02/27/what-is-the-difference-between-investing-and-speculation-2/ https://blogs.cfainstitute.org/investor/2013/02/27/what-is-t...
MarkMc 9y ago
> For new & rapidly growing tech companies, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses No, it doesn't collapse. Mr Andressen seems to be defining Discounted Cash Flow very narrowly - as the the kind of spreadsheet an MBA creates where cash flow from each year is relatively predicatable. His approach of simply making an educated guess about market size and team talent is still essentially DCF analysis.
Aron 9y ago
Very well said (to Andreessen I suppose). I started off with spreadsheets, but have evolved to this over time, even though it feels less rigorous and more intuitive. To some extent, I wonder how much investment banks suffer from the fact that they have to explain their picks with rigour\quantitatively forces them into missing the biggest payoffs which can only come from following sound intuition. And then, also if you are communicating your choices qualitatively you probably rely on familiar thematic 'stories' (big data! deep learning!) which leads to Thiel's aversion to stories.
Bromskloss 9y ago
> Instead, smart tech investor thinks about: A future product roadmap/opportunity, B bottoms-up market size & growth, C talent and skill of team. Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen. Isn't all this just a way to get an idea of future cash flows, though?

11thEarlOfMar 9y ago

> Instead, smart tech investor thinks about: A future product roadmap/opportunity, B bottoms-up market size & growth, C talent and skill of team. Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen. This thinking is what led me to buy GOOG(5x), TSLA(12x), NFLX(7x), YELP (ouch) and LC (oucher). I am buying what I believe the company will become, not what the company is. It's risky, and only a portion of my portfolio goes into these high-risk investments. Much of the rest is in mutual funds. MBAs might do a little better in income investing for dividends. It's a totally different view, but investors need to understand that as well when it comes time to transition from growth to income stocks.

weston 9y ago
You could also invest in the Vanguard Information Technology ETF (VGT) fund, which is an ETF of 365 tech stocks.

JumpCrisscross 9y ago

> ask any MBA how to value tech companies, she'll say "discounted cash flow, just like any other company" No she won't. Discounted-cash flow methods have been around since the 1500s [1]. We've had the time to figure out it's good for predictable cash flows and bad for everything else. I used to be tolerant of (non-financial) Silicon Valley's anti-intellectualism towards economics and finance. Sort of like the Graham-Dodd speculator-investor line [2], I thought it was a handy, if comically-simple, rhetorical device. I've become more suspicious. It seems like an easy way to deter reasoned economic discussion. For growing companies without earnings, you work out from production capacity (for existing markets) or down from the expected customer base (for new markets). Nobody finds this appalling. Few venture investors use spreadsheets to make decisions, though many use checklists or spreadsheets to idiot test valuations, i.e. understand what assumptions must pan out for their thesis to hold. [1] https://poseidon01.ssrn.com/delivery.php?ID=537100100007025084085031105020076000103051006034026016025071110086085001000005068074121007006025119120053086122002088079101069112050061043086003082115081127078073054037032065087027001020022064027065124065116073103087113095007110027124120101001117002&EXT=pdf https://poseidon01.ssrn.com/delivery.php?ID=5371001000070250... [2] https://blogs.cfainstitute.org/investor/2013/02/27/what-is-the-difference-between-investing-and-speculation-2/ https://blogs.cfainstitute.org/investor/2013/02/27/what-is-t...

MarkMc 9y ago

> For new & rapidly growing tech companies, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses No, it doesn't collapse. Mr Andressen seems to be defining Discounted Cash Flow very narrowly - as the the kind of spreadsheet an MBA creates where cash flow from each year is relatively predicatable. His approach of simply making an educated guess about market size and team talent is still essentially DCF analysis.

Aron 9y ago

Very well said (to Andreessen I suppose). I started off with spreadsheets, but have evolved to this over time, even though it feels less rigorous and more intuitive. To some extent, I wonder how much investment banks suffer from the fact that they have to explain their picks with rigour\quantitatively forces them into missing the biggest payoffs which can only come from following sound intuition. And then, also if you are communicating your choices qualitatively you probably rely on familiar thematic 'stories' (big data! deep learning!) which leads to Thiel's aversion to stories.

Bromskloss 9y ago