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My problem with pg's numbers is that they are almost entirely theoretical. The valuations don't represent anything close to liquidity, and the chances of those

My problem with pg's numbers is that they are almost entirely theoretical. The valuations don't represent anything close to liquidity, and the chances of those companes generating anywhere near that return in real terms are slim at best. The portfolio might be "worth" 4.7 billion, but what are the chances they'll generate a real return anywhere close to that? I'm not arguing against pg's methodology, as I realize it's fairly consistent with standard practices, but the ycombinator investors are nowhere near as wealthy in real terms as these numbers would suggest. If airbnb were to fail that would destroy a huge amount of that wealth, with no ability to extract any value before then. None of this is meant to rain on YC's parade. I have a great deal of respect and admiration for all involved, and congratulate them heartily on the very real successes they have had and continue to have. I'd simply be heasitant to describe YC as being "worth" 5BB, given a reasonable expected cash return.

zyfo 15y ago
pg doesn't describe YC as being worth 5BB, he says the projected value of all startups are in that ballpark. The question was How is YC doing? and the answer seems to be: pretty damn good. As in they are doing something right, not as in "our valuation is around 5BB".
- redthrowaway 15y ago
  Sorry, my last line wasn't in keeping with the spirit of the rest of my post. I'm not saying YC is or isn't worth 5BB, but rather that that's how they're valuing their portfolio. I don't doubt that valuation, just the utility of the money that's theoretically theirs.
paul 15y ago
Are you suggesting that Sequoia and other top VCs are making investments where the expected return is less than 1? AirBnb could end up being worth $0, but it could also be worth $10 billion. A $1 billion valuation would be a bet that it's expected value is substantially more than $1 billion. You may disagree with that assessment, but the people making that bet have a pretty good track record.
deleted 15y ago
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byrneseyeview 15y ago
This is obviously a valid criticism. But it would be far more valid to criticize any alternative valuation that fixed the problem you're addressing. For example, it would be conservative to value all of YC's startups in terms of their cash and receivables, plus the liquidation value of their furniture and servers. But then it would be trivial to say "Hey! AirBNB isn't an asset play. It's valued based on growth. The asset value is a worst-case scenario, but most of the other scenarios involve a lot of revenue growth and free cash flow." Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? (i.e. anything you think would produce a "fair" market price?) Actually, more directly: how much of your net worth would you invest in shorting YC's portfolio at this inflated $4.7bn valuation?
- redthrowaway 15y ago
  >Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? No, there isn't. Angel investing is an inherently speculative game. What I would say is this: a YC investor could reasonably claim to have seen a return on any shares he sold, or any shares he holds of a company that has gone public. That's it. Beyond that, all investments are good only in theory. Were I to buy a house, I would decide what was affordable based on the former, not the latter. The same is true for my contributions to my children's college fund or my retirement fund. In short, all of the things that actually matter in life would be based off of what I had sold and what shares I held of public companies. To make any long term financial decisions based on the projected worth of companies that had, at best, gone through a successful series A or B would be foolish. They're nice numbers to think about, but they don't mean a damned thing until they're putting food in my kids' mouths. Let's illustrate my point like this: Suppose you are given the chance to pay 1MM for some good that has a 20% chance of being worth 1BB in 5 years. If you can spare the million, then this is a fantastic investment by any measure. Having bought into this investment, however, how would you describe your net worth? Your investment is valued at 1BB. The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. Still, that 200MM is fairy money. It doesn't exist, and you can't do a damned thing with it until you somehow manage to convince someone to give it to you. To claim that you're "worth" 200MM is silly, as you can't spend a dime of it. This is the problem I have with pg's numbers: They sound great until you ask what the cash-out is. Saying "I've invested in companies that are worth 4.7BB" is great, but it doesn't say anything useful about how well your money has been used. Remember, prior to investment it was real money that could buy apples and tuitions. Now it's theoretical money that could buy a whole lot of apples, but only under a specific set of favorable circumstances. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?
andrewparker 15y ago
AirBnB was recently valued at $1BN, so even if you assume AirBnB is worth zero, you only take a 25% haircut on this back of the napkin math (because AirBnB only represents $1BN of the $4.2BN in pg's portfolio). So, then you're talking about a lifetime 10X investor instead of a 13.4X investor. Still completely amazing performance, and he has a diverse portfolio of startups to protect him from individual blow-ups (such as assuming one of his most valuable companies is worth zero).

zyfo 15y ago

pg doesn't describe YC as being worth 5BB, he says the projected value of all startups are in that ballpark. The question was How is YC doing? and the answer seems to be: pretty damn good. As in they are doing something right, not as in "our valuation is around 5BB".

redthrowaway 15y ago
Sorry, my last line wasn't in keeping with the spirit of the rest of my post. I'm not saying YC is or isn't worth 5BB, but rather that that's how they're valuing their portfolio. I don't doubt that valuation, just the utility of the money that's theoretically theirs.

paul 15y ago

Are you suggesting that Sequoia and other top VCs are making investments where the expected return is less than 1? AirBnb could end up being worth $0, but it could also be worth $10 billion. A $1 billion valuation would be a bet that it's expected value is substantially more than $1 billion. You may disagree with that assessment, but the people making that bet have a pretty good track record.

deleted 15y ago

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byrneseyeview 15y ago

This is obviously a valid criticism. But it would be far more valid to criticize any alternative valuation that fixed the problem you're addressing. For example, it would be conservative to value all of YC's startups in terms of their cash and receivables, plus the liquidation value of their furniture and servers. But then it would be trivial to say "Hey! AirBNB isn't an asset play. It's valued based on growth. The asset value is a worst-case scenario, but most of the other scenarios involve a lot of revenue growth and free cash flow." Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? (i.e. anything you think would produce a "fair" market price?) Actually, more directly: how much of your net worth would you invest in shorting YC's portfolio at this inflated $4.7bn valuation?

redthrowaway 15y ago
>Basically, is there any valuation method you have that would make you indifferent to a bet on the portfolio's valuation going up or down? No, there isn't. Angel investing is an inherently speculative game. What I would say is this: a YC investor could reasonably claim to have seen a return on any shares he sold, or any shares he holds of a company that has gone public. That's it. Beyond that, all investments are good only in theory. Were I to buy a house, I would decide what was affordable based on the former, not the latter. The same is true for my contributions to my children's college fund or my retirement fund. In short, all of the things that actually matter in life would be based off of what I had sold and what shares I held of public companies. To make any long term financial decisions based on the projected worth of companies that had, at best, gone through a successful series A or B would be foolish. They're nice numbers to think about, but they don't mean a damned thing until they're putting food in my kids' mouths. Let's illustrate my point like this: Suppose you are given the chance to pay 1MM for some good that has a 20% chance of being worth 1BB in 5 years. If you can spare the million, then this is a fantastic investment by any measure. Having bought into this investment, however, how would you describe your net worth? Your investment is valued at 1BB. The fact that it will likely never be worth that much doesn't change its value. Heading off the foreseen criticism, let's say that savvy investors would only say it is worth 200MM, the ultimate value times the expectation of realizing it. Still, that 200MM is fairy money. It doesn't exist, and you can't do a damned thing with it until you somehow manage to convince someone to give it to you. To claim that you're "worth" 200MM is silly, as you can't spend a dime of it. This is the problem I have with pg's numbers: They sound great until you ask what the cash-out is. Saying "I've invested in companies that are worth 4.7BB" is great, but it doesn't say anything useful about how well your money has been used. Remember, prior to investment it was real money that could buy apples and tuitions. Now it's theoretical money that could buy a whole lot of apples, but only under a specific set of favorable circumstances. A final reduction: There is a claimed ROI of ~13:1. Being generous, I would ask this: how many people who invested 1MM into YC have pulled 5MM out?

andrewparker 15y ago

AirBnB was recently valued at $1BN, so even if you assume AirBnB is worth zero, you only take a 25% haircut on this back of the napkin math (because AirBnB only represents $1BN of the $4.2BN in pg's portfolio). So, then you're talking about a lifetime 10X investor instead of a 13.4X investor. Still completely amazing performance, and he has a diverse portfolio of startups to protect him from individual blow-ups (such as assuming one of his most valuable companies is worth zero).