4 ms·

Surely the recent spate of websites being valued in the Billions rings some alarm bells that something is seriously up? I don't know how you can reasonably val

Surely the recent spate of websites being valued in the Billions rings some alarm bells that something is seriously up? I don't know how you can reasonably value a company that has only existed for a year or two at that level. Things can die / be killed as quickly if not quicker than they took to grow, and we see it happen every day.

qq66 15y ago
You can reasonably value a company that may be killed soon for $1 billion if, in the case that it survives, it will be worth much more than that.
diego 15y ago
What people don't seem to remember is that Google came out of the last bubble and became what it is today. It captured and hoarded a significant chunk of the value that existed back then. The value of the Google of 2020 could be split across 30 companies worth 5B each today. 29 of them could die, one could be worth 300B.
ChuckMcM 15y ago
"I don't know how you can reasonably value a company that has only existed for a year or two at that level." That is a fair question. Brad Templeton once observed that if he sent a joke to everyone on the Internet with the caveat "If you chuckled, click here to send me a penny." and only 1% of the population found it funny. That would be a $100,000 payday with a billion readers where 99% of the people didn't even think it was funny. The secret truth that Brad captured (way before it was well known too) is that the rate at which a pure information company can earn money is essentially unlimited. Not a lot of people could imagine Brad's scenario, they got bogged down in the details like "gee processing the payment would cost more than a penny" or "how do you force them to pay a penny" or whatever. But now Google comes along and capitalizes on exactly that idea, except that rather than have the users click on something if they think its funny, they have someone click on something if they think it may be an answer to their question, and rather than processing them one penny at a time, Google gathers those clicks and just does an accounting transaction which becomes an actual payment once a month for the aggregate transaction. But they don't make anything, rather they convert an action into money, and they do that at web scale. No limit to how much money they can generate. So from an investment value, they have a very very large rate of return. The actual limit is how much money advertisers are willing to inject into the system. So if you have a company whose revenue is only limited by the amount of money its 'customers' are willing to inject, and you can make a credible case for the fact that customers will be willing to inject $100M+ per year into the system, then you can make the argument that the company is 'worth' a billion dollars. (or multiple billions of dollars). So while I agree with the unspoken criticism that some recent valuations seem high based on available information, if those valuations are coming from folks who have done their due diligence then I expect they have some line of reasoning that justifies that value to their own satisfaction. In the 'individual investor' bubble of the late 90's it was clear that individual investors were doing no diligence at all.
- mixmax 15y ago
  There's a flaw in the argument that most people miss, namely that since it's so easy to create and distribute information everybody does it, making it so much harder to create a viral effect. To extend your example: If just 1% of the population sent a Brad Templeton joke to everyone on the Internet you would receive 10 million emails with a funny joke. If you chuckled at 1% of them you'd send a penny to 100.000 people. Not a very likely scenario. Since none of us receive 10 million joke emails this means that things aren't as simple as they appear. The fact is that since so much information is being created the bar for virality is extremely high, and it's rising proportionally to how easy it is to create information. The chances of your funny email reaching millions of users are as high as your chances of winning the lottery. The resemblance to slick entrepreneurs pitching their wares with the clasical "if only 1% of the market uses our product we'll make billions". That's just not how it works. Note that I'm not necessarily disagreeing with your thesis that once a startup has reached virality it can be worth a substantial amount of money, I'm simply stating that reaching that point is as hard as ever.
  - ChuckMcM 15y ago
    "There's a flaw in the argument that most people miss, namely that since it's so easy to create and distribute information everybody does it, making it so much harder to create a viral effect." An excellent observation. And you have to consider that not all information has the same value and that its value varies over time. Brad's scheme does have the flaw you describe (and it was another of the rat holes people would fall into, "Well Gee, once he sends out a joke what is to stop anyone who got from sending the same joke out to everyone but making them the recipient of the penny?") The mechanism is valid, but, as you observe, won't work with easily reproduced information. Google sells information that is both 'rare' and temporally relevant. They sell 'a person is looking for X right now' and advertisers buy access to that information with their AdWords bids. The nice thing about this information is that its very valuable to certain people (people who think they have a product for people looking for X) when it gets created and a couple of seconds after it gets created it is worth 100x less (maybe even 100,000x less, basically only as trending data).

qq66 15y ago

You can reasonably value a company that may be killed soon for $1 billion if, in the case that it survives, it will be worth much more than that.

diego 15y ago

What people don't seem to remember is that Google came out of the last bubble and became what it is today. It captured and hoarded a significant chunk of the value that existed back then. The value of the Google of 2020 could be split across 30 companies worth 5B each today. 29 of them could die, one could be worth 300B.

ChuckMcM 15y ago

"I don't know how you can reasonably value a company that has only existed for a year or two at that level." That is a fair question. Brad Templeton once observed that if he sent a joke to everyone on the Internet with the caveat "If you chuckled, click here to send me a penny." and only 1% of the population found it funny. That would be a $100,000 payday with a billion readers where 99% of the people didn't even think it was funny. The secret truth that Brad captured (way before it was well known too) is that the rate at which a pure information company can earn money is essentially unlimited. Not a lot of people could imagine Brad's scenario, they got bogged down in the details like "gee processing the payment would cost more than a penny" or "how do you force them to pay a penny" or whatever. But now Google comes along and capitalizes on exactly that idea, except that rather than have the users click on something if they think its funny, they have someone click on something if they think it may be an answer to their question, and rather than processing them one penny at a time, Google gathers those clicks and just does an accounting transaction which becomes an actual payment once a month for the aggregate transaction. But they don't make anything, rather they convert an action into money, and they do that at web scale. No limit to how much money they can generate. So from an investment value, they have a very very large rate of return. The actual limit is how much money advertisers are willing to inject into the system. So if you have a company whose revenue is only limited by the amount of money its 'customers' are willing to inject, and you can make a credible case for the fact that customers will be willing to inject $100M+ per year into the system, then you can make the argument that the company is 'worth' a billion dollars. (or multiple billions of dollars). So while I agree with the unspoken criticism that some recent valuations seem high based on available information, if those valuations are coming from folks who have done their due diligence then I expect they have some line of reasoning that justifies that value to their own satisfaction. In the 'individual investor' bubble of the late 90's it was clear that individual investors were doing no diligence at all.

mixmax 15y ago
There's a flaw in the argument that most people miss, namely that since it's so easy to create and distribute information everybody does it, making it so much harder to create a viral effect. To extend your example: If just 1% of the population sent a Brad Templeton joke to everyone on the Internet you would receive 10 million emails with a funny joke. If you chuckled at 1% of them you'd send a penny to 100.000 people. Not a very likely scenario. Since none of us receive 10 million joke emails this means that things aren't as simple as they appear. The fact is that since so much information is being created the bar for virality is extremely high, and it's rising proportionally to how easy it is to create information. The chances of your funny email reaching millions of users are as high as your chances of winning the lottery. The resemblance to slick entrepreneurs pitching their wares with the clasical "if only 1% of the market uses our product we'll make billions". That's just not how it works. Note that I'm not necessarily disagreeing with your thesis that once a startup has reached virality it can be worth a substantial amount of money, I'm simply stating that reaching that point is as hard as ever.
- ChuckMcM 15y ago
  "There's a flaw in the argument that most people miss, namely that since it's so easy to create and distribute information everybody does it, making it so much harder to create a viral effect." An excellent observation. And you have to consider that not all information has the same value and that its value varies over time. Brad's scheme does have the flaw you describe (and it was another of the rat holes people would fall into, "Well Gee, once he sends out a joke what is to stop anyone who got from sending the same joke out to everyone but making them the recipient of the penny?") The mechanism is valid, but, as you observe, won't work with easily reproduced information. Google sells information that is both 'rare' and temporally relevant. They sell 'a person is looking for X right now' and advertisers buy access to that information with their AdWords bids. The nice thing about this information is that its very valuable to certain people (people who think they have a product for people looking for X) when it gets created and a couple of seconds after it gets created it is worth 100x less (maybe even 100,000x less, basically only as trending data).