3 ms·

> assuming you gave them a generous valuation on 20x revenue and completely neglect profitability. The fact that this is a fashionable valuation tells me every

> assuming you gave them a generous valuation on 20x revenue and completely neglect profitability. The fact that this is a fashionable valuation tells me everything I need to know about the market.

hemancuso 15y ago
I would hope nobody would value a company like that. I pulled that multipier out of the air for what seems both absurd and reasonable.
- jpdoctor 15y ago
  I got the absurd part but missed the reasonable part.
  - nl 15y ago
    missed the reasonable part GOOG floated at 100x earnings, and that was really, really good value. 20x revenue seems more-than-reasonable for a high-growth company with a contained cost structure and a clear path to profitability.
    - jpdoctor 15y ago
      > and that was really, really good value. Perhaps. It will be interesting if that is still the prevailing wisdom after Europe melts down.
      - nl 15y ago
        I don't understand your comment. Google's P/E ratio is ~21 at the moment, and their share price is ~$620. They floated at a P/E ratio of ~100, and a share price of $85. Their share price would have to drop to below $85 for it not to be good value as an investment, and they would have to drop revenue to around 1/10 the current level for them to be earning less. Even if I accept the likelyhood that there will be some kind of recession in Europe are you really saying that Google will drop revenues by 10 times? (I'd point out that during the 2008 financial crisis it reduced their revenue by a couple of percent). That seems quite unlikely. Can you expand on what you are trying to say?
viscanti 15y ago
The interesting thing with these "freemium" companies is that there's generally a long conversion time. For many, it will take a year or more before free users covert. Each is a bit different, but last time I saw, Evernote fit that profile. So a good way of projecting future performance here is looking at how many free users they have, and what the conversion rate has been in the past (as well as average time to convert). If they've recently picked up a lot of new free users, we should expect a significant bump in paid accounts in about a year (or whatever their average time to convert is). The freemium businesses just have a significantly different business model, and looking at the current paid accounts is often a poor indicator of future profitability. I don't know that their valuation is justified (personally, I think most valuations are high right now), but the fact that they're only "barely" profitable now probably isn't a good indicator of future profitability.
alain94040 15y ago
The ratio between revenue and valuation changes over time, based on your growth. I actually tried to draw a kindergarten explanation here: http://blog.foundrs.com/2011/10/27/how-to-compute-the-valuation-of-your-startup/ http://blog.foundrs.com/2011/10/27/how-to-compute-the-valuat...
- jpdoctor 15y ago
  > The ratio between revenue and valuation changes over time Almost as if it's more psychologically than fundamentally based.
  - nl 15y ago
    Do you understand what "valuation" means? It is the expectation of future profits by investors. When a company is small but growing quickly is is very reasonable for investors to expect profits to increase more quickly than at a mature company. It's fairly common for small, young companies to grow by multiple-hundred percent per year.
    - jpdoctor 15y ago
      > Do you understand what "valuation" means? More than most people. > It is the expectation of future profits by investors. No, that is one component. > When a company is small but growing quickly is is very reasonable for investors to expect profits to increase more quickly than at a mature company. Not without more information. > It's fairly common for small, young companies to grow by multiple-hundred percent per year. Considering the failure rate of young companies, you have a strange definition of the word "common".
      - nl 15y ago
        Considering the failure rate of young companies, you have a strange definition of the word "common". Even taking failures into account, multiple-hundred percent per year is still probably pretty common. If a company doubles its revenue in a year that's a 100% increase, and that's not exactly uncommon. Strangely, investors attempt to pick the winners, not invest in random small companies. They look at metrics like growth rate, earnings, and cost of customer acquisition to decide what to invest in.

> assuming you gave them a generous valuation on 20x revenue and completely neglect profitability. The fact that this is a fashionable valuation tells me everything I need to know about the market.

hemancuso 15y ago

I would hope nobody would value a company like that. I pulled that multipier out of the air for what seems both absurd and reasonable.

jpdoctor 15y ago
I got the absurd part but missed the reasonable part.
- nl 15y ago
  missed the reasonable part GOOG floated at 100x earnings, and that was really, really good value. 20x revenue seems more-than-reasonable for a high-growth company with a contained cost structure and a clear path to profitability.
  - jpdoctor 15y ago
    > and that was really, really good value. Perhaps. It will be interesting if that is still the prevailing wisdom after Europe melts down.
    - nl 15y ago
      I don't understand your comment. Google's P/E ratio is ~21 at the moment, and their share price is ~$620. They floated at a P/E ratio of ~100, and a share price of $85. Their share price would have to drop to below $85 for it not to be good value as an investment, and they would have to drop revenue to around 1/10 the current level for them to be earning less. Even if I accept the likelyhood that there will be some kind of recession in Europe are you really saying that Google will drop revenues by 10 times? (I'd point out that during the 2008 financial crisis it reduced their revenue by a couple of percent). That seems quite unlikely. Can you expand on what you are trying to say?

viscanti 15y ago

The interesting thing with these "freemium" companies is that there's generally a long conversion time. For many, it will take a year or more before free users covert. Each is a bit different, but last time I saw, Evernote fit that profile. So a good way of projecting future performance here is looking at how many free users they have, and what the conversion rate has been in the past (as well as average time to convert). If they've recently picked up a lot of new free users, we should expect a significant bump in paid accounts in about a year (or whatever their average time to convert is). The freemium businesses just have a significantly different business model, and looking at the current paid accounts is often a poor indicator of future profitability. I don't know that their valuation is justified (personally, I think most valuations are high right now), but the fact that they're only "barely" profitable now probably isn't a good indicator of future profitability.

alain94040 15y ago

The ratio between revenue and valuation changes over time, based on your growth. I actually tried to draw a kindergarten explanation here: http://blog.foundrs.com/2011/10/27/how-to-compute-the-valuation-of-your-startup/ http://blog.foundrs.com/2011/10/27/how-to-compute-the-valuat...

jpdoctor 15y ago
> The ratio between revenue and valuation changes over time Almost as if it's more psychologically than fundamentally based.
- nl 15y ago
  Do you understand what "valuation" means? It is the expectation of future profits by investors. When a company is small but growing quickly is is very reasonable for investors to expect profits to increase more quickly than at a mature company. It's fairly common for small, young companies to grow by multiple-hundred percent per year.
  - jpdoctor 15y ago
    > Do you understand what "valuation" means? More than most people. > It is the expectation of future profits by investors. No, that is one component. > When a company is small but growing quickly is is very reasonable for investors to expect profits to increase more quickly than at a mature company. Not without more information. > It's fairly common for small, young companies to grow by multiple-hundred percent per year. Considering the failure rate of young companies, you have a strange definition of the word "common".
    - nl 15y ago
      Considering the failure rate of young companies, you have a strange definition of the word "common". Even taking failures into account, multiple-hundred percent per year is still probably pretty common. If a company doubles its revenue in a year that's a 100% increase, and that's not exactly uncommon. Strangely, investors attempt to pick the winners, not invest in random small companies. They look at metrics like growth rate, earnings, and cost of customer acquisition to decide what to invest in.