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Trust me, it's not. I've seen start-ups worth 100x than a smaller successful business due to speculation, despite the smaller business employing more people and

by bArray 3y ago

Trust me, it's not. I've seen start-ups worth 100x than a smaller successful business due to speculation, despite the smaller business employing more people and actually turning profit for many years.

mplscarnut 3y ago
There’s plenty of successful businesses chugging along growing at about the rate of inflation. It’s really hard to grow a business at 10 or 500 times that rate. Why would it be surprising to value the latter kind of business higher than the former?
- brianwawok 3y ago
  Growing at the rate of inflation only matters if your market is capped out. Like, say Soda makers. If you either create a brand new market, or are taking on a drastically undeserved market... you absolutely need to be growing faster than inflation. Or your brand new company would be worth $1 the first year, $1.03 the second year..
  - mplscarnut 3y ago
    Yeah I was trying to convey there are successful businesses that are broadly maintaining and there are rocketships (and everything in between) and we should expect them to be valued differently and have different risk profiles. So the observation (100x! That’s dumb!) is not rational.
- layer8 3y ago
  What use is that growth in terms of valuation if the company never manages to break even?
  - YetAnotherNick 3y ago
    VC logic is that 5% of the companies they invest in returns 100x their investment in those. So even if 95% of the companies never manages to break even they are still profitable.
    - bart_spoon 3y ago
      VC logic is that a company does not need to be profitable for a VC’s investment to be profitable. Simply getting the company to an expensive IPO is all that is required for VCs to make money. And that is possible even if the company has never made a dime.
      - YetAnotherNick 3y ago
        This is the case for all investment, not just VC. Even cash, gold, real estate etc works on the same principle. It is valuable because other people find it valuable, not because the thing will give investor the profit in itself, just the valuation are expected to grow.
- bArray 3y ago
  > There’s plenty of successful businesses chugging along growing at about the rate of inflation. Even outpacing inflation by 1.2 - 2 times. It's not insane growth, but it is consistent. Better yet is that they tend to have a decent number of assets too. > It’s really hard to grow a business at 10 or 500 times that rate. How often is 10 to 500 times growth seen in reality? I think most start-ups fail before the second year. > Why would it be surprising to value the latter kind of business higher than the former? Highly stable and proven growth as opposed to highly unstable and unreliable growth.
bombcar 3y ago
Remember that startup "valuations" are not what they're "worth" - it's simply how small of a segment they have been able to convince the last round to take. The valuations have a bunch of unknowns that can wildly swing it. The small business is successful and so the calculus as to what it is worth is much more explicit. The extreme example of this is commercial real estate with a long-term tenant (think: the person who owns the land a post office is sitting on). Everything is known (lease length, amounts, current interest rates, etc, etc) that the value/sale price is a simple formula.

by bArray 3y ago

mplscarnut 3y ago

There’s plenty of successful businesses chugging along growing at about the rate of inflation. It’s really hard to grow a business at 10 or 500 times that rate. Why would it be surprising to value the latter kind of business higher than the former?

brianwawok 3y ago
Growing at the rate of inflation only matters if your market is capped out. Like, say Soda makers. If you either create a brand new market, or are taking on a drastically undeserved market... you absolutely need to be growing faster than inflation. Or your brand new company would be worth $1 the first year, $1.03 the second year..
- mplscarnut 3y ago
  Yeah I was trying to convey there are successful businesses that are broadly maintaining and there are rocketships (and everything in between) and we should expect them to be valued differently and have different risk profiles. So the observation (100x! That’s dumb!) is not rational.
layer8 3y ago
What use is that growth in terms of valuation if the company never manages to break even?
- YetAnotherNick 3y ago
  VC logic is that 5% of the companies they invest in returns 100x their investment in those. So even if 95% of the companies never manages to break even they are still profitable.
  - bart_spoon 3y ago
    VC logic is that a company does not need to be profitable for a VC’s investment to be profitable. Simply getting the company to an expensive IPO is all that is required for VCs to make money. And that is possible even if the company has never made a dime.
    - YetAnotherNick 3y ago
      This is the case for all investment, not just VC. Even cash, gold, real estate etc works on the same principle. It is valuable because other people find it valuable, not because the thing will give investor the profit in itself, just the valuation are expected to grow.
bArray 3y ago
> There’s plenty of successful businesses chugging along growing at about the rate of inflation. Even outpacing inflation by 1.2 - 2 times. It's not insane growth, but it is consistent. Better yet is that they tend to have a decent number of assets too. > It’s really hard to grow a business at 10 or 500 times that rate. How often is 10 to 500 times growth seen in reality? I think most start-ups fail before the second year. > Why would it be surprising to value the latter kind of business higher than the former? Highly stable and proven growth as opposed to highly unstable and unreliable growth.

bombcar 3y ago

Remember that startup "valuations" are not what they're "worth" - it's simply how small of a segment they have been able to convince the last round to take. The valuations have a bunch of unknowns that can wildly swing it. The small business is successful and so the calculus as to what it is worth is much more explicit. The extreme example of this is commercial real estate with a long-term tenant (think: the person who owns the land a post office is sitting on). Everything is known (lease length, amounts, current interest rates, etc, etc) that the value/sale price is a simple formula.