3 ms·

Bill Gurley and Brad Gerstner have a new podcast and discussed exactly this in their first episode, https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 https

by yinser 3y ago

Bill Gurley and Brad Gerstner have a new podcast and discussed exactly this in their first episode, https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 (8:43) "from a company's perspective it's like taking out of your left pocket and putting it in your right pocket ... I mean a big skeptic would say you're using your balance sheet to to drive your your income statement which you know should be a no-no"

lenerdenator 3y ago
CFO: "Don't care; line went up."
- datadrivenangel 3y ago
  Next CFO: "Line went down due to previous CFO. Time for Layoffs."
  - baq 3y ago
    Not sure why you’re being downvoted; maybe for the completely unnecessary ‘Next’? ;)
fnordpiglet 3y ago
A realist would say the money is spent somewhere and better on your platform. Once infrastructure is built it’s hard to offload, so the margin comes from future spend. But revenues are still revenues, and the capital spend is invested in capital growth to support the load from the investment.
nostrademons 3y ago
It's very similar to the wash-trading pump & dumps common in the crypto space. Feed money back to yourself at inflated prices to make the line go up, convince dumber money to enter the market based on the line going up, cash out at their expense. Somehow it's illegal when a crypto company does it but not when a major tech executive does it.
- skippyboxedhero 3y ago
  It isn't. Wash trading generates a fake image. Everyone knows this is happening. They are saying: we invested at this price, these companies are buying our stuff. Your assumption is: the people making these investments are so clever...I mean, it looks really stupid...but they are so clever, they must be doing this to take advantage of other people. Reality: the people making these investments are really that stupid. Reality: they aren't creating money out of thin air, they are investing money into their customers...fine, but the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash and AI is no different). (This should be obvious too, Microsoft and Google are doing this for defensive reasons...it is like a middle-aged man buying a low spec Porsche...no, his life isn't going okay now that he has a Porsche, he is just going to be miserable but inside a different car).
  - brookst 3y ago
    Well said. Investing in customers is the opposite of wash trading: the goal is to create value. And it’s probably better to look at it like a VC fund: the expectation is that most customers will fail, but if the next Adobe or Facebook or whatever comes out of the exercise and is heavily technically dependent on your cloud / AI infra, that covers a lot of lost investments.
  - fnordpiglet 3y ago
    I think you’re missing the point. If I take $10 and give it to you for 10% of your company and you give it back to me to rent a room in my building I now own 10% of your company for $0 outlay and you get to use the room in my building for your business, and in these arrangement the room is rented at cost. Everyone wins in this arrangement. This isn’t stupid, this isn’t offloading capital into income. This is an efficient way to maximize my investment by effectively using existing infrastructure spend and boosting my investments cash flow position by reducing their infrastructure spend.
    - nostrademons 3y ago
      That illustrates exactly the point, though. Normally when you rent a room for $10, it implies that the room is worth at least $10 to the tenant, and the opportunity cost to the landlord was < $10, otherwise the transaction wouldn't have happened. And similarly, if someone invests $10 for 10% of a company at $100 pre, they're assuming that the discounted cash flows of the company are worth at least $100. People who analyze financial statements and trade in markets assume this to be true - it's fundamental to the price discovery mechanism. But if the actual cost to the tenant was $0, the value of the service might have been any number greater than $0. And similarly, if all the money in the investment comes back to the investor as revenue, the actual cost of their $10 investment wasn't $10, it was $0. You can't make inferences about what they actually value these services and investments at, because the prices were not set by a free competitive market, they were set by companies colluding (or cooperating, depending on framing) for mutual benefit. We saw the same issue with all the food-delivery startups that were offering 6 free meals - they booked the revenue and used it to justify outlandish valuations, and they booked the promotion as a marketing expense, but the root problem is that consumers wouldn't buy the product at list price, they were only buying it because of the investor-funded promotion. Or with Groupon - it was economically unviable for the businesses that participated, but they wouldn't find that out until after their revenue could be used to justify the next funding round and cash out in an IPO. Wash-trading is just the limiting case of this, where it's apparent to everyone that the economic value of the transaction is zero because there is no actual product being traded, but a self-dealing transaction is used to set a price that other participants in the market anchor off of. The tricky part is that sometimes this tactic can be economically viable, and offering discounted or financed products is a way to get consumers to get over the activation energy of trusting a new product, and once they've converted they become regular customers of the normal product offering and go on to spend a lot more. This is the point of a sale, or a rebate, or a promotion, or a financing deal. Which I guess answers my original question about why it's legal here but not for crypto wash-trades: it can sometimes result in true economic value being provided, and it's difficult to prove malice instead of incompetence. But the caution being offered in this thread is to not take revenue figures or valuations of AI startups or cloud providers at face value, lest you be the one who is incompetent.
Jommi 3y ago
Happened with ad revenue and all the app startups in 2010-2020.
bertil 3y ago
It’s a good idea for large companies to use their profit to stay profitable, and if it supports their cloud business… Where it’s a No-No is in accounting: those should probably not be counted as “sales” but as gifts in nature or some particular category. Bill Gurley and Brad Gerstner are investors, so naturally, they balk when they hear that the documents they read, financial statements, have a creative take on reality. Still, I don’t think they think that lowers Google’s overall value. They just want that in a separate column.

by yinser 3y ago

lenerdenator 3y ago

CFO: "Don't care; line went up."

datadrivenangel 3y ago
Next CFO: "Line went down due to previous CFO. Time for Layoffs."
- baq 3y ago
  Not sure why you’re being downvoted; maybe for the completely unnecessary ‘Next’? ;)

fnordpiglet 3y ago

A realist would say the money is spent somewhere and better on your platform. Once infrastructure is built it’s hard to offload, so the margin comes from future spend. But revenues are still revenues, and the capital spend is invested in capital growth to support the load from the investment.

nostrademons 3y ago

It's very similar to the wash-trading pump & dumps common in the crypto space. Feed money back to yourself at inflated prices to make the line go up, convince dumber money to enter the market based on the line going up, cash out at their expense. Somehow it's illegal when a crypto company does it but not when a major tech executive does it.

skippyboxedhero 3y ago
It isn't. Wash trading generates a fake image. Everyone knows this is happening. They are saying: we invested at this price, these companies are buying our stuff. Your assumption is: the people making these investments are so clever...I mean, it looks really stupid...but they are so clever, they must be doing this to take advantage of other people. Reality: the people making these investments are really that stupid. Reality: they aren't creating money out of thin air, they are investing money into their customers...fine, but the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash and AI is no different). (This should be obvious too, Microsoft and Google are doing this for defensive reasons...it is like a middle-aged man buying a low spec Porsche...no, his life isn't going okay now that he has a Porsche, he is just going to be miserable but inside a different car).
- brookst 3y ago
  Well said. Investing in customers is the opposite of wash trading: the goal is to create value. And it’s probably better to look at it like a VC fund: the expectation is that most customers will fail, but if the next Adobe or Facebook or whatever comes out of the exercise and is heavily technically dependent on your cloud / AI infra, that covers a lot of lost investments.
- fnordpiglet 3y ago
  I think you’re missing the point. If I take $10 and give it to you for 10% of your company and you give it back to me to rent a room in my building I now own 10% of your company for $0 outlay and you get to use the room in my building for your business, and in these arrangement the room is rented at cost. Everyone wins in this arrangement. This isn’t stupid, this isn’t offloading capital into income. This is an efficient way to maximize my investment by effectively using existing infrastructure spend and boosting my investments cash flow position by reducing their infrastructure spend.
  - nostrademons 3y ago
    That illustrates exactly the point, though. Normally when you rent a room for $10, it implies that the room is worth at least $10 to the tenant, and the opportunity cost to the landlord was < $10, otherwise the transaction wouldn't have happened. And similarly, if someone invests $10 for 10% of a company at $100 pre, they're assuming that the discounted cash flows of the company are worth at least $100. People who analyze financial statements and trade in markets assume this to be true - it's fundamental to the price discovery mechanism. But if the actual cost to the tenant was $0, the value of the service might have been any number greater than $0. And similarly, if all the money in the investment comes back to the investor as revenue, the actual cost of their $10 investment wasn't $10, it was $0. You can't make inferences about what they actually value these services and investments at, because the prices were not set by a free competitive market, they were set by companies colluding (or cooperating, depending on framing) for mutual benefit. We saw the same issue with all the food-delivery startups that were offering 6 free meals - they booked the revenue and used it to justify outlandish valuations, and they booked the promotion as a marketing expense, but the root problem is that consumers wouldn't buy the product at list price, they were only buying it because of the investor-funded promotion. Or with Groupon - it was economically unviable for the businesses that participated, but they wouldn't find that out until after their revenue could be used to justify the next funding round and cash out in an IPO. Wash-trading is just the limiting case of this, where it's apparent to everyone that the economic value of the transaction is zero because there is no actual product being traded, but a self-dealing transaction is used to set a price that other participants in the market anchor off of. The tricky part is that sometimes this tactic can be economically viable, and offering discounted or financed products is a way to get consumers to get over the activation energy of trusting a new product, and once they've converted they become regular customers of the normal product offering and go on to spend a lot more. This is the point of a sale, or a rebate, or a promotion, or a financing deal. Which I guess answers my original question about why it's legal here but not for crypto wash-trades: it can sometimes result in true economic value being provided, and it's difficult to prove malice instead of incompetence. But the caution being offered in this thread is to not take revenue figures or valuations of AI startups or cloud providers at face value, lest you be the one who is incompetent.

Jommi 3y ago

Happened with ad revenue and all the app startups in 2010-2020.

bertil 3y ago

It’s a good idea for large companies to use their profit to stay profitable, and if it supports their cloud business… Where it’s a No-No is in accounting: those should probably not be counted as “sales” but as gifts in nature or some particular category. Bill Gurley and Brad Gerstner are investors, so naturally, they balk when they hear that the documents they read, financial statements, have a creative take on reality. Still, I don’t think they think that lowers Google’s overall value. They just want that in a separate column.