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Growing Numbers of Start-Ups Are Worth a Billion Dollars

72 points by jayzee 14y ago

adventured 14y ago
It's not surprising. Much of the stock market is chasing an all time high. The Fed has got bubbles roaring all over the place, from corporate debt to treasuries to stocks to a new brewing real estate bubble to student loans (they directly fund / make possible all of it). Also, a billion dollars is now worth maybe half what it was in 1998 (some would argue a lot less than that, eg when run against gold, silver, oil, and other dollar based commodities). These start-ups should appraise their businesses as objectively as possible, and consider selling before this latest bubble explodes. The cheap money piper will be paid sooner than later.
- deleted 14y ago
  [deleted]
- schraeds 14y ago
  http://www.zerohedge.com/article/buy-dip http://www.zerohedge.com/article/buy-dip
- bluedanieru 14y ago
  Also, there's a billion dollars and then there is a billion dollars. A billion dollars of oil is a valuable commodity. A billion dollars of start-up stock is not necessarily such a great thing unless you can find someone willing to buy all of it, right now.
  - emmett 14y ago
    Of course, sometimes a billion dollars of startup stock is worth much MORE than a billion dollars, whereas a billion dollars of oil is basically worth a billion dollars. Equity in fast growing companies is high beta, but that doesn't mean it's fake.
    - ekianjo 14y ago
      > Equity in fast growing companies is high beta, but that doesn't mean it's fake. It depends. The Equity should be based on future expectations of return. For Amazon and Google, there are now clear business models to drive their value forward (for Amazon it may be rather longer term than for others) but for startups it is less obvious. Most of them have no idea how to generate value and how to grow forward, and their actual "utility" as a service may be questioned. The trend towards over-valuing the startups currently is also coming from the fact that the housing bubble has exploded and investors and putting their cash in other fields where they expect to earn more/lose less money.
      - emmett 14y ago
        Name the billion dollar companies with no business model. The fact is once a company is successful enough to go public it's often still risky, but it's extremely rare for them to reach that point without a model.
        w3pm 14y ago
        "Pinterest, an online scrapbooking and social networking site with no revenue, became worth $1.5 billion in less than three years." Does 'no revenue' qualify as a business model?
        lutusp 14y ago
        > Does 'no revenue' qualify as a business model? Only if "no revenue" actually means "no profits". There are perfectly sane business plans that grow the company and pay all the salaries, but don't turn a profit. It can't go on forever, but it's not a disaster either. I suspect the OP didn't actually mean "no revenue".
        hayksaakian 14y ago
        Are you implying that no revenue is a valid business model?
- bitcartel 14y ago
  Money supply has rocketed since 2008: http://research.stlouisfed.org/fred2/series/BASE/ http://research.stlouisfed.org/fred2/series/BASE/
  - lasonrisa 14y ago
    You cannot discuss thee money supply without discussing the money velocity. The money velocity has tanked: http://research.stlouisfed.org/fred2/series/M1V http://research.stlouisfed.org/fred2/series/M1V http://research.stlouisfed.org/fred2/series/M2V http://research.stlouisfed.org/fred2/series/M2V
    - marvin 14y ago
      Hey, this is off topic, but I am no economist and I am curious. I've heard your argument before, and it seems really obvious that this must be the reason we don't have a lot of inflation. But what is stopping all the money that has been printed from at one point entering the economy and causing inflation? From the previous chart, I read that the amount of money in the US economy has more than quadrupled. Is this a correct interpretation?
      - bitcartel 14y ago
        Most of the money is passed between central banks and technically insolvent[1] banks, helping them repair their balance sheet and dispose of toxic assets. http://dailybail.com/home/chart-of-the-day-feds-balance-sheet-hits-new-record-3-trilli.html http://dailybail.com/home/chart-of-the-day-feds-balance-shee... Some of the money seeps into the economy and may be inflating stocks and other assets. For example, banks are given loans at zero interest[2] and they can use that money for whatever, e.g. proprietary trading, bonds/treasuries, etc. Perhaps some of that money finds its way into investment funds and eventually tech start-ups? [1] http://www.ritholtz.com/blog/2012/02/fasb-sells-out-unsurprising-results-follow/ http://www.ritholtz.com/blog/2012/02/fasb-sells-out-unsurpri... [2] http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3 http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e7... http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-compiled-by-bloomberg-released-to-public.html http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-d...
dave_sullivan 14y ago
Something is worth exactly what someone else is willing to pay for it. But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. Makes for interesting reading though.
- muzz 14y ago
  > But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. No, it means exactly that. How else do you think valuation is computed?
  - vecter 14y ago
    Dave makes a very valid point, which is that the market is often illiquid. Pinterest and AirBnB have $1.5-2.5B valuations right now, but how quickly do you think they could find an acquirer at that price? Quora's last round priced them at $400M, but I bet you'd be hard pressed to find someone who's willing to buy them at that price in the next 3-6 months.
    - pg 14y ago
      Investors who invest in a company at a valuation of a billion or more don't care about potential acquirers anymore, because an investment at that kind of valuation is a bet that the company will go public.
  - bryanh 14y ago
    I might really want to invest in you, so I'll blow the valuation up. I might even be the only person willing to pay that price. But that doesn't mean I want to buy you outright at the valuation.
    - pg 14y ago
      In practice that doesn't happen. In these late-stage rounds, there is not usually a single investor willing to pay way more than other investors. And even if there were, the company would think twice before selling at that price, because it would just set them up for their next round or IPO to be a down round, which would not be good.
npguy 14y ago
Almost two years back, we had written some points on facebook's secondmarket valuation, which we think is relevant to the discussion here - http://statspotting.com/2011/03/the-truth-about-facebooks-valuation-numbers/ http://statspotting.com/2011/03/the-truth-about-facebooks-va...
- muzz 14y ago
  Your 4 points at the end are all true (and true in general), but Facebook's valuation on SecondMarket was not a stretch-- in the IPO they sold 425M shares at $38.
therealarmen 14y ago
What's missing in this article is the impact of liquidation preference on valuation. The billion dollar valuation that a VC invests at is simply the price they have to pay to get in the deal. For fast-growing startups competition is fierce, so valuations often become dizzyingly large. The best case scenario is that the startup turns out to be the next Google and everybody gets rich. The worst case (and more common) scenario is that reality hits and the startup sells for $500M instead of $10B. As long as the invested capital is less than $500M, the VC will be getting all of their money back.
- pg 14y ago
  The valuations at which VCs invest are not unconstrained though. The valuations at which they invest have to be on average a lower bound on eventual exit valuations, or they'll at best break even, and a VC firm that does no better than break even in one fund will have a hard time raising its next one. E.g. if a VC fund invested in 10 companies at a valuation of a billion each, and 9 tanked while one ended up being worth 20 billion, they'd fairly happy. But all 10 can't tank. It has to work out on average.
incongruity 14y ago
I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble? Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? (And I don't mean with the plan to turn it into an IPO and get rich/get out quick) A billion dollars for a survey website with no clear sustainable competitive advantage? Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that... Just my daily dose of skepticism...
- joonix 14y ago
  Of course it's a bubble. I think most of these will burst, but some of them will withstand it. One thing to remember: it's in the best of interest of everyone involved in a bubble to deny there's a bubble. These investors who say "it's different this time" have no credibility.
- pg 14y ago
  Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? That's not the bet investors are making. They're betting more on IPOs than acquisitions, and they're betting that the entire portfolio will end up net ahead, not that each individual company will. And indeed it would be extremely unlikely for a group of 40 startups not to end up with a power law distribution of exit valuations.
  - lifeisstillgood 14y ago
    But the statement "40 companies worth 1 bn+ each" implies that the clever people think each company is a really sellable at 1 bn Otherwise should we change the definition of "valuation" ? Edit: it is difficult not to sound snarky on this subject. If a respected investor's first reaction is to see beyond the individual companies and into the whole (and I agree tech startups will produce billions of value in The next five years) that's good - but it reflects a jargon problem perhaps - if the sophisticated investor sees a group of billion dollar valuations and thinks I will invest in them all and come out ahead it is a different thought process to the layman - that a valuation of a billion means it is worth that much. While we should allow for a degree of sophistication investing in startups, it is still a stretch of jargon to make Humpty Dumpty proud
callmeed 14y ago
I'm not familiar with all the startups mentioned, but I have to say this: I think Pinterest will be a several billion dollar company and either IPO (likely) or get acquired by Amazon (maybe). If I could buy the stock a decent price, I would. I say this based on (a) my own experience seeing it drive traffic to some recent consumer projects and (b) seeing how every woman in my life (from my 18-year-old daughter to my 62-year-old mother in-law) uses it as a giant shopping list for their lives.
sagancarl 14y ago
What is a billion? A few things worth so much: American Airlines' annual revenue: $22 billion UCLA endowment position (assets minus liabilities): $1.7 billion 500 MWe coal plant: $0.650 billion Airbus A380: $0.400 billion F-22 Raptor unit cost: $0.150 billion Falcon 9 space rocket: $0.050 billion MRI machine: $0.001 billion So, pinterest is worth more than a coal plant but a bit less than UCLA's endowment. A fun list to read: http://en.wikipedia.org/wiki/List_of_megaprojects http://en.wikipedia.org/wiki/List_of_megaprojects
- petercooper 14y ago
  The procurement cost of a B-2 bomber was $929m in 1997 dollars (roughly $1.3bn today) so in a way, Pinterest is worth slightly less than a single plane ;-)
jbarham 14y ago
Simple explanation: Investors are desperate for yield. E.g., Current yields for 10-year Treasuries are about 2%, which in real terms is effectively zero given that inflation is tracking just below 2%. So any asset that generates steady cash flow (e.g., Apple stock), or is considered to have the potential to generate future cash flow, will be hugely overpriced.
timrpeterson 14y ago
pointless discussion
vccafe 14y ago
Evernote, MobileIron, Pure Storage, Marketo, DDS and SurveyMonkey... what do they have in common?
mbesto 14y ago
“Mobile disrupts personal computers, a market worth billions. Cloud disrupts computer servers and data storage, billions of dollars more. Social may be one of those rare things that is totally new.” Isn't this logic flawed? It assumes there is a zero-sum game (with the exception of social), but the valuations are assuming that it's not a zero sum game (hence record high PE ratios for cloud computing). There's a difference between stealing market share and creating new ones.

72 points by jayzee 14y ago

It's not surprising. Much of the stock market is chasing an all time high. The Fed has got bubbles roaring all over the place, from corporate debt to treasuries to stocks to a new brewing real estate bubble to student loans (they directly fund / make possible all of it). Also, a billion dollars is now worth maybe half what it was in 1998 (some would argue a lot less than that, eg when run against gold, silver, oil, and other dollar based commodities). These start-ups should appraise their businesses as objectively as possible, and consider selling before this latest bubble explodes. The cheap money piper will be paid sooner than later.

deleted 14y ago
[deleted]
schraeds 14y ago
http://www.zerohedge.com/article/buy-dip http://www.zerohedge.com/article/buy-dip
bluedanieru 14y ago
Also, there's a billion dollars and then there is a billion dollars. A billion dollars of oil is a valuable commodity. A billion dollars of start-up stock is not necessarily such a great thing unless you can find someone willing to buy all of it, right now.
- emmett 14y ago
  Of course, sometimes a billion dollars of startup stock is worth much MORE than a billion dollars, whereas a billion dollars of oil is basically worth a billion dollars. Equity in fast growing companies is high beta, but that doesn't mean it's fake.
  - ekianjo 14y ago
    > Equity in fast growing companies is high beta, but that doesn't mean it's fake. It depends. The Equity should be based on future expectations of return. For Amazon and Google, there are now clear business models to drive their value forward (for Amazon it may be rather longer term than for others) but for startups it is less obvious. Most of them have no idea how to generate value and how to grow forward, and their actual "utility" as a service may be questioned. The trend towards over-valuing the startups currently is also coming from the fact that the housing bubble has exploded and investors and putting their cash in other fields where they expect to earn more/lose less money.
    - emmett 14y ago
      Name the billion dollar companies with no business model. The fact is once a company is successful enough to go public it's often still risky, but it's extremely rare for them to reach that point without a model.
      - w3pm 14y ago
        "Pinterest, an online scrapbooking and social networking site with no revenue, became worth $1.5 billion in less than three years." Does 'no revenue' qualify as a business model?
        lutusp 14y ago
        > Does 'no revenue' qualify as a business model? Only if "no revenue" actually means "no profits". There are perfectly sane business plans that grow the company and pay all the salaries, but don't turn a profit. It can't go on forever, but it's not a disaster either. I suspect the OP didn't actually mean "no revenue".
        hayksaakian 14y ago
        Are you implying that no revenue is a valid business model?
bitcartel 14y ago
Money supply has rocketed since 2008: http://research.stlouisfed.org/fred2/series/BASE/ http://research.stlouisfed.org/fred2/series/BASE/
- lasonrisa 14y ago
  You cannot discuss thee money supply without discussing the money velocity. The money velocity has tanked: http://research.stlouisfed.org/fred2/series/M1V http://research.stlouisfed.org/fred2/series/M1V http://research.stlouisfed.org/fred2/series/M2V http://research.stlouisfed.org/fred2/series/M2V
  - marvin 14y ago
    Hey, this is off topic, but I am no economist and I am curious. I've heard your argument before, and it seems really obvious that this must be the reason we don't have a lot of inflation. But what is stopping all the money that has been printed from at one point entering the economy and causing inflation? From the previous chart, I read that the amount of money in the US economy has more than quadrupled. Is this a correct interpretation?
    - bitcartel 14y ago
      Most of the money is passed between central banks and technically insolvent[1] banks, helping them repair their balance sheet and dispose of toxic assets. http://dailybail.com/home/chart-of-the-day-feds-balance-sheet-hits-new-record-3-trilli.html http://dailybail.com/home/chart-of-the-day-feds-balance-shee... Some of the money seeps into the economy and may be inflating stocks and other assets. For example, banks are given loans at zero interest[2] and they can use that money for whatever, e.g. proprietary trading, bonds/treasuries, etc. Perhaps some of that money finds its way into investment funds and eventually tech start-ups? [1] http://www.ritholtz.com/blog/2012/02/fasb-sells-out-unsurprising-results-follow/ http://www.ritholtz.com/blog/2012/02/fasb-sells-out-unsurpri... [2] http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3 http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e7... http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-compiled-by-bloomberg-released-to-public.html http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-d...

dave_sullivan 14y ago

Something is worth exactly what someone else is willing to pay for it. But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. Makes for interesting reading though.

muzz 14y ago
> But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. No, it means exactly that. How else do you think valuation is computed?
- vecter 14y ago
  Dave makes a very valid point, which is that the market is often illiquid. Pinterest and AirBnB have $1.5-2.5B valuations right now, but how quickly do you think they could find an acquirer at that price? Quora's last round priced them at $400M, but I bet you'd be hard pressed to find someone who's willing to buy them at that price in the next 3-6 months.
  - pg 14y ago
    Investors who invest in a company at a valuation of a billion or more don't care about potential acquirers anymore, because an investment at that kind of valuation is a bet that the company will go public.
- bryanh 14y ago
  I might really want to invest in you, so I'll blow the valuation up. I might even be the only person willing to pay that price. But that doesn't mean I want to buy you outright at the valuation.
  - pg 14y ago
    In practice that doesn't happen. In these late-stage rounds, there is not usually a single investor willing to pay way more than other investors. And even if there were, the company would think twice before selling at that price, because it would just set them up for their next round or IPO to be a down round, which would not be good.

npguy 14y ago

Almost two years back, we had written some points on facebook's secondmarket valuation, which we think is relevant to the discussion here - http://statspotting.com/2011/03/the-truth-about-facebooks-valuation-numbers/ http://statspotting.com/2011/03/the-truth-about-facebooks-va...

muzz 14y ago
Your 4 points at the end are all true (and true in general), but Facebook's valuation on SecondMarket was not a stretch-- in the IPO they sold 425M shares at $38.

therealarmen 14y ago

What's missing in this article is the impact of liquidation preference on valuation. The billion dollar valuation that a VC invests at is simply the price they have to pay to get in the deal. For fast-growing startups competition is fierce, so valuations often become dizzyingly large. The best case scenario is that the startup turns out to be the next Google and everybody gets rich. The worst case (and more common) scenario is that reality hits and the startup sells for $500M instead of $10B. As long as the invested capital is less than $500M, the VC will be getting all of their money back.

pg 14y ago
The valuations at which VCs invest are not unconstrained though. The valuations at which they invest have to be on average a lower bound on eventual exit valuations, or they'll at best break even, and a VC firm that does no better than break even in one fund will have a hard time raising its next one. E.g. if a VC fund invested in 10 companies at a valuation of a billion each, and 9 tanked while one ended up being worth 20 billion, they'd fairly happy. But all 10 can't tank. It has to work out on average.

incongruity 14y ago

I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble? Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? (And I don't mean with the plan to turn it into an IPO and get rich/get out quick) A billion dollars for a survey website with no clear sustainable competitive advantage? Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that... Just my daily dose of skepticism...

joonix 14y ago
Of course it's a bubble. I think most of these will burst, but some of them will withstand it. One thing to remember: it's in the best of interest of everyone involved in a bubble to deny there's a bubble. These investors who say "it's different this time" have no credibility.
pg 14y ago
Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? That's not the bet investors are making. They're betting more on IPOs than acquisitions, and they're betting that the entire portfolio will end up net ahead, not that each individual company will. And indeed it would be extremely unlikely for a group of 40 startups not to end up with a power law distribution of exit valuations.
- lifeisstillgood 14y ago
  But the statement "40 companies worth 1 bn+ each" implies that the clever people think each company is a really sellable at 1 bn Otherwise should we change the definition of "valuation" ? Edit: it is difficult not to sound snarky on this subject. If a respected investor's first reaction is to see beyond the individual companies and into the whole (and I agree tech startups will produce billions of value in The next five years) that's good - but it reflects a jargon problem perhaps - if the sophisticated investor sees a group of billion dollar valuations and thinks I will invest in them all and come out ahead it is a different thought process to the layman - that a valuation of a billion means it is worth that much. While we should allow for a degree of sophistication investing in startups, it is still a stretch of jargon to make Humpty Dumpty proud

callmeed 14y ago

I'm not familiar with all the startups mentioned, but I have to say this: I think Pinterest will be a several billion dollar company and either IPO (likely) or get acquired by Amazon (maybe). If I could buy the stock a decent price, I would. I say this based on (a) my own experience seeing it drive traffic to some recent consumer projects and (b) seeing how every woman in my life (from my 18-year-old daughter to my 62-year-old mother in-law) uses it as a giant shopping list for their lives.

sagancarl 14y ago

What is a billion? A few things worth so much: American Airlines' annual revenue: $22 billion UCLA endowment position (assets minus liabilities): $1.7 billion 500 MWe coal plant: $0.650 billion Airbus A380: $0.400 billion F-22 Raptor unit cost: $0.150 billion Falcon 9 space rocket: $0.050 billion MRI machine: $0.001 billion So, pinterest is worth more than a coal plant but a bit less than UCLA's endowment. A fun list to read: http://en.wikipedia.org/wiki/List_of_megaprojects http://en.wikipedia.org/wiki/List_of_megaprojects

petercooper 14y ago
The procurement cost of a B-2 bomber was $929m in 1997 dollars (roughly $1.3bn today) so in a way, Pinterest is worth slightly less than a single plane ;-)

jbarham 14y ago

Simple explanation: Investors are desperate for yield. E.g., Current yields for 10-year Treasuries are about 2%, which in real terms is effectively zero given that inflation is tracking just below 2%. So any asset that generates steady cash flow (e.g., Apple stock), or is considered to have the potential to generate future cash flow, will be hugely overpriced.

timrpeterson 14y ago

pointless discussion

vccafe 14y ago

Evernote, MobileIron, Pure Storage, Marketo, DDS and SurveyMonkey... what do they have in common?

mbesto 14y ago

“Mobile disrupts personal computers, a market worth billions. Cloud disrupts computer servers and data storage, billions of dollars more. Social may be one of those rare things that is totally new.” Isn't this logic flawed? It assumes there is a zero-sum game (with the exception of social), but the valuations are assuming that it's not a zero sum game (hence record high PE ratios for cloud computing). There's a difference between stealing market share and creating new ones.