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Why Twitter's IPO is Bad for Startups

106 points by jackaltman 13y ago

DenisM 13y ago
The article doesn't actually answer the headline question. So, valuations are running sky-high. Ok. Why is it bad for startups?
- jackaltman 13y ago
  The answer to the question is supposed to be "because it's driving startup valuations sky high", which I assumed is understood as a bad thing, but I see your point. I have written about that before - it has all sorts of problems like trouble with fundraising for later rounds, inability to get acquired, etc.
  - alexeisadeski3 13y ago
    First world problem: "I can't get acquired because my valuation is sky high!" Just sell for less. If everyone else demands high valuations, it's easier to sell, not harder.
    - byoung2 13y ago
      Just sell for less Your investors gave you $50 million at a $500 million valuation. Google wants to acquire you for $100 million. Your investors may not let you.
      - alexeisadeski3 13y ago
        "I raised too much money!" Or you can cancel some of your own shares and take the $50M.
      - RyanZAG 13y ago
        That's a nice position to be in. Disolve some of your shares: investors take $70 million, you take $30 million. Everyone should be very happy. Or if you still have runway and believe in the business, keep going and raise that $100 million. It sounds like the problem of having scaling issues: it's a problem, sure, but it means you're already a success. If you never got that $50 million to begin with because valuations weren't high, then you might be a failure now instead.
        byoung2 13y ago
        That's a nice position to be in. Disolve some of your shares: investors take $70 million, you take $30 million. Everyone should be very happy. Be sure to check your term sheet. It could be that your investors have a liquidation preference that includes a multiple. Based on my (admittedly limited) understanding, if your investors gave you $50 million for 10% of the company, with a 2X multiple liquidation preference, they would be entitled to the first $100 million of any sale, plus 10%. So you may be able to sell for $100 million, but you wouldn't see a dime.
thejosh 13y ago
not making money is bad for startups.
- ACow_Adonis 13y ago
  I don't know about that. It seems to have worked out all right for twitter :P
- rabino 13y ago
  Not really. YouTube and Instagram, for example, had insane exits while loosing money.
- davidu 13y ago
  There's no factual evidence to back this statement up. See my other comment on this thread.
  - thejosh 13y ago
    What? Not making money isn't a bad thing for startups? I must be really out of the loop, I didn't realise startups run on Unicorn smiles and jellybeans.
    - davidu 13y ago
      Many run on capital raised from investors until which point they reach a liquidity event that exists irrespective of making money. Some also make money. But VC-backed startups, which is really the only connotation of startup that we use here on YC, are a special breed of startup (generally focused on massive growth) where operating capital derived from revenue is not a pre-requisite for success.
- ojbyrne 13y ago
  Not making revenue is bad for startups. Once you have investment on board, the model is "grow the top line and we'll worry about the bottom line later." That is how venture capital works. Twitter's revenue so far in 2013 is $422 million [1]. [1] http://www.itworldcanada.com/post/twitter-loses-growing-sec-filling http://www.itworldcanada.com/post/twitter-loses-growing-sec-...
l33tbro 13y ago
"Once my sympathies for Twitter subsided ... " Right, so when is the candlelight vigil again?
zaidf 13y ago
Twitter IPO is bad for start ups because its fueled by inexperienced investors who missed out on Facebook. What they don't realize is that twitter is no where near facebook's trajectory on any of the metrics that matter(revenue, profit, user growth).
- tomphoolery 13y ago
  I'm not sure "inexperienced" investors "missed out" on Facebook. It was a very risky purchase, and for a few months there lost quite a bit of money for a lot of people. Only until the stock really stabilized did we see it sort-of hover around the $30-50 range. And even then, I feel it's priced much less at the moment than many people thought it would be when it IPOed. It even made a few acquisitions like Waze and Instagram in order to boost its investment value, but the main product still isn't as valuable (on Wall Street, that is) as people thought it was going to be. In my opinion/from what I've read, anyway.
pyrrhotech 13y ago
Blame bubble Ben. QE is 90% of the issue here. The market is addicted now. Great recession 2.0 will probably hit next fall
rafe33 13y ago
Uh, "Path is worth $550 million" ?! What crack is he smoking?
- hansy 13y ago
  http://techcrunch.com/2013/07/16/path-is-raising-50m-at-a-500m-valuation/ http://techcrunch.com/2013/07/16/path-is-raising-50m-at-a-50...
  - deleted 13y ago
    [deleted]
  - yanivs 13y ago
    actually Path is valued at $250m http://techcrunch.com/2013/11/07/path-loses-biz-head-amid-rumors-of-over-7m-in-funding-from-dustin-moskovitz/ http://techcrunch.com/2013/11/07/path-loses-biz-head-amid-ru...
    - hansy 13y ago
      Oh wow this article is only a few hours old. My bad. Nice find!
- DenisM 13y ago
  Please stay civil.
davidu 13y ago
I think lots of things are bad for startups, but Twitter's IPO isn't one of them -- and this post didn't convince me otherwise. In fact, lots of points made in this post seem to sound as though they are factual, but I'm not sure they are and would likely argue the opposite point of the author: "The real problem here is that we increasingly live in a world where technology companies are valued on emotional whims and promises of unbelievable future growth." Technology companies are almost universally about promise and potential and always have been. Read Crossing the Chasm to understand why that is. At the time that the private market investors care about them, they are so early in the selling motions that their early success in a tiny subset of the market is indicative of later potential. That's why VCs exist. To see something with early potential, pay a premium (at times) to get a part of it, foster it's development, and then ride it into reality and receive a terrific return for the foresight and fortitude. The pattern recognition there is unmistakeable. Where it gets challenged is in the fickle and finicky consumer market where externalities are more likely to cause massive changes in momentum (See: Path can't maintain the momentum of fundraising). "A surge on IPO day is good of course, but 15-20% is more than enough; 75% simply means the company was mis-priced and that Twitter left over a billion in cash on the table." This is also not a factually true statement. Because a small float was offered, and demand was prescriptive by the bankers, it's impossible to say that because of how it ended, trying to raise the price to $40 would have resulted in the same outcome. If Twitter wanted to fully maximize their first day gains, there are dutch style IPO auctions that can be done to better match demand for an offering. Google did this. I'm not going to continue, but I guess this is a great headline with a poorly made point. I'm not sure what the goal here was.
- jackaltman 13y ago
  I understand that startups are about promise and potential, and that a company with no revenue might be fairly valued at billions of dollars. A startup (or any company) is worth something like the integral of of the graph of probability vs. outcome. The problem I see right now is that people are overvaluing the positive outcomes and discounting the low end. "Because a small float was offered, and demand was prescriptive by the bankers, it's impossible to say that because of how it ended, trying to raise the price to $40 would have resulted in the same outcome." I'm not completely sure what you mean by this, but I spent time on an ECM desk one summer and I they aren't aiming for a 75% first day pop. The bankers get paid less, the company raises less. You want a pop to satisfy buy-side clients and to keep a positive public perception, but 75% is too much.
AndrewKemendo 13y ago
>Snapchat and Pinterest are worth around $4 billion dollars each. Evernote and Airbnb are each worth over $2 billion. Path is worth $550 million. By comparison, Peabody Energy, the largest coal company in the world which owns almost 10 billion tons of coal, is worth about $5 billion. I see fewer and fewer comparisons like these between tech companies and brick and mortar/commodity companies and I think it is a shame. To me such comparisons do more to highlight how broken the financial markets are, though I am not exactly sure why. It seems like investment priorities or consumer demands are out of whack when electrical utility companies (PEPCO) are valued less than social media platforms (FB).
- kooshball 13y ago
  > It seems like investment priorities or consumer demands are out of whack when electrical utility companies (PEPCO) are valued less than social media platforms (FB). This is really not a logical comparison. These are 2 companies in different fields and have very different characteristics. Investors almost certainly have different reasons from buying one or the other. The comparison between their value is not really relevant.
  - infinii 13y ago
    That's what's broken. The fact that "value" is irrelevant. Imagine life without utility companies and imagine life without FB. It's absurd.
    - hrjet 13y ago
      What you are supposed to see there is not "value" but "profit and potential". If a utility company which provides basic necessities were to make a lot of profit, wouldn't it be sort of a bad outcome for humanity? Isn't it better if basic necessities are provided to us at the most affordable prices?
    - kooshball 13y ago
      It's the comparison between two individual companies in different field that is irrelevant. My point is that the valuation comparison OP posted has nothing to do with "life without utility companies and imagine life without FB".
patio11 13y ago
If Airbnb is currently priced at about $2 billion, that's about 1/4 of an IHG Hotels (they own the Holiday Inn brand and another dozen or so). That sounds richly valued to me, but not insane. IHG (disclaimer: shareholder and double super platinum for life due to often staying there for business travel) has been trying to move, for years, into a capital structure which Airbnb had from day one: they want a cut of every night's stay without actually owning any hotel property because that's a capital-intensive location-dependent slow-growth business. They've got a substantial scale advantage on Airbnb (~600,000 rooms which each rent 300+ nights per year, whereas Airbnb does about 50 million nights a year at systematically lower price points), but 5~10% a year is great growth for them, and Airbnb is growing at about 100% every 6 months. There exist significant risks to the company, from the legal issues to merely not sustaining the hockey stick for long enough to justify the valuation, but the people with money on the line are mostly rich and sophisticated. If they lose their investment, oh well, capitalism happens. It's categorically better than when $X00,000 of pet food sold at a $Y0 million loss was valued in the billions.
- larrys 13y ago
  "That sounds richly valued to me, but not insane." The threats to airbnb are much greater (and of course different) than the threats to IHG. IHG has a lock on locations because of contracts in addition of course to locations which they own. IHG has brands. And they have standards. You book with them because you expect a certain level of service when you visit one of their hotels (regardless of who owns the property). They have a functioning marketing machine which fills up hotel rooms with conventions and corporate travel. Otoh, airbnb is much more susceptible to a threat from someone else doing something similar, slightly different, or essentially the same. There is a barrier to entry in being IHG as they have infrastructure and an established brand. To me that makes them valuable.
  - Patrick_Devine 13y ago
    I agree with most of your points, but one thing airbnb does have going for it is a network effect. They have both the supply, and the demand and that makes it difficult for other people to break into the space. If I'm looking for a place to stay, my default option will be the place with the most inventory. If I've got a place to rent out, I want to list it where most people are looking and where I can get the highest occupancy. Since airbnb is effectively an exchange, how would another exchange move in to replace it? Marketing and branding is one way, particularly since airbnb hasn't fully saturated the market. One strategy might be to include hotel rooms in listings since airbnb is unlikely to do that given their niche. Another way might be a series of negative events (eg. a serial stalker or rampant bed bugs) which could really tarnish their brand.
chaz 13y ago
I think the Twitter IPO is very good for startups. The wealth event for a lot of employees unlocks a pool of talented employees who are flush with experience, ready to take on new challenges, and armed with a network. A bit of money in the pocket is that they're less dependent upon short-term income and are willing to take on a fair amount of risk and more focused on long-term goals. Many will start a new company or join as an early/senior employee at a fast growing one. Some of them will go on to be angel investors and VCs. Some will just drive Porsches and play golf. This cycle has renewed itself many times in the Bay Area, with recent examples likes Nescape, eBay, PayPal, Google, Facebook, and LinkedIn. I feel this refertilization is not nearly as strong in many other cities like NYC.
- crassus 13y ago
  Unfortunately, for every thousand new tech millionaires there is maybe 1 or 2 that is doing anything interesting or daring with their money. The energetic give it away to charity, the lazy park it in an investment fund. Few are the Elon Musks and Peter Thiels.
  - onedev 13y ago
    Few make nearly as much as Elon Musk and Peter Thiel to have nearly even close to as much impact.
    - toomuchtodo 13y ago
      What are the Instagram folks doing with their cash? Did they not net more than Musk and Thiel from their sale?
      - jamesaguilar 13y ago
        It's been like a year and a half. Maybe cut them a little slack.
        deleted 13y ago
        [deleted]
crassus 13y ago
Twitter/snapchat are media companies in competition with prime time television and daily soaps. It's okay, IMO, if justification for their valuation consists of mushy statements about user feelings. It's their business.
AznHisoka 13y ago
All valid points, but a bit too removed from the 99%. Here's the real reason Twitter's IPO is bad for most startups: Their API is no longer going to be free in the future. That or they're going to impose harsher rate limits.
pkinsel 13y ago
I agree that valuations are too high for companies with low or nonexistent revenues. However, this analysis ignores a) startup ideas and their opportunities are unique and b) markets are winner take all. You lost me with the trickle-down argument, “So if Twitter is worth $25 billion and its size is X,” thinks the VC to himself smugly, “this other startup must be worth $250 million because its size is 0.01X.” Is the other startup doing something as unique and compelling? And does that startup have the opportunity to own that equally unique and compelling space outright? Twitter's valuation is born from its opportunity to be THE real-time information platform for the web. I would argue that Snapchat's opportunity (to be yet another photo social network) is nowhere near as compelling. Sure, valuations are too high across the board, but I do not see Twitter's IPO as bad for startups. If anything, it shows that unique concepts with the opportunity to own their market globally are highly rewarded by the public markets. As is often the case, I agree with much of your content, but take issue with your sensational headline :)
neovi 13y ago
I love these posts, ones that deal with understanding the investment side of startups. With that said, I hope you could reply because I'm an amateur in this field compared to you [quick google search] and would like to learn from this discussion. - who are you going after here? In your post the people I see are the unsophisticated investors who go for emotion/speculation rather than business perspective. Those that say with their gut "I love this product, it's so influential, therefore it's worth $50/share" and do off-the-cuff calculations "Facebook is priced at X so Twitter is around X, too" instead of doing hard research. One can see how it's bad to have these kinds of people involved in a relatively small field (ie VC), but again, your headline is towards startups and not the investors just noted. - don't startups stand to profit most from these valuations? The problem I see is in having the aforementioned investors. If we have people running around trying to get a slice of the pie, it looks like they'll pump-and-dump. They'll pump their cash into whatever startup seems to have a chance of opportunity and then walk out when it's profitable enough. Win/win, except that means the investors don't really care what the company is doing or up to, they just want to profit. - with what I just mentioned, startups stand to profit because more opportunity is available. The downside I see is there being a higher chance of shallow investments. When investing in a company, you want to really understand it and know it, but with these valuations and profits, it seems the headline shouldn't be "Why Twitter's IPO is Bad for Startups" but "Why Twitter's IPO is Bad for Sophisticated Investments." note: It's pretty difficult trying to write out thoughts on here, so hopefully I made some sense. If not, just ignore it as beginner's mind.
beautybasics 13y ago
Imagine we were in 1890's - There is biggest horse carriage company - And a dominant railway company Here comes { Ford, GM, Cadillac........} Every investor at that time can make a case that how could a transnational railway/carriage company is worth less than any motor company.
- AndrewKemendo 13y ago
  I think the difference is that in your case tangible commodity assets are being compared to tangible commodity assets. Those machines can be re-sold, melted for scrap, re-purposed etc... Software has a much harder time in the secondary market.
sjtgraham 13y ago
> “So if Twitter is worth $25 billion and its size is X,” thinks the VC to himself smugly, “this other startup must be worth $250 million because its size is 0.01X.” Isn't the main justification for these valuations growth and potential maximum size? Surely an investor can't extrapolate a $250MM valuation based on relative size with a straight face, especially as their metrics will also look quite different.
Guest98130 13y ago
Anyone catch the latest episode of Dragon's Den Canada yesterday? http://www.cbc.ca/dragonsden/ http://www.cbc.ca/dragonsden/ I think that's only viewable in Canada, but Canadians, play the video and watch the first pitch. These kids develop an iPhone app for tracking and recommending your workouts. They're asking $100,000 for 10% of their business. Their plan for generating revenue is converting users from their free app to pro at $4.99/mo, $29.99/yr. So far, 12,000 downloads on their app, and they say 1% are converting to paid. That means 120 paid users, averaging say $15 each, so they've made roughly $1,800 in revenue. What the hell? $1,800, and they value their company at one million dollars? They're not even paying themselves, and they're in one of the most saturated niches in the world, with already countless others well established and successful in that market. What blows my mind even more, one of the investors offers $100,000 for 20%, with 25% royalties until they're paid back. They turn it down.
brackin 13y ago
Coming from an investor, they're obviously looking for better terms. This is a somewhat biased perspective.
anuraj 13y ago
Just a correction - Coal India Limited (http://en.wikipedia.org/wiki/Coal_India_Limited http://en.wikipedia.org/wiki/Coal_India_Limited) is the largest coal company in the world - not Peabody Energy.
- jackaltman 13y ago
  CIL is a public company in the ran-by-a-government sense, so it's a little different. BTU is the largest private sector coal company.
  - anuraj 13y ago
    CIL is a publicly listed company though govt is the biggest shareholder. You are right about the private part.
wepple 13y ago
$4bn for snapchat? These kinds of valuations don't stack up to me - sure, startups are speculation not investment, but a four billion dollar valuation is an incredibly hefty speculation. my bet is that these billion dollar speculative valuations will continue amongst growing startups until a few of them fail to build solid profitability and fold - then we'll have a classic bubble burst through lack of share market confidence, and availability of cash and growth with slow. then, cue blog posts about "the virtues of being an organic-growth hacker"
nikcub 13y ago
> This valuation (along with the recent surge in Facebook stock) will send a rising tide of valuations rippling down through the ecosystem until “my friend and I have a pitch deck and an idea for a web app” is worth $10 million. The opposite has been shown to be true (and correlated with my own experience) for early stage companies. The biggest startup valuation bubbles happen when there are no public tech companies for money to be invested in (eg. the '07 startup bubble and more recently in '11). With Facebook, LinkedIn, Pandora, and now Twitter etc. public early stage startup valuations have shrunk again. Where it does get competitive is in the later stage rounds, but that was happening anyway as the mega-funds like DST competed with traditional VC and mezzanine funding (the business model here changed, as companies wanted to go public later). > Snapchat and Pinterest are worth around $4 billion dollars each. Evernote and Airbnb are each worth over $2 billion. Path is worth $500 million. Snapchat never raised on $4b, that was a rumor (and it continues to get cited as signs of a bubble even though the round never happen). The only other valuation here that would be out now is Path, and that is only because that startup has struggled. Were it a real bubble, Path would not have any problems raising a new round at $1b, fact is they are laying people off and searching for bridge loans from friends). > “People who think the company is overvalued,” they scoff, “just don’t get the power of Twitter.” There is nothing magic to understand, the business model is centuries old - sell services to individuals whose attention you have. Twitter currently has 250M subscribers, larger than most traditional media companies (that required printing presses, expensive TV spectrum to be purchased, entire studios like 30rock, dealing with the politics of media ownership, expensive distribution etc.) and growing quicker. I am a twitter user, I don't watch television anymore and I don't pick up newspapers or magazines. For advertisers to reach me and people like me, they need to find me on Twitter (or others on Facebook - this is the competition). The Twitter IPO is great for startups, for a few reasons: first, it returns money to investors who will inturn invest in the next generation of startups, it reinforces the hit parade and that the industry depends on, and it will bloom and entire new generation of angel investors who will be supporting the ecosystem (in the same way former Google employees did 10 years ago and FB employees did 2 years ago). edit: and I think the Buffett quote argues for Twitter, i've seen that quote used before to argue against Bitcoin, but not against an actual company that is producing hundreds of millions of dollars in revenue and growing at almost 100% a year.
dinkumthinkum 13y ago
Snapchat ... $40 billion ... ? Does money not mean anything anymore?
anovikov 13y ago
Twitter has a power to change the fates not of just people, but of whole nations. Coal on the other hand, is intrinsically worthless: we have more coal than we can afford to burn due to global warming, so availability of coal is not a limiting factor.
vampirechicken 13y ago
The market is not rational. To not ascribe rationality to the market. Do not anthropomorphize the market.

106 points by jackaltman 13y ago

The article doesn't actually answer the headline question. So, valuations are running sky-high. Ok. Why is it bad for startups?

jackaltman 13y ago
The answer to the question is supposed to be "because it's driving startup valuations sky high", which I assumed is understood as a bad thing, but I see your point. I have written about that before - it has all sorts of problems like trouble with fundraising for later rounds, inability to get acquired, etc.
- alexeisadeski3 13y ago
  First world problem: "I can't get acquired because my valuation is sky high!" Just sell for less. If everyone else demands high valuations, it's easier to sell, not harder.
  - byoung2 13y ago
    Just sell for less Your investors gave you $50 million at a $500 million valuation. Google wants to acquire you for $100 million. Your investors may not let you.
    - alexeisadeski3 13y ago
      "I raised too much money!" Or you can cancel some of your own shares and take the $50M.
    - RyanZAG 13y ago
      That's a nice position to be in. Disolve some of your shares: investors take $70 million, you take $30 million. Everyone should be very happy. Or if you still have runway and believe in the business, keep going and raise that $100 million. It sounds like the problem of having scaling issues: it's a problem, sure, but it means you're already a success. If you never got that $50 million to begin with because valuations weren't high, then you might be a failure now instead.
      - byoung2 13y ago
        That's a nice position to be in. Disolve some of your shares: investors take $70 million, you take $30 million. Everyone should be very happy. Be sure to check your term sheet. It could be that your investors have a liquidation preference that includes a multiple. Based on my (admittedly limited) understanding, if your investors gave you $50 million for 10% of the company, with a 2X multiple liquidation preference, they would be entitled to the first $100 million of any sale, plus 10%. So you may be able to sell for $100 million, but you wouldn't see a dime.

thejosh 13y ago

not making money is bad for startups.

ACow_Adonis 13y ago
I don't know about that. It seems to have worked out all right for twitter :P
rabino 13y ago
Not really. YouTube and Instagram, for example, had insane exits while loosing money.
davidu 13y ago
There's no factual evidence to back this statement up. See my other comment on this thread.
- thejosh 13y ago
  What? Not making money isn't a bad thing for startups? I must be really out of the loop, I didn't realise startups run on Unicorn smiles and jellybeans.
  - davidu 13y ago
    Many run on capital raised from investors until which point they reach a liquidity event that exists irrespective of making money. Some also make money. But VC-backed startups, which is really the only connotation of startup that we use here on YC, are a special breed of startup (generally focused on massive growth) where operating capital derived from revenue is not a pre-requisite for success.
ojbyrne 13y ago
Not making revenue is bad for startups. Once you have investment on board, the model is "grow the top line and we'll worry about the bottom line later." That is how venture capital works. Twitter's revenue so far in 2013 is $422 million [1]. [1] http://www.itworldcanada.com/post/twitter-loses-growing-sec-filling http://www.itworldcanada.com/post/twitter-loses-growing-sec-...

l33tbro 13y ago

"Once my sympathies for Twitter subsided ... " Right, so when is the candlelight vigil again?

zaidf 13y ago

Twitter IPO is bad for start ups because its fueled by inexperienced investors who missed out on Facebook. What they don't realize is that twitter is no where near facebook's trajectory on any of the metrics that matter(revenue, profit, user growth).

tomphoolery 13y ago
I'm not sure "inexperienced" investors "missed out" on Facebook. It was a very risky purchase, and for a few months there lost quite a bit of money for a lot of people. Only until the stock really stabilized did we see it sort-of hover around the $30-50 range. And even then, I feel it's priced much less at the moment than many people thought it would be when it IPOed. It even made a few acquisitions like Waze and Instagram in order to boost its investment value, but the main product still isn't as valuable (on Wall Street, that is) as people thought it was going to be. In my opinion/from what I've read, anyway.

pyrrhotech 13y ago

Blame bubble Ben. QE is 90% of the issue here. The market is addicted now. Great recession 2.0 will probably hit next fall

rafe33 13y ago

Uh, "Path is worth $550 million" ?! What crack is he smoking?

hansy 13y ago
http://techcrunch.com/2013/07/16/path-is-raising-50m-at-a-500m-valuation/ http://techcrunch.com/2013/07/16/path-is-raising-50m-at-a-50...
- deleted 13y ago
  [deleted]
- yanivs 13y ago
  actually Path is valued at $250m http://techcrunch.com/2013/11/07/path-loses-biz-head-amid-rumors-of-over-7m-in-funding-from-dustin-moskovitz/ http://techcrunch.com/2013/11/07/path-loses-biz-head-amid-ru...
  - hansy 13y ago
    Oh wow this article is only a few hours old. My bad. Nice find!
DenisM 13y ago
Please stay civil.

davidu 13y ago

I think lots of things are bad for startups, but Twitter's IPO isn't one of them -- and this post didn't convince me otherwise. In fact, lots of points made in this post seem to sound as though they are factual, but I'm not sure they are and would likely argue the opposite point of the author: "The real problem here is that we increasingly live in a world where technology companies are valued on emotional whims and promises of unbelievable future growth." Technology companies are almost universally about promise and potential and always have been. Read Crossing the Chasm to understand why that is. At the time that the private market investors care about them, they are so early in the selling motions that their early success in a tiny subset of the market is indicative of later potential. That's why VCs exist. To see something with early potential, pay a premium (at times) to get a part of it, foster it's development, and then ride it into reality and receive a terrific return for the foresight and fortitude. The pattern recognition there is unmistakeable. Where it gets challenged is in the fickle and finicky consumer market where externalities are more likely to cause massive changes in momentum (See: Path can't maintain the momentum of fundraising). "A surge on IPO day is good of course, but 15-20% is more than enough; 75% simply means the company was mis-priced and that Twitter left over a billion in cash on the table." This is also not a factually true statement. Because a small float was offered, and demand was prescriptive by the bankers, it's impossible to say that because of how it ended, trying to raise the price to $40 would have resulted in the same outcome. If Twitter wanted to fully maximize their first day gains, there are dutch style IPO auctions that can be done to better match demand for an offering. Google did this. I'm not going to continue, but I guess this is a great headline with a poorly made point. I'm not sure what the goal here was.

jackaltman 13y ago
I understand that startups are about promise and potential, and that a company with no revenue might be fairly valued at billions of dollars. A startup (or any company) is worth something like the integral of of the graph of probability vs. outcome. The problem I see right now is that people are overvaluing the positive outcomes and discounting the low end. "Because a small float was offered, and demand was prescriptive by the bankers, it's impossible to say that because of how it ended, trying to raise the price to $40 would have resulted in the same outcome." I'm not completely sure what you mean by this, but I spent time on an ECM desk one summer and I they aren't aiming for a 75% first day pop. The bankers get paid less, the company raises less. You want a pop to satisfy buy-side clients and to keep a positive public perception, but 75% is too much.

AndrewKemendo 13y ago

>Snapchat and Pinterest are worth around $4 billion dollars each. Evernote and Airbnb are each worth over $2 billion. Path is worth $550 million. By comparison, Peabody Energy, the largest coal company in the world which owns almost 10 billion tons of coal, is worth about $5 billion. I see fewer and fewer comparisons like these between tech companies and brick and mortar/commodity companies and I think it is a shame. To me such comparisons do more to highlight how broken the financial markets are, though I am not exactly sure why. It seems like investment priorities or consumer demands are out of whack when electrical utility companies (PEPCO) are valued less than social media platforms (FB).

kooshball 13y ago
> It seems like investment priorities or consumer demands are out of whack when electrical utility companies (PEPCO) are valued less than social media platforms (FB). This is really not a logical comparison. These are 2 companies in different fields and have very different characteristics. Investors almost certainly have different reasons from buying one or the other. The comparison between their value is not really relevant.
- infinii 13y ago
  That's what's broken. The fact that "value" is irrelevant. Imagine life without utility companies and imagine life without FB. It's absurd.
  - hrjet 13y ago
    What you are supposed to see there is not "value" but "profit and potential". If a utility company which provides basic necessities were to make a lot of profit, wouldn't it be sort of a bad outcome for humanity? Isn't it better if basic necessities are provided to us at the most affordable prices?
  - kooshball 13y ago
    It's the comparison between two individual companies in different field that is irrelevant. My point is that the valuation comparison OP posted has nothing to do with "life without utility companies and imagine life without FB".

patio11 13y ago

If Airbnb is currently priced at about $2 billion, that's about 1/4 of an IHG Hotels (they own the Holiday Inn brand and another dozen or so). That sounds richly valued to me, but not insane. IHG (disclaimer: shareholder and double super platinum for life due to often staying there for business travel) has been trying to move, for years, into a capital structure which Airbnb had from day one: they want a cut of every night's stay without actually owning any hotel property because that's a capital-intensive location-dependent slow-growth business. They've got a substantial scale advantage on Airbnb (~600,000 rooms which each rent 300+ nights per year, whereas Airbnb does about 50 million nights a year at systematically lower price points), but 5~10% a year is great growth for them, and Airbnb is growing at about 100% every 6 months. There exist significant risks to the company, from the legal issues to merely not sustaining the hockey stick for long enough to justify the valuation, but the people with money on the line are mostly rich and sophisticated. If they lose their investment, oh well, capitalism happens. It's categorically better than when $X00,000 of pet food sold at a $Y0 million loss was valued in the billions.

larrys 13y ago
"That sounds richly valued to me, but not insane." The threats to airbnb are much greater (and of course different) than the threats to IHG. IHG has a lock on locations because of contracts in addition of course to locations which they own. IHG has brands. And they have standards. You book with them because you expect a certain level of service when you visit one of their hotels (regardless of who owns the property). They have a functioning marketing machine which fills up hotel rooms with conventions and corporate travel. Otoh, airbnb is much more susceptible to a threat from someone else doing something similar, slightly different, or essentially the same. There is a barrier to entry in being IHG as they have infrastructure and an established brand. To me that makes them valuable.
- Patrick_Devine 13y ago
  I agree with most of your points, but one thing airbnb does have going for it is a network effect. They have both the supply, and the demand and that makes it difficult for other people to break into the space. If I'm looking for a place to stay, my default option will be the place with the most inventory. If I've got a place to rent out, I want to list it where most people are looking and where I can get the highest occupancy. Since airbnb is effectively an exchange, how would another exchange move in to replace it? Marketing and branding is one way, particularly since airbnb hasn't fully saturated the market. One strategy might be to include hotel rooms in listings since airbnb is unlikely to do that given their niche. Another way might be a series of negative events (eg. a serial stalker or rampant bed bugs) which could really tarnish their brand.

chaz 13y ago

I think the Twitter IPO is very good for startups. The wealth event for a lot of employees unlocks a pool of talented employees who are flush with experience, ready to take on new challenges, and armed with a network. A bit of money in the pocket is that they're less dependent upon short-term income and are willing to take on a fair amount of risk and more focused on long-term goals. Many will start a new company or join as an early/senior employee at a fast growing one. Some of them will go on to be angel investors and VCs. Some will just drive Porsches and play golf. This cycle has renewed itself many times in the Bay Area, with recent examples likes Nescape, eBay, PayPal, Google, Facebook, and LinkedIn. I feel this refertilization is not nearly as strong in many other cities like NYC.

crassus 13y ago
Unfortunately, for every thousand new tech millionaires there is maybe 1 or 2 that is doing anything interesting or daring with their money. The energetic give it away to charity, the lazy park it in an investment fund. Few are the Elon Musks and Peter Thiels.
- onedev 13y ago
  Few make nearly as much as Elon Musk and Peter Thiel to have nearly even close to as much impact.
  - toomuchtodo 13y ago
    What are the Instagram folks doing with their cash? Did they not net more than Musk and Thiel from their sale?
    - jamesaguilar 13y ago
      It's been like a year and a half. Maybe cut them a little slack.
      - deleted 13y ago
        [deleted]

crassus 13y ago

Twitter/snapchat are media companies in competition with prime time television and daily soaps. It's okay, IMO, if justification for their valuation consists of mushy statements about user feelings. It's their business.

AznHisoka 13y ago

All valid points, but a bit too removed from the 99%. Here's the real reason Twitter's IPO is bad for most startups: Their API is no longer going to be free in the future. That or they're going to impose harsher rate limits.

pkinsel 13y ago

I agree that valuations are too high for companies with low or nonexistent revenues. However, this analysis ignores a) startup ideas and their opportunities are unique and b) markets are winner take all. You lost me with the trickle-down argument, “So if Twitter is worth $25 billion and its size is X,” thinks the VC to himself smugly, “this other startup must be worth $250 million because its size is 0.01X.” Is the other startup doing something as unique and compelling? And does that startup have the opportunity to own that equally unique and compelling space outright? Twitter's valuation is born from its opportunity to be THE real-time information platform for the web. I would argue that Snapchat's opportunity (to be yet another photo social network) is nowhere near as compelling. Sure, valuations are too high across the board, but I do not see Twitter's IPO as bad for startups. If anything, it shows that unique concepts with the opportunity to own their market globally are highly rewarded by the public markets. As is often the case, I agree with much of your content, but take issue with your sensational headline :)

neovi 13y ago

I love these posts, ones that deal with understanding the investment side of startups. With that said, I hope you could reply because I'm an amateur in this field compared to you [quick google search] and would like to learn from this discussion. - who are you going after here? In your post the people I see are the unsophisticated investors who go for emotion/speculation rather than business perspective. Those that say with their gut "I love this product, it's so influential, therefore it's worth $50/share" and do off-the-cuff calculations "Facebook is priced at X so Twitter is around X, too" instead of doing hard research. One can see how it's bad to have these kinds of people involved in a relatively small field (ie VC), but again, your headline is towards startups and not the investors just noted. - don't startups stand to profit most from these valuations? The problem I see is in having the aforementioned investors. If we have people running around trying to get a slice of the pie, it looks like they'll pump-and-dump. They'll pump their cash into whatever startup seems to have a chance of opportunity and then walk out when it's profitable enough. Win/win, except that means the investors don't really care what the company is doing or up to, they just want to profit. - with what I just mentioned, startups stand to profit because more opportunity is available. The downside I see is there being a higher chance of shallow investments. When investing in a company, you want to really understand it and know it, but with these valuations and profits, it seems the headline shouldn't be "Why Twitter's IPO is Bad for Startups" but "Why Twitter's IPO is Bad for Sophisticated Investments." note: It's pretty difficult trying to write out thoughts on here, so hopefully I made some sense. If not, just ignore it as beginner's mind.

beautybasics 13y ago

Imagine we were in 1890's - There is biggest horse carriage company - And a dominant railway company Here comes { Ford, GM, Cadillac........} Every investor at that time can make a case that how could a transnational railway/carriage company is worth less than any motor company.

AndrewKemendo 13y ago
I think the difference is that in your case tangible commodity assets are being compared to tangible commodity assets. Those machines can be re-sold, melted for scrap, re-purposed etc... Software has a much harder time in the secondary market.

sjtgraham 13y ago

> “So if Twitter is worth $25 billion and its size is X,” thinks the VC to himself smugly, “this other startup must be worth $250 million because its size is 0.01X.” Isn't the main justification for these valuations growth and potential maximum size? Surely an investor can't extrapolate a $250MM valuation based on relative size with a straight face, especially as their metrics will also look quite different.

Guest98130 13y ago

Anyone catch the latest episode of Dragon's Den Canada yesterday? http://www.cbc.ca/dragonsden/ http://www.cbc.ca/dragonsden/ I think that's only viewable in Canada, but Canadians, play the video and watch the first pitch. These kids develop an iPhone app for tracking and recommending your workouts. They're asking $100,000 for 10% of their business. Their plan for generating revenue is converting users from their free app to pro at $4.99/mo, $29.99/yr. So far, 12,000 downloads on their app, and they say 1% are converting to paid. That means 120 paid users, averaging say $15 each, so they've made roughly $1,800 in revenue. What the hell? $1,800, and they value their company at one million dollars? They're not even paying themselves, and they're in one of the most saturated niches in the world, with already countless others well established and successful in that market. What blows my mind even more, one of the investors offers $100,000 for 20%, with 25% royalties until they're paid back. They turn it down.

brackin 13y ago

Coming from an investor, they're obviously looking for better terms. This is a somewhat biased perspective.

anuraj 13y ago

Just a correction - Coal India Limited (http://en.wikipedia.org/wiki/Coal_India_Limited http://en.wikipedia.org/wiki/Coal_India_Limited) is the largest coal company in the world - not Peabody Energy.

jackaltman 13y ago
CIL is a public company in the ran-by-a-government sense, so it's a little different. BTU is the largest private sector coal company.
- anuraj 13y ago
  CIL is a publicly listed company though govt is the biggest shareholder. You are right about the private part.

wepple 13y ago

$4bn for snapchat? These kinds of valuations don't stack up to me - sure, startups are speculation not investment, but a four billion dollar valuation is an incredibly hefty speculation. my bet is that these billion dollar speculative valuations will continue amongst growing startups until a few of them fail to build solid profitability and fold - then we'll have a classic bubble burst through lack of share market confidence, and availability of cash and growth with slow. then, cue blog posts about "the virtues of being an organic-growth hacker"

nikcub 13y ago

> This valuation (along with the recent surge in Facebook stock) will send a rising tide of valuations rippling down through the ecosystem until “my friend and I have a pitch deck and an idea for a web app” is worth $10 million. The opposite has been shown to be true (and correlated with my own experience) for early stage companies. The biggest startup valuation bubbles happen when there are no public tech companies for money to be invested in (eg. the '07 startup bubble and more recently in '11). With Facebook, LinkedIn, Pandora, and now Twitter etc. public early stage startup valuations have shrunk again. Where it does get competitive is in the later stage rounds, but that was happening anyway as the mega-funds like DST competed with traditional VC and mezzanine funding (the business model here changed, as companies wanted to go public later). > Snapchat and Pinterest are worth around $4 billion dollars each. Evernote and Airbnb are each worth over $2 billion. Path is worth $500 million. Snapchat never raised on $4b, that was a rumor (and it continues to get cited as signs of a bubble even though the round never happen). The only other valuation here that would be out now is Path, and that is only because that startup has struggled. Were it a real bubble, Path would not have any problems raising a new round at $1b, fact is they are laying people off and searching for bridge loans from friends). > “People who think the company is overvalued,” they scoff, “just don’t get the power of Twitter.” There is nothing magic to understand, the business model is centuries old - sell services to individuals whose attention you have. Twitter currently has 250M subscribers, larger than most traditional media companies (that required printing presses, expensive TV spectrum to be purchased, entire studios like 30rock, dealing with the politics of media ownership, expensive distribution etc.) and growing quicker. I am a twitter user, I don't watch television anymore and I don't pick up newspapers or magazines. For advertisers to reach me and people like me, they need to find me on Twitter (or others on Facebook - this is the competition). The Twitter IPO is great for startups, for a few reasons: first, it returns money to investors who will inturn invest in the next generation of startups, it reinforces the hit parade and that the industry depends on, and it will bloom and entire new generation of angel investors who will be supporting the ecosystem (in the same way former Google employees did 10 years ago and FB employees did 2 years ago). edit: and I think the Buffett quote argues for Twitter, i've seen that quote used before to argue against Bitcoin, but not against an actual company that is producing hundreds of millions of dollars in revenue and growing at almost 100% a year.

dinkumthinkum 13y ago

Snapchat ... $40 billion ... ? Does money not mean anything anymore?

anovikov 13y ago

Twitter has a power to change the fates not of just people, but of whole nations. Coal on the other hand, is intrinsically worthless: we have more coal than we can afford to burn due to global warming, so availability of coal is not a limiting factor.

vampirechicken 13y ago

The market is not rational. To not ascribe rationality to the market. Do not anthropomorphize the market.