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... and here's where you receive a flood of scathing email from teen/twentyish brogrammers and 37Signals fans across the planet (sent via Gmail, of course), say

... and here's where you receive a flood of scathing email from teen/twentyish brogrammers and 37Signals fans across the planet (sent via Gmail, of course), saying basically, "Oh like what would you know about Facebook anyway?" Er. Wait a minute. :-) A little less meta: I think your point is valid but I think the OA's satire was an illustration of a valid criticism of a kind of valuation model that's driven more by herd mentality, and where anything giveth ephemerally can also be taketh away ephemerally if the pendulum swings back to fundamentals-driven before the bubbled company in question can build up real profits to start justifying its currently frothy 'maybe someday' valuation. Facebook, like Google, has been an exceptional case in several ways, it could be argued. But exceptions don't invalidate the wisdom of a general rule of thumb.

paul 13y ago
Actually, exceptions are where all of the money is made in this business. The top 1% of startups produce the majority of the returns, which is why we all want to invest in the next Google or Facebook, even if we're not 100% certain that it will in fact be the next Google or Facebook.
- mkramlich 13y ago
  Good point and agreed. So the application in the case of this topic clearly is that the investors are likely betting, hoping, that SnapChat will be one of these exception cases. The one whose payoff more than makes up for losses on all their other little startup bets. It's as if there are two ways of valuing companies, two competing schools, and their methodologies are opposed, arguably in outright conflict -- they can't both be true. One is the valuation on so-called fundamentals, the other is the bet that this will one day become one of those extreme outliers whose ROI is such a high multiple that it makes up for the losses on other failed bets. They're both valid models, like Newton or Einstein, that produce correct (enough) results, but in different situations and at different scales. The trick is to know when to use one model to make your decision, or the other. To carry this forward, 37Signals/JF/DHH clearly prefer/bias to the Newton method, in this analogy, and YC & SV VC the Einstein. Or to change the analogy, the former models are based on arithmetic, the latter on statistics. They both can work well but each in a different context with different endgame goals. (And thanks for the reply. I'm a fan of your work.)

paul 13y ago

Actually, exceptions are where all of the money is made in this business. The top 1% of startups produce the majority of the returns, which is why we all want to invest in the next Google or Facebook, even if we're not 100% certain that it will in fact be the next Google or Facebook.

mkramlich 13y ago
Good point and agreed. So the application in the case of this topic clearly is that the investors are likely betting, hoping, that SnapChat will be one of these exception cases. The one whose payoff more than makes up for losses on all their other little startup bets. It's as if there are two ways of valuing companies, two competing schools, and their methodologies are opposed, arguably in outright conflict -- they can't both be true. One is the valuation on so-called fundamentals, the other is the bet that this will one day become one of those extreme outliers whose ROI is such a high multiple that it makes up for the losses on other failed bets. They're both valid models, like Newton or Einstein, that produce correct (enough) results, but in different situations and at different scales. The trick is to know when to use one model to make your decision, or the other. To carry this forward, 37Signals/JF/DHH clearly prefer/bias to the Newton method, in this analogy, and YC & SV VC the Einstein. Or to change the analogy, the former models are based on arithmetic, the latter on statistics. They both can work well but each in a different context with different endgame goals. (And thanks for the reply. I'm a fan of your work.)