3 ms·

Maybe what he meant is: If the future profits of AirBnB were known perfectly now, then their valuation should be the present value of all future profits as othe

by zodiac 11y ago

Maybe what he meant is: If the future profits of AirBnB were known perfectly now, then their valuation should be the present value of all future profits as otherwise there is an arbitrage opportunity. Since the future profits are not known perfectly, investors assume some risk, so the valuation is lower than the present value of all future profits, so that investors get rewarded for assuming this risk.

lifeisstillgood 11y ago
That first paragraph is what I meant. But the second paragraph is not quite how I understand it. The risk is entirely down to the accuracy of the estimation of future profits. If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value. Of course that is not a realistic scenario, but I just want to be clear, and maybe folks were not implying it, but there is no "reward for risk taking". There is only a difference in estimated cashflow and a market that does or does not have high competition. The more competition, as in SV VC world it seems, the closer a VC must pay to the estimated future cashflow. Which in cases of Uber or airbnb is frigging vast or nothing. I think nothing to be quite honest but that's another post.
- zodiac 11y ago
  > If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value. Is this true in the presence of other investment opportunities. Suppose I estimate the present value of AirBnB's future profits as $30B plus/minus $10B, and I'm given a chance to invest at a $25B valuation. I also estimate the present of Dropbox's future profits as $30B plus/minus $1B and I'm given a chance to invest at a $25B valuation. Are you saying that I should be indifferent to which investment I choose?
  - lifeisstillgood 11y ago
    Well no, but that does not change the game in whichever bid you do choose to participate in (and let's assume you will participate in at least one bid somewhere, and that bid will also have competitors) At some point you will compete for the asset, and you and your competitor will have estimates of future cashflow and you will logically be willing to go down to the last cent before giving up (well the last cent, discounted etc etc) The point is, profit is not a right of investment.
    - zodiac 11y ago
      But the game investors play isn't "choose a company/asset class to invest in, and then compete with other bidders". While I'm competing with the other bidders I can take my money and invest it elsewhere. So if we're really competing over the last cent an investor would logically think "my expected profit on this investment is now low enough that it makes more sense to take my money and buy government bonds instead, which offer the same expected profit but lower risk".

by zodiac 11y ago

lifeisstillgood 11y ago

That first paragraph is what I meant. But the second paragraph is not quite how I understand it. The risk is entirely down to the accuracy of the estimation of future profits. If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value. Of course that is not a realistic scenario, but I just want to be clear, and maybe folks were not implying it, but there is no "reward for risk taking". There is only a difference in estimated cashflow and a market that does or does not have high competition. The more competition, as in SV VC world it seems, the closer a VC must pay to the estimated future cashflow. Which in cases of Uber or airbnb is frigging vast or nothing. I think nothing to be quite honest but that's another post.

zodiac 11y ago
> If there are only two VCs in the market and they both estimate the same cashflow, rational economics says they will both out bid school other down to the last cent of Present Value. Is this true in the presence of other investment opportunities. Suppose I estimate the present value of AirBnB's future profits as $30B plus/minus $10B, and I'm given a chance to invest at a $25B valuation. I also estimate the present of Dropbox's future profits as $30B plus/minus $1B and I'm given a chance to invest at a $25B valuation. Are you saying that I should be indifferent to which investment I choose?
- lifeisstillgood 11y ago
  Well no, but that does not change the game in whichever bid you do choose to participate in (and let's assume you will participate in at least one bid somewhere, and that bid will also have competitors) At some point you will compete for the asset, and you and your competitor will have estimates of future cashflow and you will logically be willing to go down to the last cent before giving up (well the last cent, discounted etc etc) The point is, profit is not a right of investment.
  - zodiac 11y ago
    But the game investors play isn't "choose a company/asset class to invest in, and then compete with other bidders". While I'm competing with the other bidders I can take my money and invest it elsewhere. So if we're really competing over the last cent an investor would logically think "my expected profit on this investment is now low enough that it makes more sense to take my money and buy government bonds instead, which offer the same expected profit but lower risk".