2 ms·

That's not how company valuations work. A company doesn't have to bring in $1 million in profit for investors who valued the company at $1 million to break even

That's not how company valuations work. A company doesn't have to bring in $1 million in profit for investors who valued the company at $1 million to break even. At very late stages, a company valuation is usually a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). The valuation (which is different than market cap, but we'll conflate the two for sake of explanation) in very late stage, non-growing companies, during times of slow economic growth is around 5-7x. If a company is growing quickly at the later stages (read: exponential growth curve) its P/E ratio (price/earnings ratio) could be, we'll say, 100 on the public markets (100x). That's really high, and would rarely happen unless the economy has really low interest rates (meaning less good places to put your cash, and you need to invest it somewhere anyway). So, in other words, we give the company the benefit of the doubt and say they'll be worth 30x EBITDA. That means they'd need to bring in about 20m in one year, which is about 400m in total donations. High for sure (the buyers must really believe in them), but not completely unreasonable. If, on the off chance, they start bringing in 1B in donations, and their take is 50m, the investors will earn a great multiple on their investment. That's probably what they're hoping for.

log_n 11y ago
I think Josu was actually correct and you two are talking about two different things. Josu is saying that if the purchasers cannot find another (greater?) fool to flip the company to then they will have to manage 12 billion dollars in transactions with 0 costs if they are only charging 5% in order to break even. That's just simple math, 5% of 12 billion = the 600 million dollar buy-out price. That's if nothing changes in terms of what percentage they keep and if they have 0 costs. If the purchasers are going to buy and hold they will need to handle 12 billion dollars in transactions at 0 expenses to get their buying power back to buy another company, unless they can flip the company or borrow against it. You are saying that the purchasers have broken even on the deal so long as they have not lost money on paper in the valuation since they can probably either borrow against it or sell it off. It comes down to are you paying for current value, or potential growth in value. Frankly, in my opinion, markets that rely upon a greater fool to bail you out to make your money rather than just getting it back the old fashioned way by providing a good or service are way too frothy. Counter-argument is that you are betting on growth, not a greater fool bail out. In this instance the only way to get that growth while still handling less than 12 billion in transactions is by increasing their take from 5% to something higher or adding on ancillary sales. I'd bet on ancillaries, but this isn't my space. By the way for those reading who may not know, I was referencing Greater Fool Theory, not making a pejorative statement (heh, beyond what the theory itself may make). https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory
- josu 11y ago
  Thanks, you put it much better than I did. And yes, that was exactly my point.
josu 11y ago
Thank you for your thorough explanation, but I was just trying to use simple maths. Because if things don't add up with a very basic model, they won't either when you add complexity to it. I actually found the numbers and Gofundme brought in $470M in 2014, which is actually a bit more than Kickstarter. So, $23.5M in revenue. I don't know what the costs of operating a crowdfunding site are but I don't think that the valuation could have been less than 30X EBITDA. But yeah, with $23.5M in revenue and with such a fast growing market, a $600M valuation doesn't seem as crazy as I thought. I personally don't think that the company will ever make $600M in profit, but hey, as log_n puts it, for now they can still look for a greater fool.

log_n 11y ago

I think Josu was actually correct and you two are talking about two different things. Josu is saying that if the purchasers cannot find another (greater?) fool to flip the company to then they will have to manage 12 billion dollars in transactions with 0 costs if they are only charging 5% in order to break even. That's just simple math, 5% of 12 billion = the 600 million dollar buy-out price. That's if nothing changes in terms of what percentage they keep and if they have 0 costs. If the purchasers are going to buy and hold they will need to handle 12 billion dollars in transactions at 0 expenses to get their buying power back to buy another company, unless they can flip the company or borrow against it. You are saying that the purchasers have broken even on the deal so long as they have not lost money on paper in the valuation since they can probably either borrow against it or sell it off. It comes down to are you paying for current value, or potential growth in value. Frankly, in my opinion, markets that rely upon a greater fool to bail you out to make your money rather than just getting it back the old fashioned way by providing a good or service are way too frothy. Counter-argument is that you are betting on growth, not a greater fool bail out. In this instance the only way to get that growth while still handling less than 12 billion in transactions is by increasing their take from 5% to something higher or adding on ancillary sales. I'd bet on ancillaries, but this isn't my space. By the way for those reading who may not know, I was referencing Greater Fool Theory, not making a pejorative statement (heh, beyond what the theory itself may make). https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory

josu 11y ago
Thanks, you put it much better than I did. And yes, that was exactly my point.

josu 11y ago

Thank you for your thorough explanation, but I was just trying to use simple maths. Because if things don't add up with a very basic model, they won't either when you add complexity to it. I actually found the numbers and Gofundme brought in $470M in 2014, which is actually a bit more than Kickstarter. So, $23.5M in revenue. I don't know what the costs of operating a crowdfunding site are but I don't think that the valuation could have been less than 30X EBITDA. But yeah, with $23.5M in revenue and with such a fast growing market, a $600M valuation doesn't seem as crazy as I thought. I personally don't think that the company will ever make $600M in profit, but hey, as log_n puts it, for now they can still look for a greater fool.