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Is the private-public really such a big difference? It seems to me that if the market crashes the tech industry will get affected the same way whether it's the

by auganov 11y ago

Is the private-public really such a big difference? It seems to me that if the market crashes the tech industry will get affected the same way whether it's the public or the private market - harder to get funded, harder to get jobs etc. The difference is in how the crash propagates to the general economy. Am I wrong? I honestly don't know.

ThomPete 11y ago
The problem with the "unicorns" in the private market is that its getting funded size wise as if it's a publicly traded company. Ubers 40Billion valuation isn't based on it's funding not on it's actual performance (400million revenue, 400million spend). As long as a private company can getting to the next round of funding it doesn't matter if it's actually even close to becoming a sustainable business. So you can basically keep extending a "false" business in that all you need is convince someone to believe you can become even bigger than you already are, but without showing it through your actual revenue. As a publicly traded company this wouldn't ever work. Amazon isn't making a profit but it keeps growing revenue wise (for now) if that somehow stops then it will get hit too. At least thats my take on it.
- dylanjermiah 11y ago
  Private valuations aren't based on current revenues, they're betting on future revenues. In the case of Uber, they're predicted to grow 6x from last year (on target) and 3x in 2016. Another example, when eBay bought PayPal in 2001 future revenues from as far as 2011 (10 years!) were baked into the 1.6bn price. (Which was a _great_ purchase)
  - ThomPete 11y ago
    Oh I agree. Of course it's based on betting on future revenues which will work for some and not for others but thats not really the point I am trying to make. What I am saying is that on the current private market you can keep a company with a fundamentally unsound business in suspended animation for a long time and keep enjoying growing valuation as long as you can convince investors that they will be able to raise the next round. I.e. without it actually having proven that's it's a sustainable business. Most of the unicorns happens to be from the valley and as far as I can see have more or less the same investors behind them indicating at least to me that it's not purely based on being better at betting on the right companies. This is a very different feedback-loop than the public market where your ability to make a profit at market expectations often is is king and where this ability is measured every quarter. Maybe I am paranoid but thats what I see. And yes I haven't gotten my head around a proper way to formulate his intuition yet.
  - forgetsusername 11y ago
    "Private valuations aren't based on current revenues, they're betting on future revenues." Private valuations aren't unique in this aspect. All prices are based on expectations of claims on future cash flows.
- cableshaft 11y ago
  Amazon hasn't made a profit only because they've chosen to re-invest every penny of profit they would make back into the company. If they were forced to show a profit next year, they could pretty easily make a few cuts here and there and produce a profit. http://www.forbes.com/sites/timworstall/2014/09/07/the-internal-economics-of-amazons-no-profits-growth-model/ http://www.forbes.com/sites/timworstall/2014/09/07/the-inter...
  - ThomPete 11y ago
    I am aware of why they haven't made a profit. The point is that this is still a bet and if the strategy doesn't hold up they will be punished much more quickly than a privately funded company. My point is that the latency that exist in privately funded unicorns can end up creating a bubble exactly because the feedback loop is too slow.
austenallred 11y ago
It's wildly different. Consider one thing: portfolio theory. Top VCs actually expect to lose all of their money on some (if not most) investments. While this becomes less true at later stages, the fact is everyone is hedging their bets and are diversified in a way (within tech). Assuming all of technology investing doesn't crumble at once, which it won't, so long as the entire thing isn't built in smoke, Morris and dreams. That's why the fact that there are real revenues and profits driving everything this time matters. Most companies show promise to bring in cold hard cash, if they're not doing so already.
- forgetsusername 11y ago
  >the fact is everyone is hedging their bets and are diversified in a way (within tech) That is in no way diversification. And the correlation of investments within the tech world, when shit hits the fan, will be 1. >real revenues and profits Which of the companies are making profits? Look, I'm not calling for Tech Crash 2.0 either, but some people seem oblivious to how these things go down when they....go down.
  - austenallred 11y ago
    > That is in no way diversification. And the correlation of investments within the tech world, when shit hits the fan, will be 1. Hence the "in a way." And your argument makes the assumption that tech, as a category, will collapse. > Which of the companies are making profits? "Tech" is a very big thing, but if we're picking random companies there are a few divisions: Public: Google makes money hand over fist, Amazon tries not to make profits (and almost accidentally brought in $20m last quarter) while their revenues grow exponentially. Facebook brings in billions, Twitter, the dark horse of this category, is still bringing in >$1B/yr in revenue. Ok, but those are the titans. Let's look at the YC companies: Airbnb, Dropbox and Stripe alone would make up for every dollar YC ever spent investing. But even locally, almost every company I talk to is choosing to raise money. Meaning, they have enough revenue to stay afloat, but elect to raise money to grow more quickly. These are companies raising little $2m rounds but are either profitable or could be if they needed to, but elect to grow quickly instead of become cashflow positive. (Admittedly, my company does not fall within that category). There may be overvaluation, especially at later stages, but the investments being made assume there is. They assume that some (or most) will fail, but that the others will make a multiple. Some money will be lost, but as long as the entire category of "technology" doesn't collapse altogether, it's not like 1999 again. And given the amount of real profits and revenues in the category of "technology," my contention is that there won't be, as Marc Andreessen puts it, an "earth-shattering kaboom."

by auganov 11y ago

ThomPete 11y ago

The problem with the "unicorns" in the private market is that its getting funded size wise as if it's a publicly traded company. Ubers 40Billion valuation isn't based on it's funding not on it's actual performance (400million revenue, 400million spend). As long as a private company can getting to the next round of funding it doesn't matter if it's actually even close to becoming a sustainable business. So you can basically keep extending a "false" business in that all you need is convince someone to believe you can become even bigger than you already are, but without showing it through your actual revenue. As a publicly traded company this wouldn't ever work. Amazon isn't making a profit but it keeps growing revenue wise (for now) if that somehow stops then it will get hit too. At least thats my take on it.

dylanjermiah 11y ago
Private valuations aren't based on current revenues, they're betting on future revenues. In the case of Uber, they're predicted to grow 6x from last year (on target) and 3x in 2016. Another example, when eBay bought PayPal in 2001 future revenues from as far as 2011 (10 years!) were baked into the 1.6bn price. (Which was a _great_ purchase)
- ThomPete 11y ago
  Oh I agree. Of course it's based on betting on future revenues which will work for some and not for others but thats not really the point I am trying to make. What I am saying is that on the current private market you can keep a company with a fundamentally unsound business in suspended animation for a long time and keep enjoying growing valuation as long as you can convince investors that they will be able to raise the next round. I.e. without it actually having proven that's it's a sustainable business. Most of the unicorns happens to be from the valley and as far as I can see have more or less the same investors behind them indicating at least to me that it's not purely based on being better at betting on the right companies. This is a very different feedback-loop than the public market where your ability to make a profit at market expectations often is is king and where this ability is measured every quarter. Maybe I am paranoid but thats what I see. And yes I haven't gotten my head around a proper way to formulate his intuition yet.
- forgetsusername 11y ago
  "Private valuations aren't based on current revenues, they're betting on future revenues." Private valuations aren't unique in this aspect. All prices are based on expectations of claims on future cash flows.
cableshaft 11y ago
Amazon hasn't made a profit only because they've chosen to re-invest every penny of profit they would make back into the company. If they were forced to show a profit next year, they could pretty easily make a few cuts here and there and produce a profit. http://www.forbes.com/sites/timworstall/2014/09/07/the-internal-economics-of-amazons-no-profits-growth-model/ http://www.forbes.com/sites/timworstall/2014/09/07/the-inter...
- ThomPete 11y ago
  I am aware of why they haven't made a profit. The point is that this is still a bet and if the strategy doesn't hold up they will be punished much more quickly than a privately funded company. My point is that the latency that exist in privately funded unicorns can end up creating a bubble exactly because the feedback loop is too slow.

austenallred 11y ago

It's wildly different. Consider one thing: portfolio theory. Top VCs actually expect to lose all of their money on some (if not most) investments. While this becomes less true at later stages, the fact is everyone is hedging their bets and are diversified in a way (within tech). Assuming all of technology investing doesn't crumble at once, which it won't, so long as the entire thing isn't built in smoke, Morris and dreams. That's why the fact that there are real revenues and profits driving everything this time matters. Most companies show promise to bring in cold hard cash, if they're not doing so already.

forgetsusername 11y ago
>the fact is everyone is hedging their bets and are diversified in a way (within tech) That is in no way diversification. And the correlation of investments within the tech world, when shit hits the fan, will be 1. >real revenues and profits Which of the companies are making profits? Look, I'm not calling for Tech Crash 2.0 either, but some people seem oblivious to how these things go down when they....go down.
- austenallred 11y ago
  > That is in no way diversification. And the correlation of investments within the tech world, when shit hits the fan, will be 1. Hence the "in a way." And your argument makes the assumption that tech, as a category, will collapse. > Which of the companies are making profits? "Tech" is a very big thing, but if we're picking random companies there are a few divisions: Public: Google makes money hand over fist, Amazon tries not to make profits (and almost accidentally brought in $20m last quarter) while their revenues grow exponentially. Facebook brings in billions, Twitter, the dark horse of this category, is still bringing in >$1B/yr in revenue. Ok, but those are the titans. Let's look at the YC companies: Airbnb, Dropbox and Stripe alone would make up for every dollar YC ever spent investing. But even locally, almost every company I talk to is choosing to raise money. Meaning, they have enough revenue to stay afloat, but elect to raise money to grow more quickly. These are companies raising little $2m rounds but are either profitable or could be if they needed to, but elect to grow quickly instead of become cashflow positive. (Admittedly, my company does not fall within that category). There may be overvaluation, especially at later stages, but the investments being made assume there is. They assume that some (or most) will fail, but that the others will make a multiple. Some money will be lost, but as long as the entire category of "technology" doesn't collapse altogether, it's not like 1999 again. And given the amount of real profits and revenues in the category of "technology," my contention is that there won't be, as Marc Andreessen puts it, an "earth-shattering kaboom."