"A parabolic rise in start ups with valuations of $1 Billion or More" or "A linear rise in startup valuations on a logrithmic scale".
Amazing what happens in 10 years when worldwide smartphones go from a tens of millions a year (2004) to over a billion a year (2014). Apple has 130 billion in cash sitting overseas with nothing to spend it on. Microsoft has 90 billion. Google has at least 30 billion. Facebook has over 10 billion cash (domestic + foreign).
So yeah. Startups are going to be valued at over a billion. Because there are more than a couple of potential buyers who can spend that in cash.
My rule of thumb is that if you can get 100,000,000 users you can sell for $1,000,000,000. You don't even need revenue! Crazy, but that is a shit load of users. How many 2000 dotcom companies had a hundred million users? Hell did even Google have a hundred million users back then?
You are citing existing old ultra-successful companies, the best of the best, to justify the high valuation of startups now. That isn't much of an argument.
> My rule of thumb is that if you can get 100,000,000 users you can sell for $1,000,000,000.
Lots of users does equal success because you only have to monetize them at low numbers. But the number of 100M user companies is still very few.
> Hell did even Google have a hundred million users back then?
They had a dominant search position, so their percentage penetration of internet search was huge, maybe higher than it is now because China and its wall garden hasn't yet arisen.
I don't think it was a comparison of quality, just an observation of spending clout. Things are being bought at billion dollar valuations that would have failed, just because the top players don't want to even think of risking their dominance, and that isn't going to stop unless they run out of money. This means that some of the easiest exits available are in making things like snapchat, where you will get bought just because you have users communicating over it.
Which is still a big risk: at some point, the market can crash simply because the dominant players get low on cash to keep making acquisitions like that. Suddenly all the assumptions and valuations people are relying on turn out not match up to reality, and everyone stops investing while they take a long hard look at their books.
>> "My rule of thumb is that if you can get 100,000,000 users you can sell for $1,000,000,000. You don't even need revenue! Crazy, but that is a shit load of users. How many 2000 dotcom companies had a hundred million users? Hell did even Google have a hundred million users back then?"
You could have 6 billion users - it doesn't mean anything unless you can monetise them.
And nobody can come up with a smarter way than advertising? It's the only thing to fall back on because of how the companies start. If you get 100,000,000 users and charge them nothing they will leave you if you try to start charging. They may get pissed about advertising but that will fade. I would love to see more companies focussed on monetising from the start.
Whatsapp seemed to be doing a pretty good job of that (99¢ per year) but they took on a ton of funding so had to sell. I understand the mentality of take all the funding you can get ('free' money, why not?) but nobody seems willing to struggle for a bit. They want high paid employees with lots of nice perks from day 1.
Advertising revenue is not stable! I'm alarmed that nobody is talking about this.
I used to run an abandonware game site when I was in high school during the first dot com bubble, and we would get paid $100-300 per month from advertisements on the site, which paid for us to run it.
After the dot com bubble crashed, we were getting paid $20-30 for the same ads and more traffic. It forced us to take the site down, as we didn't have enough revenue to fund it anymore (we kept the ring up though, it's still in operation today, probably with some of my code still under it's hood: http://abandonwarering.com).
Here's my question: Let's assume this is a second bubble for the sake of my question. After that bubble crashes, if advertising revenue tanks with it, how much does that tear into the profitability of these companies that depend exclusively on advertising?
I'm not a gold bug, but I remain highly concerned about the heavy burn rates and artificially high private valuations in the industry right now. Something I've learned from experience is that if it feels too excessive, it usually is.
Very interesting. I think that a lot of these companies are dependent on advertizing revenue, but so is both Facebook and Google. I guess one has to see which companies are dependent upon advertizing from start-ups rather than established companies to figure out who is most vulnerable in a downturn -- although you said that overall ad rates decreased during the last correction across the board.
I wonder to what degree that would happen again. I think percentage wise it is likely to be less severe than last time, but it could still be significant.
We have no real data form Google on pre-bubble/post-bubble advertizing as they were not advertizing at that time. But it probably would be a horrible hit to them this time around -- even 30% correction would be severe.
It will be different this time. Last time it felt like the whole internet thing was just a fad, so advertisers went back to their normal channels. But this time they have metrics and probably find that no other advertising channel can compete against online advertising as far as ROI is concerned (well, for many companies).
What's often missing in these discussions is that a lot of the value of the companies is based on the threat they present to actual profitable companies, like Google and Facebook, and has nothing to do with whatever revenue they currently have.
The real reason WhatsApp were worth so much is they started to look like an existential threat to Facebook. Similarly for Instagram and SnapChat. Uber will in the long run to Google.
One of the best get rich startup models today is to create something where it looks like you'll take away the core raison d'etre of another entrenched service, and it will radically inflate your value.
> The real reason WhatsApp were worth so much is they started to look like an existential threat to Facebook.
I know it's anecdotal, but the thing that makes WhatsApp so great for me it's that "it just works". I have it installed on my iPhone 4, and compared to Facebook's app is hundreds of miles ahead. Until 6-months or so ago the FB app needed 2-3 or minutes to actually open and redirect me to the private messages window, after I had received a notification. In one case it took 5 minutes (or even more) for the messages I was writing in the FB app to reach the person I was talking to, making for a very awkward conversation. And forget about trying to send images. In the meantime they decided to force the use the Facebook Messenger app, which cannot be installed on my phone's OS. I'm probably supposed to buy a new, expensive phone, which I would have if apps like WhatsApp hadn't existed.
It sounds like your issue was a slow phone. Facebook's Messenger app works great for me. I also use Whatsapp daily but prefer the Facebook app. It's a much nicer experience.
Yeah, it's slow because it's "old" (3-year old). The thing is that it is slow only when trying to use the FB app, the browser, WhatsApp and GMaps all work pretty well.
I disagree with your premises as well as your argument.
WhatsApp, Instagram, and SnapChat are valuable because they have users. There are a million ways to monetize users once you have them, but it's hard to get them. Google, Facebook, and others are large, humming machines that squeeze money out of users, but WhatsApp, Instagram, and SnapChat are not. The latter three companies are valuable because they can be fed into the larger machines that already figured out how to monetize.
Unrelated: Uber certainly is a threat to a lot of companies (USPS, Zifty, DHL), but I can't see the Google connection. In fact, Uber and Google recently became partners.
If anything, Google is a massive, existential threat to Uber because it's working to perfect self-driving cars.
How in the world would Uber threaten the United States Postal Service or Deutsche Post?
Even if that's a typo and you meant United Parcel Service (UPS), even if we examine DHL independent of its parent company, they are heavily invested in international freight and supply chain management.
I see no great benefits there from the ability to summon a cargo plane on a whim with your phone, nor from handing it off to someone with no formal training/license/qualifications.
Because Uber could eventually become a cheaper, easier, crowd-sourced version of "the last mile"[1]. This is a huge threat to the thousands of DHL and UPS delivery folk who make a living shipping parcels in the Last Mile, and to the businesses they belong, which make most of their delivery fees via the Last Mile. Unless Uber (or companies like Shyp) partner with them, it could bring these old business models down.
I have difficulty imagining any way Uber can compete with an entrenched last mile provider on cost. What possible economic advantage would individuals have in parcel delivery versus an entrenched provider? UPS has massive benefits from economies of scale in terms of route density / fleet maintenance / fuel costs / etc etc, which no individual vehicle operator will ever be able to compete with.
Sure, an Uber driver could charge less for labor, but given that the cost of operating their vehicle will inevitably be more expensive per delivery I expect there is probably no price point at which they can realistically compete.
Perhaps Uber drivers have a path forward in niche delivery services: food, very time sensitive deliveries, rerouted deliveries, etc. But in those areas they will need to compete on quality, and the market for more expensive, higher quality deliveries (while possibly extant) cannot be large enough to represent an existential threat to a company the size as UPS.
Beyond this, I'm curious as to whether it's even in UPS's best interest to continue to service the last mile.
Both UPS[0] and FedEx[1] already have services wherein they partner with the USPS specifically to avoid servicing the last mile. Outsourcing to better/cheaper/more efficient last mile service providers might eliminate a lot of UPS employees and revenue, but the last mile is incredibly expensive to operate. Is the last mile service really a major source of profits when compared to their highly efficient long distance operations?
There's already a cheaper crowd-sourced version of "the last mile" here in the UK. They're called Yodel (formerly the Home Delivery Network), most of their packages are delivered by non-employees using their own cars, lots of big companies like Amazon use them, and they have a really terrible reputation.
All self-driving cars are a threat to Uber, but it will be a really long time for fully self-driving cars to reach significant penetration, as much as I love them. I think for the next 10 years we will be in the era of smart assisted driving.
1) I actually think self-driving cars are moving faster than expected. Ten years is still a pretty reasonable guess, considering the pace of governments and the auto industry, but we're closer than I thought we'd be by now.
2) Uber will use self-driving cars, probably exclusively as soon as it's legal.
Uber wants to be the internet of the physical world. With the internet, information could travel anywhere with the tap of a finger. Uber wants the same reduction of friction for objects and people.
The problem for Uber is it's already easy to poach drivers from Uber. Drivers don't care if they drive for Lyft or Uber because the payouts are pretty similar. I've met drivers who switched between both.
When cars drive themselves, Uber will have to become even more competitive to stay on top. The cost of building an Uber-like fleet will be no more than buying the hardware.
Remember how hosting companies proliferated in the 90s and early 00s? Until AWS and similar PaaS options, the hosting space was incredibly fragmented, and the margins were awful. That's what Uber has on the horizon.
Cool thought, that the Last Mile will soon be commodity-priced and driverless cars will be making deliveries when they're not otherwise occupied. Software eating yet another business.
Providing capital to build a replica of an existing proven business model is easy, you already provided the example: gajillions of hosting companies providing physical hardware for peanuts because a few people had proved the business model worked. The cost of the hardware is amortised over its expected lifetime and any bank will provide the loan.
If this is Uber's future then Travis must be looking to exit before that...
In the long run, I'm going to suggest Uber is worth very little at all. We're probably ten years away from the first self-driving cab company. It won't be long before electric drive cabs can self-drive themselves to an induction charger, full service car wash, or maintenance shop where the owner has a contract. If the car gets stuck, it can call roadside assistance. There will be no reason to own an office anymore. One can probably even get by without renting a parking space.
The software features which make Uber and Lyft a unique experience will eventually become commoditized.
What happens to companies like Uber when the barriers to entry are so low that margins are non-existent?
I wouldn't be surprised if Google acquired Uber or Lyft within the next few years. The massive amount of data one of those companies can provide would beneficial enough to Google to justify the purchase - mapping data for Google maps, traffic data for Google Now/Maps, detailed driving data for the self-driving car project, information about where specific users go (targeted ads, Now, etc), and more.
Additionally, Google's self-driving car technology that it's developing would be best-suited to something like Uber or Lyft. The self-driving car is (at least at first) much better for an on-demand usage model, rather than an ownership model.
> The real reason WhatsApp were worth so much is they started to look like an existential threat to Facebook.
I disagree. The real reason were that part of their userbase was using Whatsapp on feature phone. It was as much a tech acquisition as a userbase acquisition. To get to the point Whatsapp was Facebook would have had to, develop the tech _and_ attract the users. In the end, buy whatsapp was faster, less risky (no guaranty they would have been abble to steal/convert the whole Whatsapp userbase) and probably cheaper.
Maybe this is the right place to ask something that really confuses me: Why hasn't anyone really challenged Google at their core business (Adsense/Adwords)?
For all the menacing Whatsapp can pose to FB, advertisement is a much larger market, with a clear path to profitability. The problem is not simple, but not outlandish either.
Yet, candidates such as Bing and, at one time, Yahoo, continuously fail to properly serve this market.
It's different because this time it's VC money, not people's savings.
When a company is listed, the stock price better reflect the actual market value of the company (otherwise a dot-com bubble happens). However, if rich VCs like to bet on startups, that's expected to be a high-risk investment.
A little of it is pension funds or sovereign wealth funds, but most of it is from high-net-worth individuals. Investors are required to be financially sophisticated; they know the risks they're taking.
If VCs lose all their money, it won't be anything new. Only a tiny fraction of VCs provide a return, after you take out the managers' fees. Large firms pump money into VCs almost charitably or as a PR thing -- they rarely expect much out of it, and their portfolios certainly aren't made or broken by their VC bets.
In 1999 boom, Nasdaq P/E reached 200, while general stock market P/E was 'only' 34. 6 times the difference. This time it is around 24 and general market is at about 19. Just 25% the difference. So i think there is really nothing to be worried about. There are few extreme valuations, and when those correct (Zynga, Groupon, ...) it doesn't create a domino effect.
Even Snapchat doesn't sound so stupid - it may never make any revenue, but having such a crowd of loyal users can bring a lot of cash to many companies who have already figured out their monetisation (Apple, Google, etc.) so they will be just buying a huge market. And they have a lot of cash to pay for what they buy, and sometimes they do actually buy. So people investing in Snapchat on these seemingly extreme valuations are likely not that stupid, or subversive.
Just a thought, but before that crash, I wasn't actually using ANY of the websites that were valued so high. And I think not a lot of people really were?
I read about the big investments back then, but to me, they never became more than a headline. Never a place to visit. More like "a place that I should visit, sometime in the future". It was full of promise, not of value.
Though now, I use and actually pay for many services. I feel like they add a certain value that, back then, nothing did.
Now, a billion dollar is a lot. But A billion people is too.
I've always wondered what pure software startups are doing with millions of dollars.
I mean come on you can develop awesome software without having a fancy office, nice furniture and a super high salary.
Take me and my friends for example. We love building stuff and work for all our products in university or at home.
Also we're doing it for, what, like 400$ a month working 20-30h...
At some point, you will complete school, your friends will go their separate ways and you will lose access to university resources. At that point, you will need a decent salary to pay for living expenses, support a family and all the other things you wish to do in life. If your startup consists of even a handful of people, competitive salaries/benefits start to add up and those "millions" won't seem as much any more.
I would like to see a map showing where all this money is going by office location, coded for number of employees, as one thing that does seem odd for many of us outside a few very select areas is that we are hearing about this mega-splooge of massive quantities of cash, but very little of it seems to be filtering through to the wider economy. As far as I can tell it is being spent in very concentrated regions on relatively small amounts of people, largely on businesses that are trying to target the pockets of a rapidly shrinking middle class, which doesn't particularly bode well.
Is that where Jeff Dean suddenly acquihires the ability to use 100% of his brain and automates all the work for every single US corporation, making the rest of the population unemployed overnight, other than those lucky few who can grab jobs fetching Jeff coffee?
Nah, that would be too much actual value.
I think it's shortly after tweeting something like "poopr - have your BMs delivered to your friends with quadcopters every day for free" makes Facebook buy your twitter account for $25 billion.
I think the trigger will be as most bubbles. Every joe shmoe on main street starts buying and profiting off these start ups in some way or another then smart money takes it's profits, prices dive slightly, main street panics and there you have it.
Only related insofar there is a common cause. QE isn't the cause of the easy money in SV. Demand in the economy is still low, which means there is no sensible place for people to park their money. So SV looks more attractive because startups aren't affected much by the general state of economy. The low interest rates and QE certainly don't hurt, though.
I have not read a good analysis as to the end game of quantitative easing. What does the end of that era fortell in terms of US macroeconomics and how does quantitative easing feed into the VC ecosystem? Or is quantitative easing here to stay and we will just have a related long term slow devaluation of the USD?
They are, of course, weakly correlated. If the US government dropped one million dollars cash into everyone's yard via helicopter, we would probably have some inflation.
But contrary to sibling poster, economists have known for many decades that it is only a weak correlation and plenty of other forces are at work. The weak inflation resulting from QE was predicted by mainstream economics and does not come as any surprise. This is nothing specific to the US economy - Japan and the EU are similar real-world examples if you don't care for the economics and the modeling.
Japan is a fine example actually - 15 years later, Japan is, as expected, still not seeing some kind of phantom, invisible-hand "correction" causing massive inflation.
> My pet theory is that money supply and inflation no longer have much of a correlation. In fact, they might never have.
They have stronger correlations in small country economies. The US economy is sort of uniquely positioned in the world and that makes its exception and more complex. I think that with the US economy is that the repercussions of actions are delayed because the interconnections slow reactions down -- although this also lets things get unsustainable before the correction actually takes place.
The state of the economy would cause deflation, were it not for rigidity in nominal prices, wages, and interest rates. The expansion of the money supply is mostly just backfilling against deflation, while causing asset prices to inflate in some areas.
I'm reading things like this since 5 years. When do people start to analyse what's really happening instead of saying "according to what we experienced 10-15 years ago, it should be way worse than it was back then." There are reasons why the start-up market is still growing but wasn't in 2000.
Just because there are repeated warnings about irrational exuberance, and we haven't had a correction YET, doesn't mean that there isn't irrational exuberance.
> When do people start to analyse what's really happening instead of saying "according to what we experienced 10-15 years ago, it should be way worse than it was back then."
I don't think it needs to be way worse that it was then. Corrections are different every time.
> There are reasons why the start-up market is still growing but wasn't in 2000.
Define "start-up market" and "growth", because in 2000 prior to the crash there was a ton of money going into startups, a ridiculous amount. It was only after the crash that things went sour.
If the market goes "rational" where that was what you were betting on, you make money. You go bankrupt when the market "stays irrational", i.e. the stocks you thought were overpriced stay overpriced.
I'm very worried about the property bubble collapse in China that will happen in the near future. I'm seeing the same patterns. People from said country buying up expensive property overseas, people lose fortune when property bubble explodes. It happened with Japan (remember when Japanese yakuza were buying up property in West coast). It surely to happen with China (buying up property in west coast like crazy).
Seems s/he's saying that wealthy Chinese people are buying property on the West Coast of the US.
If their market crashes and individual wealth drops, they wouldn't be able to pay their mortgages, which I guess would be a problem for lenders in the US?
Lots of leaps here, but I can see a connection if his/her facts are right.
high valuation comes from people paying high prices, mainly from China. if these people were to default or sell mode it would push the real estate valuation down significantly.
The only ones loosing will be the lower end of the food chain. Everyone on top knows what's coming and is storing their assets on single state islands far away from where the water will be going dry. You really think all those SV people preaching "this is not a bubble" are 100% in and haven't at least liquidated 99% of their value from the stock market?
Amazing what happens in 10 years when worldwide smartphones go from a tens of millions a year (2004) to over a billion a year (2014). Apple has 130 billion in cash sitting overseas with nothing to spend it on. Microsoft has 90 billion. Google has at least 30 billion. Facebook has over 10 billion cash (domestic + foreign).
So yeah. Startups are going to be valued at over a billion. Because there are more than a couple of potential buyers who can spend that in cash.
My rule of thumb is that if you can get 100,000,000 users you can sell for $1,000,000,000. You don't even need revenue! Crazy, but that is a shit load of users. How many 2000 dotcom companies had a hundred million users? Hell did even Google have a hundred million users back then?