Tag Archives: Facebook

Explaining the Snapchat valuation

19 Nov

There was a lot of buzz this past week about reports that Snapchat turned down a $3b all-cash offer from Facebook and a subsequent $4b counter-offer from Google.  It’s admittedly an extremely rich valuation for a young company with no revenue.  But I think there’s some nuance to note:

  • I think the investor psychology and math here is important.  VCs are more worried about missing out on the next Facebook/Twitter/Workday/etc. than they are in investing in the next MySpace/Bebo/etc.  For say a $500m fund, the cost of not being in one of the 2-3 huge outcomes that drive investor $ returns every year is higher than the cost of writing a say $30m investment to $0.  Investors, moreover, are probably more keenly aware than ever of the power law dynamics at play in tech investing (see here and here)
  • There’s been some handwringing over how Snapchat will monetize.  I wouldn’t be so worried about this.  Consumer internet companies don’t fail because they can’t monetize.  It seems unlikely that you’re going to have a highly engaged audience of hundreds of millions of users and not enough opportunities to make money.  Consumer internet companies are adept at finding ways to monetize with ads and advertisers are keen to experiment with new potential ROI.  The common early refrain on Facebook, Twitter, Instagram, etc. was that “they didn’t make enough money.”  That, of course, turned out not to be true.  There is a risk though that it doesn’t monetize as well or as quickly as its current backers hope (see Tumblr as an example).
  • Part of the challenge for Snapchat is that it’s grown its user base so quickly so fast.  The company is less than three years old and the rocket ship took off less than 18 months ago.  It hasn’t had an opportunity to explore monetization.
  • The concern of Snapchat’s team and investors should be around the product and making sure its audience stays engaged.  It’s captured the teen and 20-something audience, which is also probably the most fickle set of users.  I think the concern is whether these users move on to some other app over time.  But I think it’s reasonable to bet otherwise as the network effects in a business like this are incredibly powerful.
  • There have been some rumors that Snapchat is going to be raising another large round of funding, much of it going into secondary purchases of founder shares.  I’d be a bit concerned about this.  The founders already took $10m each off the table in the last round.  If the rationale for pre-exit founder liquidity is to give founders the ability to go for big wins, I’m not sure how another large secondary cash out makes sense, especially given that the company isn’t monetizing.  It’s one thing to sell down your stake as a founder when you’re a later stage, EBITDA-generating company.  But I don’t see how it aligns investor, founder, and employee interests at this stage.

How High Private Valuations are Contributing to the Decline in IPOs

11 Jul

I just read this piece from March written by Scott Kupor, a partner at VC firm Andreessen Horowitz.  I broadly agree with most of his argument (though I think he overstates the importance of the IPO market to strengthening the American middle class).  Taking a company public today is a bigger regulatory and financial burden than it needs to be.  The more onerous parts of Sarbanes-Oxley should be amended and reverting back to a higher minimum tick size should be changed as well.

Also, Kupor doesn’t point this out, but the pressure created by the quarterly earnings cycle is as intense as ever (see declining CEO tenure)  Simply put, with late-stage private financing opportunities abundantly available for the best companies, why should founders/management opt for the IPO route?

Companies are staying private longer in favor of a “private IPO.”  That’s to say that they’re both issuing new shares and offering secondary share sales to large institutional investors to achieve investor, founder, and early employee liquidity.  Only in these “IPOs” there is no public participation.

I think one of the more subtle factors at work here isn’t simply that companies are choosing to stay private longer through late stage financings, but also that these rounds are being done at extremely high valuations.

From a public markets perspective, the current financials of many of these companies wouldn’t support the valuation they’re getting in the private market.  I’m not going to get into whether public market investor are applying a more rigorous standard or are simply naive (i.e., they don’t get the story behind tech), though I tend to think they’re pretty rationale and that investors understand consumer web, SaaS, and other types of businesses than they have in the past.

Late-stage, private investors are clamoring to get into the “hottest” companies – EvernoteUberFab, etc. and once private companies like FacebookZynga, and Groupon.  The excess supply of capital and fear of missing out on the next homerun are driving some valuations above where they would trade if public today.    Some of these companies have to delay an IPO because they don’t have the financials to support the valuation they require to earn an appropriate return for the last round investors.

Twitter is a good example.  It’s only in the last year that its advertising efforts and revenue trajectory have really taken off.  The late stage bets being taken in 2009-10 were being taken on the site’s awesome user growth and assumption that monetization would eventually catch up.  Financials at the time wouldn’t have supported the valuations these rounds were being done at.  As the valuations being to support the valuation, the main beneficiaries will be the private investors, not the public guys.

Innovation Debate: Take Two

7 May

Yesterday I posted the video of a recent debate between Marc Andresseen and Peter Thiel regarding the state of “innovation.”  One of Thiel’s contentions is that breakout innovation leads to big ideas which in turn ends up creating huge companies.  To support his thesis that levels of innovation have declined, he points to the fact that the total market cap of tech companies founded in the 1990s is significantly larger than the combined market cap of companies created in the 2000s.

A couple thoughts and questions on this:

  1. There is a time effect here that needs to be adjusted for.  There’s natural market/GDP growth that older companies will have benefited from.  Salesforce has a $25b market cap today, it’s completely plausible it will be 2-4x that in a decade. Ditto for Facebook, Workday, etc. etc.  This effect, however, probably isn’t large enough  to explain the variance on its own.
  2. How much of this effect is one company – Google?   Google’s market cap today stands at around $285b, dwarfing the next largest company in the analysis set (Amazon at $116b).  Google is a special company that’s going to skew any comparison like this.  Google was also incorporated in September 1998.  Move that forward 16 months and suddenly Thiel’s comparison reverses.
  3. While the aggregate public market cap dollars created might have declined between the 1990s and the 2000s, my sense is the the absolute number of tech companies reaching a $1b valuation has definitely increased (anyone have the analysis to back this up?).  It certainly wouldn’t be any surprise given the lowering of startup capital requirements, huge increase in internet users and IT spend, etc.
  4. Fewer companies are going public today, which Andresseen noted in his comments.  A proper analysis would need to adjust for M&A transactions and valuations of well-established private companies like SurveyMonkey.

My point here isn’t to argue that Thiel’s comments are necessarily wrong.  I just don’t know that looking at public company market caps leads to the easy conclusion he’s trying to make.

His overall question still stands though.  Are the big, low hanging opportunities in tech already taken?  Are there still $100, 200, 300 billion opportunities available?

Note: spoke to a friend after this.  He made a great point, which is that it would be interesting to do Thiel’s analysis for other sectors.  Which sectors show the opposite effect?  My guess would be Healthcare, Biomed, and maybe Energy/Commodities?

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