It's funny that people here think he's making fun of snapchat, but the article is from 2009. He was making fun of facebook's $6.5b valuation (or maybe it was $10b). The fact that he was completely wrong (fb is now over $100b) doesn't stop people here from thinking that there's wisdom in this nonsensical post.
In making any business decision you are also looking at the downside vs. the upside.
On "Let's Make a Deal" [1] there was always "door number two" or three and you had to decide if you were going to take the chance or not. Now it's one thing to pass up some "Furniture from Broyhill" and another thing to pass up a billion dollars or any large sum.
Now most of us don't know what "door number two" was so it's hard to say. So of course people are going to comment on how they view the situation from what they do know.
It's a property based on the premise that not just any made up number is equally good as a valuation...
The very definition of "valuation" points to the underlying "true" part -- valuation means an attempt to guess at the value of something.
It might not be possible to have a perfect guess (because nobody has all the data or knows all the future events that might affect it), but it's very possible to know a valuation if BS and critisize it.
Would you buy a Denny's dinner in rural Nebraska for 1 billion dollars?
And yet, if one avoids this supposed "fallacy", the logical conclusion would be that no group has any definite properties, and everything is interchangeable.
So, yes, there actually are things that "no true scotchman" would do (else there's no reason to invoke a group named "scotchmen" at all).
Sure, but the restrictions are
1. be from Scotland
2. be human
In the case of OP, valuation is simply what the market will pay to own the stock of a company. Sometimes it coincides with what any individual will pay, sometimes not. There is no sort of magical intrinsic value to a company. All we are really doing is arguing over the definition of valuation.
>He was making fun of facebook's $6.5b valuation (or maybe it was $10b). The fact that he was completely wrong (fb is now over $100b) doesn't stop people here from thinking that there's wisdom in this nonsensical post
Errm, how does the fact that FB is "now over $100b" prove that he was "completely wrong"?
How about: he was right that such valuations are crazy when FB was at $6.5b, and he is even more right now, as $100b is even more crazy.
It's not like FB somehow PROVED it deserved to be valuated as $6.5 at that time -- it just bubbled up even more in the stock market since.
If his premise was that such stock valuations are BS, then that's even more ammunition to his argument.
Thanks Paul for this. I posted this in the comment thread an hour ago making the same exact point but was lost in the comment weeds. I guess PG'a secret Algo of surfacing sensible comments to the top is working.
https://news.ycombinator.com/item?id=6745220
It helps to know the founders and internal metrics, which nobody here does. I honestly don't know if Snapchat is worth $3B or not, but I certainly wouldn't dismiss them.
... and here's where you receive a flood of scathing email from teen/twentyish brogrammers and 37Signals fans across the planet (sent via Gmail, of course), saying basically, "Oh like what would you know about Facebook anyway?" Er. Wait a minute. :-)
A little less meta: I think your point is valid but I think the OA's satire was an illustration of a valid criticism of a kind of valuation model that's driven more by herd mentality, and where anything giveth ephemerally can also be taketh away ephemerally if the pendulum swings back to fundamentals-driven before the bubbled company in question can build up real profits to start justifying its currently frothy 'maybe someday' valuation. Facebook, like Google, has been an exceptional case in several ways, it could be argued. But exceptions don't invalidate the wisdom of a general rule of thumb.
Actually, exceptions are where all of the money is made in this business. The top 1% of startups produce the majority of the returns, which is why we all want to invest in the next Google or Facebook, even if we're not 100% certain that it will in fact be the next Google or Facebook.
Good point and agreed. So the application in the case of this topic clearly is that the investors are likely betting, hoping, that SnapChat will be one of these exception cases. The one whose payoff more than makes up for losses on all their other little startup bets.
It's as if there are two ways of valuing companies, two competing schools, and their methodologies are opposed, arguably in outright conflict -- they can't both be true. One is the valuation on so-called fundamentals, the other is the bet that this will one day become one of those extreme outliers whose ROI is such a high multiple that it makes up for the losses on other failed bets. They're both valid models, like Newton or Einstein, that produce correct (enough) results, but in different situations and at different scales. The trick is to know when to use one model to make your decision, or the other. To carry this forward, 37Signals/JF/DHH clearly prefer/bias to the Newton method, in this analogy, and YC & SV VC the Einstein. Or to change the analogy, the former models are based on arithmetic, the latter on statistics. They both can work well but each in a different context with different endgame goals.
(And thanks for the reply. I'm a fan of your work.)
It's like a joke I heard about Icelandic banks a while ago. Neither of us have any money, but if we're banks I can sell you a cat for a billion dollars and you can sell me a dog for a billion dollars so that we're both billionaires. The way that insufficiently regulated banks and stock/commodity markets effectively allow certain people to create new money from nothing and then trade it for things of real value is only a tiny bit more subtle than that. Of course, sooner or later what happened in Iceland will happen anywhere that such things are allowed to occur.
Michael Lewis' "Wall Street on the Tundra" is classic.
> For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends...
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.” They bought stakes in businesses they knew nothing about and told the people running them what to do—just like real American investment bankers!
The analogy is false. One of the problems with what Icelandic banks were doing was this:
"The rules prevent banks from posting their own debt as collateral (Central bank of Luxembourg). The three banks circumvented this rule by posting each other’s collateral at the CBL. This process is known as issuing ‘love letters’. However, CBL later restricted this type of funding. This, however, continued in other places such as Central Bank of Ireland (CBI)."
It's a funny thing about analogies and metaphors: they don't have to be absolutely perfect in every detail to have explanatory power. What actually happens is slightly more subtle (as I said) but the principle still applies. Thank you for providing an example.
Trust. After you sell me your cat for an imaginarily large amount of currency, why continue to spend your gains or buy my imaginarily intensely valuable cat?
Snapchat isn't being valued on revenues or potential monetization, but rather as a piece of someone else's (eg Facebook's) business model.
In the Steve Blank sense I don't think it's even right to call Snapchat or any of these "growth looking for a home" things "startup"s. They aren't actually searching for a business model. Their plan is to grow until they dock with the Deathstar.
I don't have the reference handy, but somewhere Steve Blank basically says, "If there's another bubble, ignore all this advice. Building a real business only makes sense when the market is sane."
The only way I could look at SnapChat as a startup is that their market isn't consumers, it's Mark Zuckerberg plus a few people who are trying to compete with Facebook. We know that Facebook is willing to buy things perceived as threats to their business model, or perhaps to buy large sets of users they've failed to capture.
It's a stupid business to go into, in that the odds of success are really bad: low barrier to entry, lots of interest, lots of competitors, a winner-take-all game. But if you win the lottery you can get zillion-dollar offers from Zuck and feel like a genius.
Bubble 1.0 was filled with built-to-flip companies, and one of the things I like best about the Lean Startup movement is that it demands building an actual business. Sad to see that the pendulum might be swinging back some.
The only way I could look at SnapChat as a startup is that their market isn't consumers, it's Mark Zuckerberg plus a few people who are trying to compete with Facebook. We know that Facebook is willing to buy things perceived as threats to their business model, or perhaps to buy large sets of users they've failed to capture. It's a stupid business to go into, in that the odds of success are really bad: low barrier to entry, lots of interest, lots of competitors, a winner-take-all game. But if you win the lottery you can get zillion-dollar offers from Zuck and feel like a genius.
I wouldn't be so quick to dismiss the Instagram acquisition as crazy. Isn't Instagram now used by most teenagers, and sometimes preferred over fb?
Nobody is doubting spending 1% of your 100b market cap on your #2 competitor is a dumb idea. And your point is well taken, that empirically the defection from fb is to Ig, which is a lot less of a problem than it otherwise would be for fb stock.
I'm not saying it's crazy for Facebook to buy Instagram. I'm saying it's crazy for anybody to try to start companies in the hopes that Facebook will acquire them.
The evidence from companies that have that many users certainly points towards high revenues, but not revenues commensurate with a $3billion valuation.
Facebook is a mature advertising platform with far more to offer advertisers than Snapchat is ever likely to, and earns revenues of less than $7 per active user per year. If Snapchat is as effective at monetising at Facebook, which sounds optimistic, it would take them 17 years to make $3billion in revenue off ~25million active users. I don't doubt that Snapchat's user base will continue to rise in the short term, but I also don't think it'll be around in 17 years...
If you compare Snapchat not with the internet's leading repository of user metadata, and more with similarly popular locations for ephemeral meme-sharing amongst teenagers, its current user base more closely resembles that of the Cheezburger Network, whose decision to lay off a third of their workforce earlier this year hardly points towards stratospheric advertising revenues from their own ~25 million users
Exactly. If there's any lesson people should learn from Facebook, Instagram, and Snapchat, it's that these users are fickle. Valuations based on long-term growth and long-term exploitation of those users are somewhere between very speculative and outright fantasy.
I don't disagree, but to me, $3 billion dollars is indeed a gold-mine.
I don't know what they're worth, what they will be worth, or whether or not it'll ever end up being super profitable. Apparently, the naysayers were wrong about Groupon, as they're now doing pretty well, and it seems that turning down the acquisition offer wasn't entirely stupid.
That said, $3 billion dollars is a lot of money, and I would pretty much always take it, and move on to executing the next idea.
I am very sure. A quick Google search doesn't turn it up, so I think it must have been in the early part of Four Steps to the Epiphany. My copy of that is in storage, though, so I can't find the quote. You can see similar sentiments here: http://steveblank.com/2010/10/04/why-pioneers-are-the-ones-w...
Sorry, I'm referring to this paragraph: "They guess at their business model and then do premature, loud and aggressive Public Relations hype and early company launches and quickly burn through their cash. This is a great strategy if there’s a bubble occuring in your market or you are going to bet it all on flipping your company for a sale."
This still doesn't say "ignore all the Lean startup advice during a bubble". That's what you claimed, and this sentence doesn't say anything of that sort.
He is saying that in a bubble it is a great strategy if you "guess at their business model and then do premature, loud and aggressive Public Relations hype and early company launches and quickly burn through their cash."
That is precisely the opposite of the Lean Startup approach. So I believe the sentiment is, as I said, similar. If you aren't seeing that, I'm happy to disagree.
> is that their market isn't consumers, it's Mark Zuckerberg plus a few people who are trying to compete with Facebook.
This.
My take is that SnapChat's valuation is driven mostly by the perception that it's a strong contender for acquisition by Facebook or the like.
Of course it's a separate issue as to whether that buyout makes sense in the long run, because, from what I've heard anyway, a big part of the attraction of SnapChat to teens is that it is NOT part of Facebook (or Twitter or G+). Because they of them not wanting parents/teachers to see stuff, not wanting Facebook intentionally or accidentally exposing their data later, and also just the desire to be "cool" like other cool kids (the temporary fad effect, always churning along with all ages, but at a faster rate with juveniles.), etc. All/most of that gets extinguished immediately, or, eventually after, an acquisition by Facebook.
> "All/most of that gets extinguished immediately, or, eventually after, an acquisition by Facebook."
We think that because we follow the tech news and are savvy about the consequences of an acquisition. However, I'm not sure (anymore) that it necessarily plays out that way for the general public.
For example, I'm not an Instagram user but I do wonder how many of them are aware that it's now a Facebook property. If I look over their website I don't see anything obviously linking it to Facebook so maybe there's a chance that a proportion of their user-base is still treating it as independent (of course, I'm not aware of the in-app experience).
It reminds me of one of those stories I read about an online game (EVE-Online?) where one guy had cornered the entire market for selling a particular power-up/drug but had a number of completely different avatars 'on the ground' so his customers had no-idea they were buying from the same person.
> We think that because we follow the tech news and are savvy about the consequences of an acquisition. However, I'm not sure (anymore) that it necessarily plays out that way for the general public.
fair point. this is a recurring pattern where there's a kind of profitable arbitrage that occurs between high/early-info groups and low/later-info groups (eg. between Wall Street types and mom-and-pop on Main Street.) This certainly could be partly due to that effect again.
I look at this from the angle of FB and GOOG, and seriously question if Snapchat is worth the acquisition. My gut tells me that patience will be rewarded.
The value to FB/GOOG is the audience -- the users they're trying to reach. It's not as if they couldn't replicate the technology to drive that type of service. The defensibility of Snapchat against competitors is the demographics of the user base.
I don't use Snapchat, nor does my wife. Or any other set of parents I know. But my kids do, as do their kids. Right now, for any teen/tween in our community, it's Snapchat and Instagram.
And if I acquire Snapchat, that gets me.......what? A service with no revenue and a user base that's naturally fickle. The only way I can justify this acquisition for FB or GOOG is if there is some long-term value from the user base. And I don't think the value is there.
If I'm GOOG or FB, I think I sit on Snapchat for as long as possible. I'm betting that Snapchat's value will never be more than it is right now.
> And if I acquire Snapchat, that gets me.......what?
It gets you solid 3-7 years of billions of eyeballs to monetize from, and nobody is better at monetizing than Google or Facebook.
There are 2 reasons why GOOG/FB are interested in picking Snapchat up. #1 user base #2 traffic. No other reasons.
#1. When FB strategist comes to Zuckerberg, he tells him: "listen this company is making dent in our traffic. If its continue the kids that abandon FB for Snaptchat will create $XX billions (sum A) of a hole in ads sales. So you need to go out and offer X% of sum A and pray they accept it.
#2. When FB ads vp come to Zuckerberg, he tells him: "listen, here are my ideas how we can serve ads to those billions of eyeballs. This will create $XX billions (sum B) of profits for Facebook. So you need to go out and offer X% of sum B and pray they accept it.
Thats it.
As of whether its a "startup" or not, I say it is exactly for the reasons other says its not: revenue (or lack of it). I don't think you can call a company "startup" only when they have a business model and or revenues. Snapchat through millions of uniques proved to the world they do solve some kind of problem, even if its as silly as flashing photos of a drunk teen for 5 seconds.
Edit: so the wisdom of the day would be: build a service for a huge user base that is important to facebook (youngsters), preferably on mobile (that is a future of computing/socializing).
Revenue (or lack thereof) doesn't determine "startup" status and I never said it did.
A startup according to Blank is a group if people in search of a business model. I am making the claim that SnapChat is not searching for a business model, but rather an exit -- by being a juicy component to someone else's model.
> I am making the claim that SnapChat is not searching for a business model, but rather an exit.
And you base that on the fact that they just declined $3B from FB, and presumably $4B from Google.
Sure, they built all that service to decline both offers and close down the doors. Sure, Snapchats owners and VC are mentally ill and they declined buyouts because they are not searching for a business model themselves.
There's no reason to think that they're planning to build a real business. People build companies to flip all the time. Sometimes they turn down offers because they think they can get a better deal later. Sometimes they're wrong, and end up deeply fucked. The stakes here are higher than normal, but the patterns are the same.
Note that they don't have to be mentally ill to turn down a big offer. They could just be young, foolish, and arrogant. College-age entrepreneurs are known for many things, but humility and wisdom are not items typically mentioned.
You aren't taking into account the value of money to people that are already rich.
Also, they have the scale to start testing monetization, but they are not, because they'd rather increase the value of their exit to an acquirer by growing users.
It gets you solid 1+ years of billions of eyeballs to monetize from, and nobody is better at monetizing than Google.
I updated the statement to reflect what I think would be a best-case scenario for any acquisition. I think Google could monetize it the best, but then they would put the Google-plus-kiss-of-death on the service, and that would be that.
The strategy of rolling yet another billion-dollar-picture-based-app into the fold at FB would be a tired story. They've been ineffective in monetizing FB, they haven't yet monetized Instagram, but they'll be good at monetizing Snapchat? I don't think that's a good bet.
> Their plan is to grow until they dock with the Deathstar.
If that was their plan, then I would think that $3B would be enough for them to drop anchor.
As a zero-revenue company, I would only deny that payday if either:
1) I believed that my company had the potential to be its own Deathstar.
2) I disliked the company that made the offer so much that I had nightmares about them owning my company.
3) I cared more about my company than the money.
4) he lost control and the board won't let him sell. Founder surely wants to sell. Unfortunately snapchat took $800M vc money, and his new VC bosses have completely different incentives to go for a long tail outcome. Which sucks because the founder is probably a lot more likely to get nothing than he is to get a huge exit and he knows it. Though as wengsing says he probably got a bunch of cash in prior rounds so maybe he doesn't really care.
Spot on. I provided another analogy to this concept in a comment awhile back:
> It's not particularly strange if you break down the business models that dominate the SV ecosystem. These companies you speak of are merely procurement channels. Think of them as oil drills that suck up as many attention spans as physically possible. And largely they are all competing with each other to strike the next big oil well. Not unlike the oil industry they put massive amounts of capital into the discovery and refinement of such oil wells. The likes of Facebook, Google, etc are simply refineries who sell this attention (refined by analytics and insight) off to the Fords, Coca-Colas, etc of the world.[1]
Not saying 25BN & 120BN are the "right" valuations but most people would agree that the prices that 37s made fun of seems like great deals. They could still go back to less than 1bn & 33bn (users leave, consumer trends change, get bored etc) but those are different risks not monetization risks that 37s is making fun off.
It would be insane to short any of these companies, because the perception is so far from reality; and it's perception driving the price, not reality. That's the point.
The market isn't necessarily efficient at a given point in time. Just because the stocks are going up, doesn't mean the valuations represent the intrinsic value of the company.
Shorting is a dangerous strategy, especially if you feel the prices are delusional. "The market can stay irrational longer than you can stay solvent."
Yes- agree with you. I think DHH/JF & 37s were not making as much fun of the actual valuation but the lack of monetization.
If we stretched the valuation analogy, it could be applicable to AMZN/Bezos as well- where there is always discussion on their lack of profits & nose bleed valuation. FYI - Bezos is an investor in 37signals.
I have lots if respect for Bezos, JF, DHH etc. I just think it's a little "unfair" (for lack of a better term) to make fun of companies before their monetization plans have kicked in.
No. You're missing the point. FB and TWTR have already made it. If you could, short the vast pool of VC-backed pointless startups in the space that have not IPO'd yet and you would make a fortune.
Hmm- you may well be right. Because VC as an asset class have underperformed. But- you wouldn't have made a fortune shorting it. Maybe, even lost a little money but not much.
On the other hand, if you shorted USV/Sequoia/Benchmark's portfolios you would be hurting a lot.
The VC industry is largely a scam. VC funds underperform passive investment in the S&P 500, and greatly underperform similar risk asset classes such as the Russel 2000.
Is it possible that Snapchat is interested in slightly more than money? When a few 20-something year olds get valued at ~$3 Billion, I think it's fairly likely that they've made some money already, probably to the point that they will be set for life. It seems that Snapchat is an opportunity for them to leave their mark on the consumer software world.
Besides, Snapchat is certainly an outlier and I don't think that bubble indicators rely on outliers. A better indicator may be the new selfie app that Bieber backed, but I'm not sure that I'd lump the two together in the same category (Snapchat is many degrees of magnitude more popular and successful at acquiring a user base).
If Facebook is worth X, and there is a raising service which generates x/40 of social traffic, then it will make sense for Facebook to evaluate the new kid as Facebook/40, or to say the least, the owners of the raising service will expect the offer to be at that rate.
If there is a bubble, the bubble is at Facebook and Twitter, and not at Instagram or Snapchat or Pinterest or any of those zillion-terabytes-daily-uploads services.
There were several articles recently telling how teens are away of Facebook, and for them, it shall be rather natural to try to stay the ultimate social hub.
I get that DHH doesn't believe in this whole trend of over-valuation of companies that don't make any cash, but doesn't this article give you the sense that they're a little bit jealous that they're not in that group?
I think their take is that the valuation is a BS metric. Sure it is a calculation based on the cash paid for the equity but that doesn't mean that someone is going to go in and pay the $X valuated for the 100% equity.
I imagine that 37 Signals is doing just fine with their revenues and all told will probably be laughing their way to the bank with their total lifetime value when all is said and done.
Amazon is playing the game to take over, not get the small wins. There will be a day when no other business model or even the thought to dream up one will exist because Amazon will sell everything for less, to your door on the same day. They will be a UPS/Walmart for everything under the moon. The future is dark.
Point taken, but I highly doubt most investors would roll their eyes at AMZN's numbers. It's not that they can't turn a profit; they're opting not to at this point.
Or taking advantage of tax loop holes around licensing to move the profit offshore - or "sorry Mr Cameron we are just a poor loss making company can we have a taxpayer hand out to subsidize our minimum wage workforce ;-)" even mad Nad aka nadine dorries can see through that one.
