Look at the cash flows from operations. This is a big indicator of whether the core business is profitable. I have not looked at Amazon, but non-cash write-off usually play a significant role in lowering net income.
If you operations are sucking up cash, then the sustainability of the business depends on ability to inject new cash from somewhere else.
This is a solid venture backed company that has been generating quite a bit of revenue for some time now. This exit will provide its investors with a solid return. Odd how little attention a company like this gets from the tech community.
Bernie Brenner, the guy who heads up their business development, wrote The Sumo Advantage which one of the best books I've read on BD. He very clearly identifies the role of BD and how it is distinctly different than sales. I'd recommend it for any startup looking to partner with large established businesses to spur growth.
It's a good company with a good service (I used them last year when I was buying a car--walked in with their piece of paper and said 'if you give me this price I will buy this car now, in cash.' That was the end of the negotiation. Drove out of the dealer a couple of hours later (yes, it still took a couple of hours to get the transaction complete.)
But I don't think the tech community should be all excited about this company. It's not a 'tech' startup per se, it's just a normal marketing (lead-gen, specifically) company that happens to use the Internet--and using the Internet to do business has not been something to get excited about for at least ten years now. It's not like Oculus or WhatsApp or Airbnb or even Uber. There's no technical innovation at play here, there's no business model innovation at play here, there's no new market segment being addressed, it's not disruptive or even radical innovation. It's not innovation driven, it's just a good company delivering a good product. It's not a 'startup' the way we use startup in the tech community, it's just a plain old business.
Silicon Valley did fund some "hyperloops", look no further than Musk's other two big ideas (Space X & Tesla). Look for the few VCs that are non conventional thinkers themselves. The ones that discuss the distant future as though it is right around the corner or even happening now.
As an example watch any 10 minutes of this interview with Steve Jurvetson of DFJ. You'll see why he and Musk were a good fit: http://youtu.be/O2tK0Wl2F8w
Those are not hyperloops. Both SpaceX and Tesla are built on decades of R&D and core science paid for mostly by taxpayers to the tune of hundreds of billions of dollars.
This is not to take anything away from the "layer" that Musk added to this foundation. But hyperloop does not have the same foundation. There have been space missions and electric cars before; there hasn't been anything approaching a hyperloop at scale. So the investment risk is even greater.
If SpaceX isn't a "hyperloop" project, then almost nothing would qualify. HP, Intel, Cisco, and other Silicon Valley giants -- the type of companies that the original post would probably point to in contrast to something like Snapchat -- benefited from decades of military and university research.
And if that's the case, that also suggests an answer to all of this. Spend more on basic R&D.
There's no contradiction. HP, Intel, etc. happened because they were built on a foundation of massive government investment in microprocessor tech during its early, super high risk phase, and then government procurement. Hyperloop isn't happening within the Silicon Valley model because it's core tech/infrastructure that does not have the government's interest, because our system is built around defense spending.
That's not to say the government couldn't fund it as a transportation infrastructure project, but that's not the Silicon Valley model, and the funding is much smaller and harder to come by than defense spending.
The problem isn't really just to spend "more" on R&D -- have you seen the defense budget? Hyperloop would be a blip. The problem is deeper.. it's that our system is not set up to funnel taxpayer funds into public services like this. IMHO for political reasons. Running it through the pretext of defense makes it harder for citizens to question how funds should be spent and who they should benefit.
We need political change to make sustainable public transport projects like this take priority. Just like we need it for education, social welfare, etc. It's easier to control people when you tell them the Russians/terrorists are coming so we have to take your money and fund defense.
I was going to compare it with the bullet train - but that apparently runs on standard gauge rails (just welded to the sleepers instead of bolted) - I swear they told us it was a levitated magnet in school...
So maybe you're right, the hypertube is very complicated compared to a pair of rails and an power supply cable.
Even standard HSR is a lot more complicated that that—you can't just put a bigger motor in a slow-speed train—but it certainly benefited from the large amount of commonality with lower-speed rail, and most of the higher-speed technology was developed over time, with real testing. [Note the first Shinkansen was a fair bit slower (~200km/h) than today's highest-speed models, and ramping up the speed from there occurred over many years.]
Japan is also building a real (long-distance, high-speed) maglev system. It's much more of a leap from standard rail than HSR was, but again, they're using technology which they actually have long-term real-world experience with.
Hyperloop, by contrast, doesn't even have a lab model. It's a diagram on a napkin, with some of the calculations worked out.
The press and the general public may not notice this distinction, but people investing large amounts of money most certainly will...
I think the point is that a "lab model" would be useless, since the problems change non-linearly at scale and speed... and computer simulations of fluid dynamics and physical systems are pretty good these days, since computers got so much faster (physicists add more and more complexity/realism to their modelling such that a simulation always takes ~3 days to run, however good their computer. Our computers are awesome now.)
Also, some parts of it are tested, e.g. the roller coaster magnetic thrusters/brakes.
I do understand the difference, but the point stands for all revolutionary, as opposed to incremental, technologies. We will need some, how do we fund them?
Question: If you were to have a CS grad from Stanford offer you 50% of all of his income for the rest of his life. How much would you pay in one lump sum? $100? $1 million? Probably more… Point is, you would agree the number is not zero.
He doesn't have a job yet (and never had a job before), but by any measure everyone that knows him says he's extremely talented. And now he's even getting huge job offers from Google and Facebook.
Would you say that you wouldn't make that investment? Is he worthless cause he has an upcoming rent payment due and also has to feed himself?
It would be an extremely risky bet which I would never make. There's no guarantee that the grad wouldn't take your money and live the rest of his life as a heroin addict -- lots of smart people don't live up to their potential. Also, he might get hit by a bus tomorrow.
Similarly, lots of companies run by smart people don't live up to their potentials, or are not lucky enough to be popular long enough to make billions of dollars.
Definitely not, because at that valuation the offer is suspiciously too cheap - in fact it's so cheap it's unlikely he'll pay out because the first thing he'll do is hire a lawyer to get out of that contract.
You're nitpicking. It's a hypotethical. He's trying to show how something that is not profitable right now might still have positive value.
The point of the question is whether you expect the person to earn enough that getting 50% of their life income would be worth 100, 1k, 10k etc. today, not 'how likely that person is to actually keep the deal'.
But that's exactly relevant to the point - the issue is that the details of the arrangement matter, which is relevant to the wider point: how are we expecting profit to be made? Gesticulating to size doesn't actually monetize something.
I'm sorry, but your hypothetical is bad for this scenario.
This only works if, in addition to all of the other possible risks we all face in life, this CS grad could simply disappear because a CS student in the new freshman class is more interesting.
Snapchat is risky because it's audience is as fickle as they come.
I would actually argue that there are more top tier Stanford CS grads than there are startups with Snapchat's engagement numbers. The value of the student should be discounted more than the value of snapchat from a competition standpoint.
In either case the point was to illustrate that, all risks considered, snapchat is still worth a lot of money. I have yet to see anyone (HN commenters, tech press) argue about what their valuation should be, which seems like the reasonable follow up to "It should not be $3 billion".
We can agree that its not zero, then what basis can we use to agree that $3 billion is inaccurate?
I see a lot of the comments the thinking in the founders logic. But remember there is also likely a good deal of pressure from investors who, depending on circumstances, have quite a bit of say on if they approve a deal or not. It is not uncommon for founders to want to sell and the vc want to hold out to produce a better return.
Why is that? Economics of a venture fund. Say a VC recognizes this is likely to be the biggest winner in their fund. If I run a $400 million dollar fund and I am trying to return 3 times that to my investors that means that I have to make my investors $1.2 billion. Considering my fund only owns 10% of the company, a sale for $3 billy ain’t gonna cut it.
Yes, this would be one of the 30 investments I made from this fund, but I am only expecting 3 of those to really knock it out the ballpark. I have to extract all my returns from those three.
I certainly don’t know that this is the case for Snapchat, but it has been the case for some. While this may sound like it’s holding founders money hostage, this is the game they (hopefully) knew they were getting into when they took that first dollar. Best of luck to them, they are still very much killing it.
I really cannot fathom any investor that would not be absolutely ecstatic over a $3B exit for a product like this. Would any VCs care to comment on this specifically?
Therin lies the problem. That is the fundamental conflict between the diversified vc and the concentrated entrepreneur. It is not a secret, in fact a lot of good VCs want entrepreneurs to have a very clear understanding of what the end goal is.
I think you are perhaps conflating returns on the fund as a whole vis-a-vis returns on an investment by investment basis. The goal of a VC, as I understand it, is to only invest in companies that can provide 10x returns, providing that one of those investments does return 10x, one returns 2x, three break-even, and five are outright failures. If a VC owns 10% of a company that exits for $3B, then the VC gets $300M, which returns 75% of the total fund. I very seriously doubt any VC firm would have stopped this transaction.
While I am a huge fan of Tesla, and Musk, I think your reasoning is a bit unsubstantiated. While most analysts who don't have their head in the sand would agree that Tesla is an awesome company and has years of explosive growth ahead, there has to be some numerical concept that helps you distinguish a good company from a good investment.
The key concern is all your points still apply if the stock price was $500, instead of $180. At that point would you still invest?
Another way to think of it: If I were to give you one lump sum for half of all of your future earnings (salaries, bonuses, gifts) what would a be a reasonable price that you would sell that to me for? You could be a very capable professional with a lot of earning potential but there is still an upper limit on what I should pay if I plan to come out profitable, correct?
Your perspective is correct, but the vast majority (99%) of new businesses in the economy will never raise money from a VC (and shouldn't).
Most VC portfolios are structured such that the expectation (at least at the time of investment) is that this company will be able to make up for ALL the inevitable losses I am going to take in the other companies I invest in. Well, not really that cynical, but in reality usually one or two companies in a fund are where all the profits come from, so you can understand why investors push each company to swing for the fences.
Key takeaway for entrepreneurs is just to know when a VC is right for your business and when it's not. The key factor here is how quickly you need to scale. For example most entrepreneurs don't have the goal of a nine figure exit for their business in the next several years, but some do.
Pretty sure it was the Pebble Watch. Their largest, most publicized project was called in to question after repeated delays.
I think the subsequent changes (i.e. no renderings) made make the platform substantially better. But they still need to get away from that "presale" perception that the general public has.
The first few projects I backed were friends or just because I thought they were cool ideas that would be awesome in real life. Getting something in return was really, in its purest form, a 'perk'.
For clarification, the 6 page memo is not read aloud. Each person is provided a copy at the beginning of the meeting and the first 10-15 minutes of the meeting are completely silent.
This actually works pretty well because in the real world people usually only skim the info provided in advance of most meetings because they only need to "get the gist" of what's being said. This forces everyone to have a thorough understanding and promotes more thoughtful discussion.
It has interesting framework, divided into two. The first part is what you can do. The second is how you can create an environment that keeps you on track.
To say, net income may not be the best indicator of success for high growth tech companies. They reinvest every dollar to continue to spur growth.