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Comment by dhh | Hacker News Reader

1. Thanks for the word correction, updated.

2. Publicly traded companies have instant liquidity on many more shares, which makes using "last share sold" an meaningful metric.

3. When only 3% of the money a company is supposedly worth has been moved around, it's a poor indicator of what the other 97% would go for.

4. They haven't figured out how to make much profit yet. And it's still questionable whether they will. MySpace supposedly also just needed to turn on the faucet, but apparently the water ran out before they got to it.

5. Oh, and New York smells. (take that!)

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2. That's just not correct. Spend twenty minutes talking to anyone who trades in bonds or equity before you make assumptions about what liquidity you need to get a good price... it's not much. Facebook trades all the time on sharespost, certainly enough to be liquid and to reach a market price. Google itself only has a tiny fraction of the shares available to the public (10% if I remember correctly) and far less than 1% of the outstanding shares trade every day. That doesn't mean that the market doesn't find a market price.

3. Also not correct. When entire companies are bought and sold that had a previous market in the shares, the price for the entire company is usually a PREMIUM ON the the market valuation. "PREMIUM ON" means MORE THAN. Somewhere in Chicago, I understand that there is one market of some sort, I think they trade corn and pig bellies, surely SOMEONE there can explain it to you...

4. Also, just not true. They are very profitable and their profit is almost certainly growing at a rate that will make their valuation reasonable.

2. The bond and equity markets are based on sound regulation, transparency, and quarterly statements. Facebook has none of those things when it operates in the dark of the secondary markets.

3. Again, these premiums are based on outstanding shares traded under the transparency of the public stock market. See Secondary Suckers for a nice take on the perils of the secondary market: http://www.homethinking.com/brontemedia/2010/09/17/secondary...

4. Do you have their P&L handy to back that up? If the valuation was so wonderful and they were raking in the profits, then taking series E funding three months ago doesn't make much sense.

Point of order... It wasn't a series E, it was $120 million in purchases on the secondary market

http://techcrunch.com/2010/06/28/elevation-invests-another-1...

This is an extremely important point, germane to the conversation.. The $120mm was not a funding round -- it was liquidity for founders. Huge difference, and it invalidates much of dhh's original analysis.

These are all valid points, but they are logically equivalent to saying "I don't understand why anyone pays $12 for a Ke$ha album".

You may not agree on the worth of the album or of the shares, and nobody is forcing you to buy either one. That some people do consider it a good price is enough to result in a market price for both, on the basis of which many decisions are made.

Well, no, it's like saying "I don't understand why anyone pays $12,000 for a Ke$ha album." If the price was broadly reasonable, there would be no argument. But if the price gets outlandish, then someone needs to call B.S.

And yes, this happens now and then for ordinary, exchange-traded companies. Usually, it results in the exchange suspending trading for the company for a bit. Sometimes, it requires someone to call B.S. In an ordinary, regulated market, one or the other of those actions restores sense, gets the price back somewhere within shouting distance of reasonable.

Not true, b/c as far as I know nobody is buying Ke$ha albums at $12K, while there are many investing in FB, hence the notion of a market price.

Not sure what phenomenon you're referring to in your second paragraph.

Actually I don't understand why anyone buys a Ke$ha album at any price...

> The bond and equity markets are based on sound regulation, transparency...

Presumably subprime mortgage backed securities are the exception that proves the rule...

Exception that proves the rule means that since their is an exception a rule must exist.

For instance - Tonight we got an exception and are allowed to stay out till 11pm, would imply that there exists a rule that forbids them staying out that late. Hence the exception proves the rule.

The stock market is well regulated but the bond markets a lot less so, hence that's where Wall Street makes big profits (when times are good.) They make serious profits as 'market makers' (standing between buyers and sellers) with bonds.

You view the bid/ask spread as an indicator of poor regulation? Not actually true.

The spread reflects the willingness of firms to compete as market makers. More firms competing means a smaller spread.

The spread also reflects the risk associated with the market maker holding inventory. The more perceived risk, the bigger the spread.

Do YOU have their P&L handy to back up YOUR statements about how they have no idea how to monetize their users? Or is that only a valid critique of people who are arguing with you?

Maybe the equity markets. The bond markets not so much.

Also, Sharepost currently has 3 positions for sale at valuations between 33 and 44 billion. The total outstanding shares for sale represent 0.001% at 44B.

That's pretty close to the 0.000000001% that put our $100B valuation on paper: http://37signals.com/svn/posts/1941-press-release-37signals-...

But hey, you better snatch these shares up quickly. It's rare that you get a chance to a clear shot at a company where "profit is almost certainly growing at a rate that will make their valuation reasonable". How much can I get you down for, Joel?

If you're selling another 0.000000001% of 37signals, put me down at $10. Being a minority shareholder of 37signals and putting "increased the value of 37signals 10x" on the CV has far more than $10 of cachet ;-) (as Microsoft realized with FB).

6 orders of magnitude is not pretty close.

His $1 trade was in jest. The point is, both are very small numbers compared to 100%, or even 1%.

Uh, Joel, have you bought any Facebook stock on Sharespost?

Valuing Facebook just by the market price on Sharespost is like predicting the outcome of an election when only 1% of the votes have been counted. Maybe those votes are a representative sampling, maybe not.

I'm inclined to think not, because you have to be an accredited investor, ie already wealthy, to buy pre-IPO shares. Facebook's investors are there for the potential upside and are more comfortable with risk than Joe Blow saving for retirement or his kid's college education.

So Sharespost prices will be higher because (PROB_FB_DIES * NEG_UTILITY_FORME_IF_IT_DOES) will be less negative for millionaires than for the middle-class people or conservative mutual fund managers who will buy most of Facebook's equity when the company goes public.

Predicting the outcome of the election when only 1% of the votes have been counted is sometimes known as polling.

I'm inclined to think not, because you have to be an accredited investor

You "only" need $1 million in net assets (minus the house due to recent law I believe) to be an accredited investor. I would really be surprised if Joel didn't have at least that much.

http://www.sharespost.com/companies/facebook

I think the simple summary of your point is this: Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them.

Facebook is worth $26 billion. That doesn't mean that buying it at a valuation of $26 billion is a good investment. Worth and my estimation of what it will be worth in the future two are different things.

"Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them."

I agree with this, but there is a difference between the market being willing to pay $26 billion for a company, and minority investors being willing to pay $26 billion/0.03. Only the former establishes the actual* value.

Now, now. Let's be reasonable. No one is valuing Facebook at $866.67 billion.

/pedantry

That is sharespost's estimate of Facebook's worth, not what Facebook is actually worth. Hopefully if this thread was a little less heated, at the basics this is a discussion on estimating the present worth of Facebook.

A decent estimate would include the expected future worth, whether it is based on expert analysis or a market's expectations. I don't think any estimate here could be categorized as what "it will be worth in the future".

Estimation beats market cap when it comes to the sustainable value, which only comes from hard-earned cash, not crazy bomb-passing games you can observe in every bubble scene. I do think that FB can be traded around $50 billion and may be $500 billion (Who cares? Most of investors-speculators don't care about its paper worth on the market.) if another dot-com bubble forms. However, what would be its sustainable value? How will it generate its profit to justify its valuation? Until it's on its verified earnings statement, it's just another bomb-passing game. Who really care whether it's $5 billion, or $500 billion, if one believes he can pass his bomb to the enthusiastic guy beside him?

I know you were being facetious, but agricultural derivatives are totally different from equities. But we do also have a stock exchange and options exchange in Chicago, you know.

Anyway, the primary reason that your point 3 is true is because of basic supply and demand. It is harder to buy all the shares than to buy a few. When it's perceived there's a very small number of shares available--I don't know if this is true, but it does seem like investors are clamoring to invest in Facebook--share price will be higher than if that were not the case. In particular, perceived scarcity can share prices artificially high. The idea of getting a slice of the pie before someone else does was a big factor in the dot-com bubble, for instance.

Sheesh, did this topic hit close to home or something? Someone needs to chill and lay off Chicagoans, or red bull, or something..

Doesn't it come down to who comes up with the price and what their motivation for investing is?

When a VC invests in a company, they're looking for a big exit. Essentially, they're trying to predict how much the company might IPO or get acquired for. A public investor is trying to predict the rise in future profits of the company. The difference in motivation matters when you consider a hypothetical.

Suppose the company is guaranteed to have stagnant or falling profits. Does that discourage the VC? Not necessarily. They don't care about whether the company can make money. They care about whether they can keep building perceived value in the eyes of anyone who would want to acquire. A public investor, however, would not put their money in that company (at least not for long).

Therefore, I think David's main point is sound - VC's are more likely to over-value your company than the market is. We also know this to be true because of what happened in the early 2000's.

Hi Joel, ex stock analyst here. What you say re minority trades is correct in so far as that is the way market valuations are calculated. However, what David says is also correct: just because someone pays X for a tiny fraction of the company doesn't mean someone else will pay the same for all of it.

Wily investors always look for meaningful volumes before taking big jumps/declines in share prices seriously.

One of the easiest ways to ramp a stock (apart from getting your journalist buddy to write a puff piece) is to continually lift the offer for small volumes.

As Joel points out, it's tautological. How many companies would buy up Google for it's current market valuation? Apple? Since no buyers have tried to do that, are they ipso facto no actually worth that market cap?

Yes, but Google's valuation is confirmed by trading volumes.

In the early days of computerized trading it was quite common for even quite liquid stocks to be suspended limit up/down because of programming bugs.

But by Joel's logic, the market has 'spoken' and these companies are now worth 10% more/less than 30 seconds prior, when in fact all that has happened is some faulty code just ripped through the book on minimal volumes.

The point is that 'true' valuations are validated by significant volumes. Hence Google's valuation is real. Depending on your viewpoint, the size of the recent transactions in FB may or may not be material - and I think this is the point that David was making.

You need some amount of liquidity to make a meaningful valuation. Lack of liquidity leads to price volatility. Think May 6 flash crash.

Hey! Ad-hominem the 37 signals if you must, but leave Chicago out of it!

It's weird, it's like in Chicago they don't have multiplication or something.

Oh, and New York smells. (take that!)

Two of my heroes dragging discourse on hacker news into the toilet. What's the world coming to?

Apparently it wasn't obvious from the "New York smells" point that it was a joke. So let me spell it out: It was a joke (even if it's actually, technically true. Many parts of New York really do smell from all that trash on the street!).

people don't have a sense of humor. obviously my comments about chicagoans not knowing how to multiply was a joke, too. They multiply like bunnies.

Let this be a lesson to you edw519: you make a joke, and both your heroes attack you! Biff! Bam! Actually, I can't imagine a funnier response.

Ah, the Chicago-New York feud, older than Hatfield–McCoy.

Joel's comment:

Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the groupies?

.. is a often genuine criticism of 37s here on HN. Probably part of the reason the joke was missed.

Just came from San Francisco to NY. If you think it's bad here...walk around downtown SF sometime ;-)

You should never meet your heroes (IRL or online). It invariably leads to disappointment.

I wasn't disappointed by meeting DHH. In fact, it led me to respect him even more.

Having senses of humor, they are clearly JOKING with these lines.

Warning: Prolonged exposure to HN comment sections may blunt your sense of humor, too.

Both of them have some insights worth pondering, but the attacks are kinda negatively overshadowing the discussion. Joel really shouldn't have started the Chicago hyperbole.

Do they have some history or it's just impulsive?

I think it all started with Joel's "Language Wars" article http://www.joelonsoftware.com/items/2006/09/01.html for which DHH responded with "Fear, Uncertain, and Doubt by Joel Spolsky" http://www.loudthinking.com/arc/000596.html. They have been at loggerheads since then.

If you're like me and can't access loudthinking link, here's a copy: http://www.artima.com/forums/flat.jsp?forum=123&thread=1...

Thanks for the link. I couldn't really access the loudthinking link.

On this one, I am with David. Joel pretty much negates his point about using something battle tested and mainstream in the end when he mentions using some proprietary language for his product, which translates to a couple of mainstream languages. I don't really see the point of cross-compiling to multiple languages. The work and time invested in maintaining the proprietary language can be better invested on other critical activities. If language interoperability is an issue, thrift or message queues is there to the rescue.

Why he would use some fancy stuff when he himself is advocating using mainstream stuff is beyond me. I sure would be betting on ruby being more robust than whatever he is using in-house (preposterous claim; I have no ideas what they have in-house)

IMO the only valid complain about Ruby was lack of good unicode support at the time post was written.

Did joel ever post a response?

Joel really shouldn't have started the Chicago hyperbole

He's a New Yorker, it's in his DNA.

They are competitors.

That alone shouldn't be reason enough and I would say both of them behaved very unreasonably if being competitors is all there is to it. I was asking more along the lines of previous altercations or confrontations.

I do remember some post from 37 signals commenting about Joel's taking investment; not sure if it was David or someone else though.

A very thin line divides frank and honest speech and rude and arrogant statements. Most of the internet celebs sit on the fence and cross it every now and then - Linus Torvalds (Open BSD devs are a bunch of masturbating monkeys), Zed Shaw(Rails is a ghetto) etc etc.

That being said, there always is a take-away as these people are one of the most hardworking and talented people in the industry but the sad thing is it makes it difficult for people not familiar with their style to neglect the firework and just consume the good parts(not that it would matter to any of them).

http://37signals.com/svn/posts/2159-all-the-wrong-reasons-fo...

The fact that they responded to your jest in sincerity gives hope to the "little guy"

HackerNews: battlebots for geeks who can't build an ashtray without a makerbot

You should take a chill-pill and go check out reddit sometimes.

Agreed, kind of depressing that neither appears to have anything better to do.

Not really. They are both professional writers of online publications. This forum is the perfect place for them to stir up controversy to entertain their target audience. I'm entertained, at least.

I was impressed (surprised?) at how civil this response was. Probably because it was a response to Joel and not randomHNuser9 :)

I was also surprised that it didn't really address the question of whether or not you (37S, dhh) are "stewing in their own witty ideas, listening only to the adoring comments they get from the groupies"

Do you have any thoughts on the "bubble-ness" of Chicago. Think it's a totally invalid point?

Given employees of small service companies sometimes deal with clients more often than they deal with their own families, it's not unreasonable to posit these clients act as a "bubble" that insulates the company from the world at large.

What's laughable is Joel's implicit assumption that the majority of 37s clients are, apparently, Chicagoans. How charmingly pre-internet of him.

Such arguments should be left to professors of financial theory. Here's a balanced analysis:

  In the real world, markets cannot be absolutely efficient or wholly 
  inefficient. It might be reasonable to see markets as essentially a 
  mixture of both, wherein daily decisions and events cannot always be 
  reflected immediately into a market. If all participants were to believe 
  that the market is efficient, no one would seek extraordinary profits, 
  which is the force that keeps the wheels of the market turning.

  In the age of information technology (IT), however, markets all over the 
  world are gaining greater efficiency. IT allows for a more effective, 
  faster means to disseminate information, and electronic trading allows 
  for prices to adjust more quickly to news entering the market. However, 
  while the pace at which we receive information and make transactions 
  quickens, IT also restricts the time it takes to verify the information 
  used to make a trade. Thus, IT may inadvertently result in less 
  efficiency if the quality of the information we use no longer allows us 
  to make profit-generating decisions.

Source: http://www.investopedia.com/articles/02/101502.asp

If you take #3 to its logical conclusion, any company's shares, if sold all sold at once, would be worth far less than the price at the nexus of supply and demand (the market price).

Price is simply a function of supply and demand. It's not customary to use a fire sale price as the sole basis of a company's valuation.

http://en.wikipedia.org/wiki/Valuation_(finance)

I can verify point five. New York does indeed smell.

only when you're outside. :)

Or not on the subway.

Everyone thinks their sh*t don't stink. Honestly, Chicago smells too.

Yes, like chocolate!

David's point 2 is a good one. It is the reason why bourses insist that a large percentage (IIRC >25% for the LSE) of share capital is in public hands at all times. (Where "public" means people or organisations not associated with the directors or major shareholder.)

Nonetheless, Joel's post is quite funny.

I'd bet they make a lot more profit than 37signals.

it's "a meanningful metric" not "an meaningful metric". Please spell people. This is not SMS!

I think it is always wrong to point out spelling mistakes, except in posts about spelling mistakes.

Especially as many spelling mistakes are actually typos.

Also, "meanningful" is an excellent example of Muphry's Law.

http://en.wikipedia.org/wiki/Muphry%27s_law

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