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Comment by Estragon | Hacker News Reader

This confuses me. I believe Zynga has earnings, because in the comments of the OP Fred Wilson estimates their P/E at 13x ("Zynga trades at something like 13x pre-tax cash flow when you back out the $1.5bn of cash they have.") And I know Pandora has earnings, because I pay them $36/year myself.

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I read Fred Wilson's blog on occasion and he seems like a decent human being. But I get a chuckle out of the fact that he's the first to leap into the comments of post like this, discussing the bubble. He's a VC for crying out loud. He benefits from the bubble.

Like I've said before: I'm a reasonably young man, and this is my first go-around having actual money as these various economic cycles occur. I watched the housing bubble closely. And the whole way down the realtor associations were screaming, "There is no bubble! This is the best time to buy!"

I think it's something we all know, but it feels more "real" to me, because I witnessed it. The lesson is, don't listen to the opinions of people whose livelihoods depend on maintaining the run-up. Keep that in mind when you read these blogs, written by techies, with comment sections filled with VCs and and CEO/CFO/CTO's of 1 employee companies waiting for their funding.

i don't benefit from the bubble. it drives up the cost we have to pay to invest in companies. i pray for the day the markets tumble.

True, but the other side of the coin is that investments can exit at much higher value in a bubble environment.

It's not the price that matters, it's the activity level. House-flippers don't complain about the price of the house; returns are relative. You can't honestly tell me that times like this aren't better than, say, 2003?

Now, I don't mean to imply that you, personally, have some sinister intentions to keep the bubble going. But in general, VCs have to speak highly of the industry. Otherwise, how do they explain any investment?

If I'm wrong, and I could be, I'd love to see some examples of tech VCs who are actively calling a bubble. I'll bet there aren't many, and that's no coincidence.

we raised a fund in 2003. i remember it well. it took us a year to raise that fund. nobody wanted to invest in internet startups. that fund will go down in history as one of the best VC funds raised. certainly one of the best of that decade. price matters. environment matters. that was a much better time to invest than now.

That's disingenuous. How have the companies you funded in 2005 been doing? For those that were acquired or IPO'd, the current valuation bubble has benefited you immensely. The amount you invest in new companies pales in comparison to the payout from a company like Groupon. Granted, few investors have a Groupon in their portfolio, but you're still getting paid more than you would without inflated valuations.

we are not investors in groupon. ugh. yuck.

I wasn't suggesting that you were, but rather that the valuation bubble has meant the exits of companies you've invested in have been higher than they otherwise would be. It costs you more to invest now, but that's offset by the increased income from companies you invested in pre-bubble.

Revenue != earnings.

Earnings = revenue - expenses

It's super-important to remember the distinction.

Thanks, I understand.

Forbes ran an article recently describing how some social media companies may be deferring revenues of digital purchases by classifying them as "durable goods", which could be seen as a way to make themselves more attractive as an ongoing investment. The Forbes article is quite skeptical. Worth a read:

http://www.forbes.com/forbes/2012/0507/features-social-media...

Your $36/year is revenue, not earnings [1]. Unless I'm misreading the numbers, both P[2] and ZNGA[3] still have yet to report a profit and establish actual ratios for P/E.

[1] http://en.wikipedia.org/wiki/Earnings

[2] http://finance.yahoo.com/q/ks?s=P+Key+Statistics

[3] http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics

P/Es are a little confusing... earnings by that metric really means net income or earnings per share. In other words their liabilities and costs figure into "earnings".

Fred Wilson is using some wonky math there. Using projected earnings their P/E would be easily be calculated at 100+ and possibly much more. They would really have to do something out of this world to have a P/E in the teens.

http://www.google.com/finance?q=NASDAQ:ZNGA&fstype=ii

here's the math. it is not wonky.

market cap = ~$6bn, cash = $1.5bn, enterprise value = ~$4.5bn, pre-tax earnings/EBTIDA in Q1 = $87mm, annualized = $358mm, enterprise value/annualized ebitda = ~13

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