Comment by octotoad | Hacker News Reader

Comment by octotoad | Hacker News Reader

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Here's how I like to view these 'valuations': I am certainly a 'nerd', 'geek', 'tech-head'; whatever sort of label you want to throw at me. I am also the furthest you could get from somebody who has half a clue about stocks, mergers, IPOs etc.

Forget about the hype, the amount of users, the "mindshare", the paradigm-shifting omg-teh-adsense-ponies. To a 'regular joe' like myself, all I think when I hear anything about these sorts of companies is this: Do they currently make money from the service they provide? If so, for how long will this be a viable revenue stream? If not, does anybody realistically expect this situation to magically change at some future date?

As others have pointed out, this kind of investment prospect is often an easy way to make a quick buck for people in the know/money. I do understand this.

What I don't understand is how there can be such a lack of retrospective caution exercised by so many people who may have a hand to play in the outcome of these IPOs.

Despite not having the slightest clue about stock markets and financial investments, when it comes to these 'Web 2.0' companies, I do know a viable business model when I see one.

How the hell do all these people involved in the artificial inflation of the value of these companies not think back to what happened with the first web/tech bubble of the late '90s and early '00s?

I'm an uneducated oaf in the tail end of my 20's and even I can recall the ridiculous shit that went on back then. How can people with so much more technical and financial wisdom seriously think services like these are worth so much?

The problem is that your real worth, and your potential worth are two different things. Facebook/Tencent finds their users and especially their youth valuable. Factoring that into their value, they think they're worth 4 billion.

That said, that's far too high of a real worth for this company, illustrating how a prospective buyer can really drive up your companies pricetag. It may factor in real revenues and growth potential, but this price is largely market speculation. Very risky, but apparently worth it for some big players. My advice to the little guy is to stay out of it cause if one thing goes wrong the whole price could come tumbling down.

This definitely feels like the 21st century gold rush where everyone's just rushing in before it's too late just in case that hot tech startup becomes the next Google. I don't know if wisdom can overpower the greed that people have.

Gold rush is a zero-sum game with unsustainable business model, while startups are not any of these things. I feel that such comparisons are misplaced and do not provide useful abstractions to effeciently reason about startups.

Fair enough that gold is a zero sum game and perhaps gold rush might be the wrong terminology to use. What I really was referring to was the fact that many investors just jump on the bandwagon to avoid missing out on the next big thing. Even when the business model is unclear.

Here's how you calculate the worth of a company:

Consider the lifetime of the company. Record an estimate of all the profits and losses the company will ever make over that lifetime. Discount each number for risk, inflation, and opportunity cost (because money is more valuable if you have it now and invest it in something profitable than if you wait 10 years - you should probably discount at least 4% a year, which is about what the average inflation-adjusted market return is).

This number is the appropriate value of the company.

Naturally, there's a lot of guesstimates going into here with the profits-and-losses / risk, even for big stable companies. The high price of Snapchat means that someone with money believes that Snapchat will generate a lot of revenue, or that they will be bought out. It's quite possible they're totally crazy, or that they've wrong about the risk.

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