37signals valuation tops $100 billion after bold VC investment (2009)
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37signals.com
You can't say anything about the current investors. Only the future will tell if it's a wise investment.
strictly speaking: or fools that got lucky
Profit now, that's another thing.
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).
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.
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?
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.
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.
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.)
You are completely missing the point of the article, too. It is referring to the bubble of air which valuations are based on.
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.
I think the problem appears when other people are buying shares of our pets as if they were actually worth billions.
"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)."
From: http://financetrain.com/how-icelandic-banks-funded-their-ris...
> 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!
http://www.vanityfair.com/politics/features/2009/04/iceland2...
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.
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.
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
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 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?
That's a very similar sentiment.
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.
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.
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.
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.
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.
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).
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.
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.
/sarcasm.
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.
They want a larger exit.
> People build companies to flip all the time.
This doesnt seem to apply to SnapChat as they just decline huge exit offer. I mean what bigger proof you need than $3B ?
> They could just be young, foolish, and arrogant
you mean VCs with hundreds of years of experience (combined) that do VCiing for living? Don't think so.
@wensing
> They want a larger exit.
Most likely not. Did Facebook look for "a larger exit" ?
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.
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.
> 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]
many chased that model in 2002-2007, with google in mind
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) I'm already so wealthy as a founder that's sold stock through multiple rounds of funding that I might as well wait for the $5B offer.
This original post by Jason Fried was making fun of Twitter which went from 1bn to 25bn. More background here: http://www.forbes.com/2009/10/15/venture-capital-software-te...
Another post from DHH said that the value of FB was not 33bn & it's now roughly 120BN http://37signals.com/svn/posts/2585-facebook-is-not-worth-33...
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.
Shorting is a dangerous strategy, especially if you feel the prices are delusional. "The market can stay irrational longer than you can stay solvent."
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.
On the other hand, if you shorted USV/Sequoia/Benchmark's portfolios you would be hurting a lot.
I remember reading it back then. It's interesting how it's still relevant after all these years.
A noble calling it is not.
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 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 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.
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value revenue profit
TWTR 25B$ 0.3B$ -0.08B$
AMZN 170B$ 61B$ -0.04B$
CRM 34B$ 3B$ -0.27B$