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Comment by RyanZAG | Hacker News Reader

> When you look at the rumored Snapchat valuations of over 3 billion dollars, it’s difficult to understand how an investor can think that Snapchat is worth that much. Because the truth is, it’s not.

How much is your house worth? Might be it cost you $100K, but if someone is willing to give you $1M for it because they want to build a supermarket there, then your house is worth $1M.

So if Snapchat is being offered $3B from Facebook because they think it would give them at least that much value, then Snapchat is worth $3B.

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"Price is What You Pay, Value is What You Get". [1]

I could hypothetically buy an apple or an investment for $100 billion (if someone gave me the money). There could be any number of reasons for doing so, but those reasons don't change the fact that it's highly unlikely I will derive $100 billion or more in pleasure or return from that money.

On the other hand, if I can buy something cheap and I find it to be more enjoyable, or an investment returns more money, than expected, then the item was more valuable than what I had paid for it.

[1]: http://en.wikiquote.org/wiki/Warren_Buffett

"'you have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.'"

Michael Lewis in Boomerang

He is amongst the best at converting the craziness of Wall Street and Finance into plain English.

And now you both owe $100 Million in sales tax ;)

> "Price is What You Pay, Value is What You Get".

Yes, the real estate people at the supermarket must have decided that the plot has a value of more than $1M. They might be wrong or even foolish to think so, but they must clearly think that is the case, otherwise they'd be fools to pay it.

This is why those kinds of plans are kept secret as long as possible, because the supermarket hopes to pick up the plot at much closer to $100K than $1M.

What Buffet means, quite sensibly, is that you should only buy an asset when (your assessment of) its value is a lot higher than its price, not when its price accurately reflects its value.

There's two definitions of "worth" being used here. The investment definition and the laymen's definition. The layman probably adds up all the IP, assets, even the chairs the programmers sit on and comes up with some number << $3b. A more sophisticated layman might even look at revenue and growth and project out 4-5 years and still come up with some number << $3b.

The investor does some other kind of magic math and whatever because it's worth whatever somebody's willing to pay for it anyways so why bother?

He's not talking about the FB acquisition, he's talking about the rumored funding round. If there were an ac on the table, it was, at least until they turned it down, worth at least the price of the ac of course. He makes that distinction clear at the beginning of the post, just doesn't connect those dots directly.

Except no one has paid $3 billion for Snapchat. They've only bought a slice at that valuation.

Most people own a fraction of their home, and hold a mortgage that is largely backed by the value of the home.

When you buy a house you agree to pay 100% of the agreed upon valuation. Investors in Snapchat are only buying a few percent at this valuation.

This is what it looks like to me:

Step 1) Buy 30% of a company at a $5 million valuation.

Step 2) Buy (or hopefully convince dumber investors to buy) 5% at a $3 billion valuation.

Step 3) Tell Yahoo to acquire you for at least $5 billion since your last raise was at $3 billion and you want your dumb investors to be happy.

Step 4) Cash your billion dollar check.

I thought the offer from facebook was 3B all-cash for everything?

http://blogs.wsj.com/digits/2013/11/13/snapchat-spurned-3-bi...

Maybe, but that's a rumor of a failed acquisition attempt. They will almost certainly raise money at that valuation or higher though. Just as soon as their current investors can find some dumb investors to pump the valuation sky high.

http://allthingsd.com/20131029/snapchats-giant-funding-from-...

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