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Comment by bhayden | Hacker News Reader

With all the bubble talk and speculation recently (of which I have no real opinion either way) - to me, this is the biggest evidence I've seen of a bubble. The day after Magic posted on HN, someone posted how to make an identical service with only a couple hours (tops) of configuration. Per user, this valuation seems insane. You could launch an identical service for free, essentially instantly, and for tremendously less than $12 million you could get the same number of users and same brand recognition. I have no idea how this can be justified.

I also think Magic is going to be hard to be sustainable due to fraud. Get Magic to buy you thousands of dollars worth of something and then do a chargeback on the card (or use a stolen credit card). There's nothing they can really do about that other than try to detect fraud before it happens.

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Your misconception here is to think that valuation means how much the company is worth today. Or to read it as an intrinsic signal of the difficulty of creating what the company has created so far.

It's neither.

Early stage investors make calculated bets on teams that they think can succeed in the long run. Valuation is a technicality, and depends on how well founders can pitch their idea, and how desired they are by other competing VCs. Ultimately, what really matters, is the potential of the team, and the size of the space they're exploring.

In this case, Sequoia is not investing in a simple messaging app that can be "replicated in a couple of hours" (regardless if that's true or not). They're giving money to a team they believe can do something great with it. And one that spent 3 months being personally trained by Paulg plus some of the best minds in the startup ecosystem, to seize opportunities and create something big.

From a purely statistical perspective, 80% of investments will fail. It's very likely that Magic will fail, too. But the 20% that succeed will pay for all the other ones.

For anyone interested, I strongly recommend "The Launch Pad: Inside Y Combinator" [1], by Randall Stross. It shows in incredible detail the ins and outs of YC, and explains why angels and VCs do things that seem, at face value, crazy for outsiders. It will give you a totally different perspective on deals like this.

[1] http://smile.amazon.com/Launch-Pad-Inside-Combinator/dp/1591...

So essentially they really liked the team working on Magic and are paying millions to, in a sense, employ these people?

pretty much.

Yes, and to let those people deploy their capital profitably for them.

Not even that! Literally the valuation is a figment, especially without knowing the associated terms. $12m at $40m post-money with a 3x participating preferred? Literally all we know is the team has access to $12m in the bank to spend, not on their own salary, but on building a company called Magic. After the $12m is spent they should have a company that is worth $40m.

It's a bet that for every $1 the team spends they can create about $3 in value. Which at 5x revenue is to say, they can spend $12m and at the end of the day be cash flow neutral and have about $8m in ARR.

Throw in a liquidation preference on that $12m and what you actually have are golden handcuffs and high expectations but the work for this team all lays ahead of them not behind them.

Getting to the proof of concept like they did is easy. Going from there to having many millions of recurring users is not. They can easily be as big as Amazon's retail arm is, but they need to grow fast. After this $12m is spent on marketing and tech, you will have a much harder time competing with them with your two hours of configure editing. They have identified a good business model and are actively building a moat around it while we sit here debating.

Bingo!! The 12 million invest is what sets them apart :)

Too late, yeah you can build it --- but would you get funded for something so simple when someone else is already ahead?

Market validated ... but barely, and definitely not enough to fuel more ... and if they do ... ha.

I don't disagree, but where do you see the moat? $12m could be spent on developing hard-to-copy technology eventually, but I don't know if that explains the current valuation. Also, I believe Amazon has strong economies of scale, but I'm not sure if Magic does or not.

By analogy, I could build an ecommerce site but not compete with Amazon, I could build a search engine but not compete with Google, or a hardware company but not compete with Apple/Dell/Lenovo. These companies have the brand recognition and market share as well as economies of scale. Will economies of scale come into play for Magic? I can see it. The trchnology you can have afree two hours of confus editing is not going to be ask good as the trchnology you get ad we spending a few million on it. They are more or less first to market, and that is no predictor of long term success, but it does allow them to grab customers before others jump in.

For their solution to be attractive, they need to learn your preferences. The more customers they get to place more orders, the less attractive it will be for those customers to sign up with another service and have to go through all the motions of teaching those services about them again.

I often pay by Paypal - using an account that's never funded, but paying straight from my debit card - simply because I don't want the hassle of re-entering my card details, for example. It takes very little added convenience before there's a switching cost. And the perceived switching cost may be far greater than the actual switching cost.

Maybe it's not a bubble in the sense of "the entire industry is doomed", but it's just par the course for wall street poker face mentality of upselling the fuck out of your investments and then offloading the spoiled hot potatos to the next sucker.

There's plenty of room to build useful and valuable businesses, products, and services with new technologies. The hype bubble I see is just classic sales flare amongst VC investors. Make a solid business and there shouldn't be a problem.

If you think you can launch an identical service "for free, essentially instantly", and know that such a service can get $12 million of funding that quickly, why don't you?

I guess you give part of the answer yourself:

> I also think Magic is going to be hard to be sustainable due to fraud.

In other words, you can't launch an identical service for free, essentially instantly, without being prepared to put in a huge amount of gruntwork afterwards to solve hard problems - like fraud.

There are lots of early stage startups these days that, on the surface, are easily replicated. The fact is though that they were the ones to do it first/successfully. This isn't to say that someone else can't come and eat their lunch, but as an investor, if you think the market in general has potential, you obviously have to bet on the best horse before the opportunity gets snapped up. Fraud is always going to be an issue with companies that deal with transactions but money can help alleviate to put the systems in place to deal with it.

> someone posted how to make an identical service with only a couple hours (tops) of configuration.

now apparently worth $40M, so why don't they?

seems like an easy return on investment if you believe the theory

i guess it is like with Groupon - the value is in the spinning of the wheel of the business. The faster the wheel - the more money gets invested which are directed toward spinning the wheel even faster.

Bubble prediction is easy. I have predicted it already some time ago :) The value is in predicting of the burst of the bubble. And so far there is no such in sight... When this sentiment consume majority - i guess that would be the time :)

You demonstrate a breathtaking lack of understanding of the topic. Yes, the front-end tech is easy. The hard part is the scheduling tech and the task management. And you seriously underestimate what it takes to get noticed and the value of such. Many/Most Magics result in a face-to-face meeting which cuts down dramatically on fraud. And card transaction is susceptible to being charged back.

Let's be real here: Magic likely did not develop much, if any, scheduling tech and task management technology in-house. I would be comfortable betting they are using off the shelf software for this and applying some smart decisions about how to use it. Before launching I would also bet less than a month of full-time work went into planning scheduling tech and task management. It's a cool achievement, I like their service and wish them luck, but valuing this amount of effort (and a great deal of luck) at $40 million seems pretty ridiculous.

I agree getting noticed and getting users is hard, but did Magic really generate millions of dollars worth of brand recognition in only a few weeks?

I'm with you, IMHO this is a 'jump the shark' moment. Enjoy the $12m while you have it!

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