Hacker News Reader

Comment by pserwylo | Hacker News Reader

> 3, the number is just for a time period (like $904 million per year) and their valuation is over a much longer period (e.g. decades)

Okay, so this along with your sister the comment from raldi points at what I probably missed: The duration for which the valuation is made is unspecified, at least in this article. Thanks for pointing this out.

View on HN

You don't "specify a duration" for the valuation: an infinite duration is baked in the valuation itself through the time value of money. If the annual interest rate is 10%, 100$ in 1 year is worth 90$ today, 100$ in 10 years is worth about 35$ today and so on. Of course, in the case of company valuations, you have to also account for the uncertainty (both on the upside and downside) of the future cash flows.

Actually, replace 90 by 91 (100 / 1.1), and 35 by 38.5 (100/1.1^10)

Valuations are instantaneous. It is, roughly speaking, how much a buyer would have to pay to buy the company right now. That's easy to do with public companies because it is just "trading price * number of shares". Venture-backed companies typically use their last investment round for valuation, where, if they had $100M invested in the company for a 1% stake, you multiply that by 100 to get the $10B valuation.

It is likely an inflated number, but it's hard to tell because it isn't in an open market. It could be $1M or it could be $100B.

Incidentally, "trading price * number of shares" almost always understates the selling price when a public company is bought, and it almost always overstates the selling price when a company is liquidated (technically, shares are worth zero when a company is liquidated, but I mean how the share-price usually free-falls in a very short period right before a firesale). The reason for this is that trading price, by definition, is set by the most marginal buyers and sellers, those who most want to get rid of their shares or most want to acquire new shares. The actual shareholder body consists of a large range of individuals with a large range of selling prices. To acquire a full company, a buyer needs to start convincing less marginal shareholders to sell, and usually needs to pay a premium (sometimes up to 50% over market cap). To get rid of a company that has suddenly started heading for bankruptcy, shareholders need to sell into a market of much less willing buyers, and so they need to offer a significant discount.

But that's missing the broader point that it's not useful to try to define a category like "business file sharing" and then pigeon-hole a company like DropBox into it. It's like people wondering how Uber could be valued so much larger than the total taxi industry. Well, the opportunity is much, much larger even without moving into adjacencies.

It's like being 1000 miles down the road and going 60MPH. There's nothing inherently contradictory about the first number being bigger than the second.

(Of course, the calculation for a business valuation is a lot more complex than a simple distance = rate * time.)

Reply on news.ycombinator.com