Also, there's a billion dollars and then there is a billion dollars. A billion dollars of oil is a valuable commodity. A billion dollars of start-up stock is not necessarily such a great thing unless you can find someone willing to buy all of it, right now.
Of course, sometimes a billion dollars of startup stock is worth much MORE than a billion dollars, whereas a billion dollars of oil is basically worth a billion dollars.
Equity in fast growing companies is high beta, but that doesn't mean it's fake.
> Equity in fast growing companies is high beta, but that doesn't mean it's fake.
It depends. The Equity should be based on future expectations of return. For Amazon and Google, there are now clear business models to drive their value forward (for Amazon it may be rather longer term than for others) but for startups it is less obvious. Most of them have no idea how to generate value and how to grow forward, and their actual "utility" as a service may be questioned.
The trend towards over-valuing the startups currently is also coming from the fact that the housing bubble has exploded and investors and putting their cash in other fields where they expect to earn more/lose less money.
Name the billion dollar companies with no business model. The fact is once a company is successful enough to go public it's often still risky, but it's extremely rare for them to reach that point without a model.
It means that return on investment would be, if they were in a situation where they would return everything to shareholders, of 1.2%. That's very weak for a company valued at multi-billions, and it is not clear how they can generate much more profits in the upcoming years.
That's what I am talking about.
And Twitter is one of the better ones, by the way.
Only if "no revenue" actually means "no profits". There are perfectly sane business plans that grow the company and pay all the salaries, but don't turn a profit. It can't go on forever, but it's not a disaster either.
I suspect the OP didn't actually mean "no revenue".
The only way equity can have a positive value is if it generates ROI. No-profit-but-pays-the-salaries is a lifestyle business, which is great and all, but the equity is worthless.
Pinterest's business model, of course, it getting bought by Facebook, and that is indeed a little bubbly. Basically, if Facebook slows down, then the entire cottage industry of fancy social media startups hoping to get bought will collapse.
> The only way equity can have a positive value is if it generates ROI.
Yes, but If the company's value increases, that increases the value of shares, even in the absence of profits. This is one reason a no-profit business can attract loyal investors -- that and the promise of future profits, of course.
> No-profit-but-pays-the-salaries is a lifestyle business, which is great and all, but the equity is worthless.
Not so. A company's equity represents the company's value, not its present profitability (although some equity investors require profits, other are satisfied to see growth). One can grow a business by running at an apparent 0% profit in a way that causes the business size and customer base to grow over time. The argument can be made that business expansions can only result from profits, but this can be structured as essential equipment replacements, personnel increases and so forth, in a way that profits remain at zero.
