I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble? Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each? (And I don't mean with the plan to turn it into an IPO and get rich/get out quick)
A billion dollars for a survey website with no clear sustainable competitive advantage?
Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that...
Do we really think that all 40 of those startups could actually find someone to buy them out, completely, at 1+ billion each?
That's not the bet investors are making. They're betting more on IPOs than acquisitions, and they're betting that the entire portfolio will end up net ahead, not that each individual company will. And indeed it would be extremely unlikely for a group of 40 startups not to end up with a power law distribution of exit valuations.
But the statement "40 companies worth 1 bn+ each" implies that the clever people think each company is a really sellable at 1 bn
Otherwise should we change the definition of "valuation" ?
Edit: it is difficult not to sound snarky on this subject.
If a respected investor's first reaction is to see beyond the individual companies and into the whole (and I agree tech startups will produce billions of value in The next five years) that's good - but it reflects a jargon problem perhaps - if the sophisticated investor sees a group of billion dollar valuations and thinks I will invest in them all and come out ahead it is a different thought process to the layman - that a valuation of a billion means it is worth that much.
While we should allow for a degree of sophistication investing in startups, it is still a stretch of jargon to make Humpty Dumpty proud
To say that each of the 40 companies will be worth at least 1 billion is indeed unlikely.
But all that is required for the investors to be "rational" is for the total value of all 40 companies to exceed 40 billion.
So if two companies end up worth 25 billion each and the rest are worthless, that'll still have made it all worthwhile (assuming as an investor you diversified across all 40 companies).
In this scenario, we could rationally say that "each of the 40 companies had a 5% chance (2 out of 40) of being worth 25 billion dollars, which made them worth 25/20 = 1.25 billion dollars each".
But that is not what a common dictionary reading of "40 companies all with a valuation of over 1billion" means.
Yes, that is how a sophisticated investor (who has all 40 companies in their portfolio) will see it.
It is not what a layperson will read - and that is likely to be a problem - jargon should not conflict with natural interpretation, it should complement it.
It doesn't mean that they think someone would buy the company for $1B now. It means that they purchased some stock for a price equivalent to buying all of the stock for $1B, and that they believe that this is a good bet to make given their risk tolerance, the possible outcomes for the company, and the likelihood of those outcomes.
I think that's what I mean - I hear "company valued at 1 bn dollars" and I have to do this mental and linguistic gymnastics leap.
A list of 40 companies valued individually at 1 bn is a bubble, a portfolio of companies only a fraction of which will generate significant returns is a sensible investment spread.
But that is not what the words used mean when I look in a dictionary. Especially as few investors have all of these in their portfolio (if any).
The verbal gymnastics required to differentiate between what VC's seem to mean by valuation and the common-sense use of the term is one of the key things that makes this a bubble.
VC's are okay buying a share of a company as-if the company were worth a billion+ because they (rightly) believe that they can (frequently) turn around and exit in an IPO and get a significant return by convincing others that the company is worth a lot of money – never mind that the long-term financials and competitive advantages aren't there to back that valuation up.
As a (relatively) short-run money making scheme, many of the VC's have it spot-on, but at some point, if the markets can't sustain the aggregate valuations of all of these multi-billion dollar valuations, the IPO values will dry-up and someone's going to be left holding the bag. That is to say, the bubble will burst at some point if it's not carefully deflated.
Same game, different names. Here's Jim Cramer in 2000.
"You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
OK. Here goes. Write them down -- no handouts here!: 724 Solutions (SVNX), Ariba (ARBA), Digital Island (ISLD), Exodus (EXDS), InfoSpace.com (INSP), Inktomi (INKT), Mercury Interactive (MERQ), Sonera (SNRA), VeriSign (VRSN) and Veritas Software (VRTS)."
My goodness. I thought "they can't all have done too badly" – if one did well it'll balance out. I was wrong.
All of them appear to be bust except VeriSign, who are massively down on the peak valuations they had in 2000. It's weird, it looks like a sensible linear growth except someone has scribbled over 2000 and 2001. If you had bought it in the bubble, you have lost a ton of money, even now, even though they've done well since.
Of course it's a bubble. I think most of these will burst, but some of them will withstand it.
One thing to remember: it's in the best of interest of everyone involved in a bubble to deny there's a bubble. These investors who say "it's different this time" have no credibility.
> I've struggled to say this and not sound snarky, but, in the face of this, how can we not admit that there's a bubble?
Is this actually a controversial statement? I don't think so. Startups can be fueled by passion but ultimately are about making money. I sort of assumed most folks here were here to try to cash in on the bubble before it's over.
A billion dollars for a survey website with no clear sustainable competitive advantage?
Spotify seeing a ~3.5 billion valuation in the face of an estimated loss of 40 million for 2012 – owing your existence to an industry that is kicking and screaming into the digital age (and with strong bargaining power and a strong sense of greed)? It's possible – and Spotify is an exciting entry with some clear success, but almost 4 billion in valuation strikes me as bubble territory, at the moment, given all of that...
Just my daily dose of skepticism...