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I have no idea what Twitter is worth or what it will be worth - if I was good at predicting future prices i'd be making a fortune on wall street - but companies that are worth a lot make a lot of money and companies that make a lot of money don't raise (high priced) capital from venture capitalists. Since Twitter just raised more capital, I think it's safe to assume that they don't make a lot - or any - money and therefore independent of what the VCs paid for the potential of future earnings, the liquid value (the only value that puts cash in your pocket) of Twitter today is low. Certainly not $5B.
Pure speculation by blogger community I think will make it hard for them to execute. In the same way as public companies suffer from shareholder pressure and are not able to take decisive actions that are critical for there survival but may not be investor friendly.
This puts an immense amount of pressure on a company like Twitter who is, only now, rolling out their first 'official' program for achieving revenue. With all of these predictions in the air, the perceived success of their program will be determined by many (most likely the same people) in the first few weeks.
In the end, I believe its silly to append a value to Twitter this early on and at such staggering values. Let them continue to develop the platform, revenue streams and the rest of us should just keep enjoying the interaction . . .
There is a side benefit of hype: ease of the business deal. People like to be associated with winners (even potential winners), and putting together deals, recruiting talent, etc becomes amazingly easier. I would guess that much like everything else, there is a tipping point for positive speculation...
Should we also remove clocks from the offices so people don't watch
time count down as a measure of a successful day?
Wouldn't a better solution be creating different and unique
measurements that were not tied to externals (stock price / company
valuations) but specific. Internal measurements that dont require
constant vigellance.
But what do I know, I've been watching Lijit's pageviews all day.
As long as there are yard sticks and scales we'll alway measuring ourselves by them.
Perceived value is where it's at. I'd buy Twitter stock if it was lower than I etimated their current value at (tough guess without revenue or a p/e).
Thanks Micah and Howard. I appreciate you smart folks chewing on the rough pieces of the value question. I say open the market 24/7, if people wanna trade let them.
Not that such speculation very often predicts outcomes well....
Fact is Twitter is still in early stage of its development and formation. Valuation is a moving target at best.
just too much energy in this country fiocused on the stock market. the less you do the better.
but isn't the vast majority of amateur trading volume either the morgan stanley broker calling them with a "hot tip" or stuff they read in a book on how to be a "stock market genius" or some kind of technical/momentum analysis? i don't have any data on it but that's my suspicion.
i tell all my (non finance industry) relatives to decide how much to put in stocks vs bonds and then just buy S&P ETFs and a ladder of Treasuries.
The problem with hedge fund is that it's damn hard to do good due diligence on them. I wouldn't trust a fund of funds to do it as they have a dismal record in this area and I'm not sure I would trust myself. Hedge funds overall aren't such a good deal after fees and yes there are standouts but what does past performance mean?
graham and dodd would certainly think so
Anyone can invest in anything. It's the idea that one can gain expertise at looking at something high technical and very new to invest a lot in something. Usually in order to invest a lot, it isn't your own money (or exclusively your own money), so as a society, we've regulated both legally and socially who gets to invest through developing people who understand the nitpicks of what makes for good investments across different domains.
there is absolutely nothing wrong with this; i love VC, and the speculation is definitely methodical in nature. that said, it is still highly risk-averse speculation by nature, and i think it might potentially be hypocritical to think that others don't have that same right to speculate, if you are a VC.
I still would say the exact same thing if you had a whole and functioning company fully on the market, with stocks and clear numbers and everything all lined up as ducklings following mommy ducks. At the end of the day, because we have complex other classes of things we trade, we can't fully know. It's still a certain amount of speculation, albeit trained speculation, and that's how we ended up with a Wall Street culture. Interestingly, I'm not sure if everyone their loves it.
The fact that it is hypocritical you can take up with the SEC and other regulatory bodies. Their rules. Not mine.
My personal question has always been- when will average joe guy be able to invest in hedge fund land without intermediaries.
and in terms of how you feel towards wall street culture vs stock investing vs hedge funds, etc etc. i dunno, i have been a value investor for years (ironically, as i have also worked at startups for years as well), and there is a fundamental difference between the speculation/trading/etc nonsense that goes on in most of wall street, and the actual investing that goes on only @ a few funds comparatively speaking.
i would suggest reading anything by paul sonkin, seth klarman, joel greenblatt, david einhorn, etc etc, if you'd like a more modern day take on what i mean; they are the more recent investment "gurus" of our time (not to mention whitman, buffet, graham, etc, but they're sort of no brainers, and sometimes a bit more antiquated in their thinking)
i am the average joe, and i have successfully invested in "hedge fund" land without intermediaries for years. picking good businesses with track records of long-term value is something that does not change, no matter what derivative instruments, or esoteric markets, or other BS manage to root up over time. i think tricking people with these other subterfuges, and with "quick money" schemes, is what has kept the average joe @ bay from real investing for so long.
probably not the right convo for this comment thread, so i will finish with this last one, heh.
@fred below, you're absolutely right, and apologies for understating these facets of any VC's role, i think strategic advisory is exactly what makes VCs so valuable/necessary for so many companies
Mary Meeker told me about a book last week called something like "Investing: The Last Great Liberal Art". The title alone piqued my interest
"Security Analysis" - B. Graham, kind of an obvious one
"Value Investing: From Graham to Buffett" - B. Greenwald, great overview of analysis and thought process behind screening for value plays
"Distress Investing: Principles and Technique" - M. Whitman, a lot of good stuff in here
"The Dhandho Investor" - Monish Pabrai, entertaining book for investors and entrepreneurs (I just read this recently)
"Margin Of Safety" - S. Klarman, I only read through a friend's copy, some great stuff in here, but def not worth the price if you can't borrow a copy from someone
Buffet's BRK Letters - the first thing I read when I started value investing, some great stuff in these, you can find them going back to 1977 - http://www.berkshirehathaway.com/letters/letter...
"Value Investing: A Balanced Approach" - also M. Whitman, more entertaining, less analysis
"The Little Book That Beats the Market" - J. Greenblatt, nice/easy read on value investing, and why it makes sense
On my google reader, in my "Investing" folder:
www.barelkarsan.com - great insights/tips on value analysis; good ideas too; I'm a big fan
www.distressed-debt-investing.com - really nicely drawn case studies
www.greenbackd.com - good liquidation analysis scenarios
etc etc. I'm a VERY amateur value investor, with only 4 years of spare-time experience. I'd be happy to contribute at some point, if there is a wiki. If not, I'd be happy to start one, ha. I was thinking about doing this awhile ago, when I got a chance to get around to it.
It causes more unfounded speculation (than not) and is rarely tied to more than one or two pieces of factual data. The surge of articles about Facebook's worth since the Digital Sky investment is a huge benefit to Facebook - the general public *believe* that today Facebook's value is close to X. In the future X will be used (in some form) to build future valuations, whether justified or not.
When a public company is "valued" the full balance sheet is available. That is in stark contrast to private companies that yell about major investments but are essentially silent on cost and revenue. If a company is not ready to share everything, they are not ready for prime time.
I shared a few of my own thoughts on distractions versus development just a few days back (I'd link it but the iPhone is being stubborn about copy). The tricky portion of the problem is understanding what's important versus optional/uneeded
The same goes for Twitter.
$5-10bn.... what planet does Scoble live on?
And that sad thing is, somebody out there might be stupid enough to pay that kind of money (egged on by VCs and corporate advisers...no vested interest there, then....) and guess what happens...two years later most of the value gets written off when they realise they paid too much for it (AOL, Skype and just about every other dotcom/social media company).
To your latter point, I agree that pushing valuations is dangerous
Understatement of the year.
Great post, Fred.
But if someone likes to speculate, maybe this "High Tech Startup Valuation Estimator" is the answer http://www.caycon.com/valuation.php (I just tried what would google offer for "startup valuation calculator") - try to put Twitter into this and see what it will give :)
The truly successful, original VC funds did this for many many years, greatly reducing the risk of mania and greatly benefiting themselves, their portfolios and their LPs -- everyone simply went about the process of doing their work, not of dreamy silly speculation.
(Not sure, but doesn't Greylock mark their portfolios this way, Fred?)
You may say I'm a dreamer. But I'm not the only one...
prohibits a VC from valuing an investment LOWER? From discounting, or
calling assets distressed because of their high likelihood of failure?
That is, since such a huge percentage of all VC portfolio investments end up
being worth zero (despite today being valued at significant numbers right up
until they implode), FAS 157 mandates that VCs mark UP companies rather than
discount them down to vcalue of capital?
PS Happy birthday.
I can't wholly understand how many software services can be worth $XMM? Sure some companies have a wealth of customer data(eventually to be auctioned off); but others purely provide a service...Friendfeed.
;-)