A VC - Latest Comments in Is Speculating On What Private Companies Are Worth A Good Idea?

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

ShanaC — Tue, 08 Sep 2009 19:26:47 -0000

Thanks so guys for putting together this list. Joy of being Average and young is knowing you should at least try to get people to answer questions.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

paramendra — Thu, 03 Sep 2009 15:55:56 -0000

Scoble is on the mark, though, I happen to think.

;-)

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

needcaffeine — Tue, 01 Sep 2009 10:55:35 -0000

For the most part I don't see much point on guessing the worth of a private company; other than for private investment. It tends to create unnecessary criticism, which (if the company is concerned/aware about it's public image) can create internal havoc. Plus for those public companies which are competing in the same market; they're under greater scrutiny from their shareholders.

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.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Eric R. Voth — Tue, 01 Sep 2009 10:52:11 -0000

Excellent points. Many small companies will never go public, but establishing a company's value will help when it's time to sell your privately owned company.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Tue, 01 Sep 2009 06:21:03 -0000

Yup. We are constantly being forced by our auditors to write up investments

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Steve Kane — Tue, 01 Sep 2009 06:17:08 -0000

No doubt you know this stuff far far better than I do but FAS 157 really
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?

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Tue, 01 Sep 2009 05:48:05 -0000

Yeah, but you can buy beer with a credit card these days

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Tue, 01 Sep 2009 05:42:02 -0000

Nobody does that anymore. The accountants don't allow it. Now with fas 157 you can't even use last round. You need to guess what the company would sell for at that moment, either to a buyer or in an IPO and use that value. Its totally stupid and counter productive

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Tue, 01 Sep 2009 05:01:04 -0000

Great comment and great list. Thanks!!

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Alex Hammer — Mon, 31 Aug 2009 11:29:46 -0000

I think that the general conclusions about the value of sites (e.g. reasons for value, e.g. Scoble's fascinating post) may be more valuable than the specific figures, even ranges of figures, offered.

PS Happy birthday.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

MikePLewis — Mon, 31 Aug 2009 11:26:41 -0000

I saw this happen at AOL in 2000 and 2001. Everyone had the stock ticket up on their desktop and watched it all day and kept recalculating how much money they were making with their stock. I was new to the company and didn't have much stock (nor a good strike price) so i didn't really care. But a ton - almost the majority of the people i worked with were paper millionaires. This concept caused some paralysis as the focus wasn't on how to win in the marketplace and how to crush the competition but how to make more money. It was definitely a distraction.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

bfeld — Mon, 31 Aug 2009 10:30:52 -0000

A wise man one told me "it's not real money until you can buy beer with it."

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

kirklove — Mon, 31 Aug 2009 10:28:44 -0000

I absolutely love that you just dropped an "Oh Snap" +5

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Steve Kane — Mon, 31 Aug 2009 10:15:01 -0000

A lot of this valuation hysteria would simply vanish if VCs went back to the original old school method of internal accounting -- valuing their portfolio companies simply, as the amount of cash raised. And not as whatever implied valuation is created by the funding, which is literally never correct.

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...

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

azeem — Mon, 31 Aug 2009 09:30:53 -0000

I could go on with my favorites, but I'll throw a few complete randoms into the ring (by no means complete or even systematically chosen, just the few that come to top of mind):

"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.berkshirehathawa...
"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-investi... - 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.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Pascal-Emmanuel Gobry — Mon, 31 Aug 2009 07:39:12 -0000

I like the Nassim Taleb advice to put it 90% in TIPS and 10% in highly speculative bets. And I'd add, if you're HNW, those bets should be angel rounds.

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?

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

valto — Mon, 31 Aug 2009 07:34:03 -0000

I agree, general public speculating about the valuations are useless. Valuations are needed for real transactions only and are meaningful for the parties involved only.

But if someone likes to speculate, maybe this "High Tech Startup Valuation Estimator" is the answer http://www.caycon.com/valua... (I just tried what would google offer for "startup valuation calculator") - try to put Twitter into this and see what it will give :)

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Pascal-Emmanuel Gobry — Mon, 31 Aug 2009 07:28:47 -0000

"This is not the first time that someone has used a blog post to speculate on what a private company is worth."

Understatement of the year.

Great post, Fred.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Mon, 31 Aug 2009 05:27:02 -0000

Not that I know of. These people do that for audience, the same reason the news media focuses on michael jackson not healthcare reform

To your latter point, I agree that pushing valuations is dangerous

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Mon, 31 Aug 2009 05:26:02 -0000

Yes. Exactly

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

fredwilson — Mon, 31 Aug 2009 05:23:03 -0000

Thanks

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Dominic — Mon, 31 Aug 2009 03:55:29 -0000

Do VCs get their mates in the media to puff up valuations to stupid levels and then give them a kick back when they cash in?

$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).

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Marc Vermut — Mon, 31 Aug 2009 00:39:18 -0000

Quick question, but aren't you (also) looking at valuation from a forward perspective of its ability, given the round and potential follow-on dilution, to bring appropriate return given a potential future exit value?

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Brian Hamlett — Sun, 30 Aug 2009 23:44:09 -0000

I would have to agree! The problem we seem to have is identifying the "maturity point" of these young firms. We see Facebook with 200 million users and think it's all grown up. The problem is, it's only producing revenue off advertising. Name me a whole industry that is going belly-up that was always supported by advertising? Their business model isn't complete and sustainable... yet. So why value them. What we're valuing is the potential "audience" they have IF they can figure out how to monetize it... and not chase it away when they start "selling" to it!

The same goes for Twitter.

Re: Is Speculating On What Private Companies Are Worth A Good Idea?

Elie Seidman — Sun, 30 Aug 2009 21:35:03 -0000

Start with "Extraordinary Popular Delusions & the Madness of Crowds". Also, Snowball - the new book about Warren Buffet.