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« Tinybop and Crafting a Brand | Main | The Economics of a Small VC Fund »

What Something Isn't Worth

Dollar Tree.

Smucker's.

Uber.

If the Bloomberg story is right, all three of these companies are now worth about $10 billion.  I don't know about you, but I'm pretty sure I'd rather own Uber than all of the crappy Dollar Tree stores or a peanut butter company.

Plus, I'm more of a almond butter guy anyway.

I don't totally understand why people get obsessed with valuations--especially given that the complete lack of context around a deal.  There are so many factors that play into valuation that the big headline number is completely meaningless.

First off, if I buy one billionth of your company for a dollar, does that mean your company is worth a billion dollars?  Technically, that's exactly what it means, if you price your company's shares on the value of the last trade.  That doesn't seem reasonable, though, does it.  When does that become meaningful?  At 1%?  5%?  I'm not totally sure. 

What about if you think about how much money the person writing the check has?  When Apple bought beats for less than 2% of its cash, do you think they were really paying that much attention to the price?  Think about what you could buy for 2% of the cash in your bank account.  

If the investment in Uber was $500 million put in by a middle east oil family who has $50 billion in assets, is 1% even meaningful for them?

And what return are they seeking?  If I'm looking for a 10% annual return, what I could be saying is that Uber is going to go public in three years at a valuation of about $14 billion.  That doesn't seem particularly unreasonable.  If I was looking for a 30% annual return, and I invest. I'm saying that Uber is going to be worth $22 billion in three years.  That's obviously a bigger future.  

We don't know the terms of this deal.  If the company is getting preferred shares, they're also the first money out--so they don't need it to be worth $10 billion to get their return.  Maybe there's a dividend that starts kicking in.  You don't know.

Plus, there's the question of why someone is making that investment.  Do they just want to be an investor in Uber because they think it's cool.  Maybe it's General Motors, and they want all of the Uber drivers to use Cadillacs, in which case, they might recoup their investment back on increased sales.  

Or maybe it's a mistake... and a bad idea.

At the end of the day, who really cares?  I mean, what does it matter?

Does the valuation of one company mean we're in a bubble?  No.  I mean, it's got real revenues and they're growing rapidly.  Is it likely to completely implode and be worth nothing?  Doubtful.

It would be great if valuation made us debate whether Uber is just a cab company or the future of all transportation.  That's an intelligent conversation.  

Randomly opining on paper numbers... that doesn't really do much for anyone.

 

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