@RiskReversal Great analysis & I understand your thinking..& I agree. But what about What’s App & Instagram valuations ?
— Sam Sasson (@SamSasson1) June 15, 2015
My response to Sam, please watch video:
— Dan Nathan (@RiskReversal) June 15, 2015
We now live in an investment landscape where unicorns are quite common. In 2012 when $FB paid $1 billion for Instagram most (including myself) thought it was nuts to pay that much for a company that had not registered a dollar in sales. In hindsight that was a brilliant move. Especially when you consider the trajectory of private tech valuations since then. That trajectory means the term unicorn is being thrown around so much that it may need to be changed.
The speed in which tech startups are valued at $1 billion (great Unicorn primer from TechCrunch from 2013- Welcome To The Unicorn Club) is truly mind boggling now. Some see the ease in which capital is being thrown at these start-ups as a sign of a coming Tech-pocalypse. That’s probably true and it will be fairly easy to look back at this period as one of excess. But obviously without a crystal ball we have no idea how silly things will get first nor when it will end.
If analysts want to throw around $35 billion valuations for Instagram, then have a ball. FB is already trading at 13.5x its expected $17 billion in 2015 sales at a whopping $230 billion market cap. Instagram is a great property, and while it might have been a steal at $1 billion, its worth is being measured in users, not revenue dollars with no significant revenues in the near future. But one could argue that within the FB ecosystem it is keeping users in related properties, possibly keeping them from other social networks (like Snapchat.) And that was the true genius of Zuckerberg’s vision.
So the benefits have been real with Instagram and the same rationale can be applied to WhatsApp, which came at a slightly higher price tag at $19 billion. Zuckerberg and crew made a fairly important and big bet over the last few years that mobile messaging is the glue to a lot of what they do (similar to the realization that Facebook was essentially a photo sharing service threatened for the first time by Instagram), and they have not been shy to use their available currency to protect their vision of social media’s near future.
But assigning financial value to this vision is a much more difficult thing to do for shareholders. At this point, even if WhatsApp’s purchase price was suddenly written down to half, it really doesn’t matter for investors. But in the near future these so called unicorns that have yet to secure an exit only to see a mark down in their value could signal the beginning of the end.
Last fall there seemed to be a chorus by some of the smartest and most successful tech VCs about cash burn at startups:
WSJ: Venture Capitalist Sounds Alarm on Startup Investing, Silicon Valley Has Taken on Too Much Risk, Gurley Says
Business Insider: New York’s No. 1 VC Has An Ominous Warning For The Tech Industry
So when I get asked about valuations of former unicorns, I have no idea. They’re worth what people are willing to pay for them at that moment. And that can change on a dime.
Matthew McConaughey’s character in The Wolf Of Wall Street hits the nail on the head, suggesting that not he, nor Warren or even Jimmy Buffet knows if a stock is going up, down, or sideways. That’s especially true of the hundreds of billions of dollars tied up private market values right now:
Its a Fugazi, Fugazi. It’s a wazy. It’s a woozie. It’s fairy dust.