Color Will Be The Pin That Bursts The Startup Bubble
7 comments
No, the burst will come after the Facebook IPO when they can't find a way to make the $5,000 per user per year that their stock valuation will suggest it can earn. When Facebook stock crashes and it's plastered all over the news, that'll be the start of the bust. We're a long way from that.
Where are you getting $5k/user/year?
I just pulled it out of the air for dramatic purposes.
Yeah, but your drama is way off.
They claim 500MM active users. Assume that's a total lie, and it's 50MM. Assume their valuation is 100 billion (twice the Goldman round).
Let's also assume that they hit a P/E ratio of, oh, 10. (Google's at 22, Apple 19, Yahoo 18, so 10 is really low.)
So to hit a 100b valuation, they'd need to earn 10b annually, or $200/user.
$200/user is on the high end, but reasonable, at least as far as U.S. users are concerned.
(For what it's worth: Twitter would have been a good example, I think.)
They claim 500MM active users. Assume that's a total lie, and it's 50MM. Assume their valuation is 100 billion (twice the Goldman round).
Let's also assume that they hit a P/E ratio of, oh, 10. (Google's at 22, Apple 19, Yahoo 18, so 10 is really low.)
So to hit a 100b valuation, they'd need to earn 10b annually, or $200/user.
$200/user is on the high end, but reasonable, at least as far as U.S. users are concerned.
(For what it's worth: Twitter would have been a good example, I think.)
Facebook has 500 Million active users, where active is defined as logging in at least once a month.
i see ~$83b valuation, and ~500m active users, putting it at around $166/user
you really think there are 500m active users? My BS detector goes off when I hear that number. Unless they have a couple billion total users...
Edit: just to be clear, that's not a rhetorical question. Anyone know how they define "active"?
Edit: just to be clear, that's not a rhetorical question. Anyone know how they define "active"?
Is a valuation actually given with the expectation that they'll make that amount of money each year?
The value of a stock is the total future profit of a company priced in today's dollars.
The value of a stock is whatever people are willing to pay for it
So if I'm understanding correctly, if they only make $1 per user per year, and do that for the next 166 years (not adjusting for inflation,) then they're just as well off?
Except that it is more formally the negative of the expected future loss of the company as a present value; it takes into account the probability of a given income in a given year, not the best case scenario.
I would say the probability Facebook is making much in PV terms 166 years in the future is very low. Facebook has such a high value now because they have lock-in for their users; a user has a lot of Facebook friends and so can't make a unilateral decision to leave the platform and still have access to the value having their friends on the platform provides - and so that limits the threat to Facebook right now from competitors. However, there are still significant threats to Facebook longer term, and some of those threats could open Facebook up to threats from other firms with smaller costs that Facebook can't easily transition to compete with profitably long term.
Facebook therefore has very good prospects short term, but this position is still relatively precarious and the probability of maintaining as many users and as much revenue decreases progressively into the future - the probability of high revenues continuing after 50 years or even 20 is so low that it is not worth taking it into account when working out the intrinsic value of a share, and profits in the near future make up a much greater proportion of the total 'area under the integral' (i.e. future profits).
Formally: v = -E(L_{total}) = integral_0^infinity (integral_(-infinity)^infinity (l * P(L(t)=l)) dl) dt where v is the intrinsic value of a stock, E(L_{total}) is the expected total loss of a stock in Present Value terms, and l and t are bound variables used for time and rate of loss, L(t) is a random variable representing rate of loss at time t, and P(L(t)=l) represents the probability that the rate of loss at time t is l.
I would say the probability Facebook is making much in PV terms 166 years in the future is very low. Facebook has such a high value now because they have lock-in for their users; a user has a lot of Facebook friends and so can't make a unilateral decision to leave the platform and still have access to the value having their friends on the platform provides - and so that limits the threat to Facebook right now from competitors. However, there are still significant threats to Facebook longer term, and some of those threats could open Facebook up to threats from other firms with smaller costs that Facebook can't easily transition to compete with profitably long term.
Facebook therefore has very good prospects short term, but this position is still relatively precarious and the probability of maintaining as many users and as much revenue decreases progressively into the future - the probability of high revenues continuing after 50 years or even 20 is so low that it is not worth taking it into account when working out the intrinsic value of a share, and profits in the near future make up a much greater proportion of the total 'area under the integral' (i.e. future profits).
Formally: v = -E(L_{total}) = integral_0^infinity (integral_(-infinity)^infinity (l * P(L(t)=l)) dl) dt where v is the intrinsic value of a stock, E(L_{total}) is the expected total loss of a stock in Present Value terms, and l and t are bound variables used for time and rate of loss, L(t) is a random variable representing rate of loss at time t, and P(L(t)=l) represents the probability that the rate of loss at time t is l.
How come everyone misses the fact that the app doesn't make the company. I think color actually redefines "social". If these guys are successful in executing their vision, their current valuation will seem a no-brainer. I seriously don't understand all the negativity and backlash around their launch.
This is coming from a guy that couldn't get their app to work. Every time I try to take my picture, the app crashes. But I don't think that really matters.
Isn't this the same community that proclaims, if you are not embarrassed with your initial product release, then you haven't released it early enough. ?
This is coming from a guy that couldn't get their app to work. Every time I try to take my picture, the app crashes. But I don't think that really matters.
Isn't this the same community that proclaims, if you are not embarrassed with your initial product release, then you haven't released it early enough. ?
All of the startup mantras hacker news recites go out the window if you raise lots of capital, apparently.
And they should. There's a big difference between two guys renting a house and living of their savings accounts pre-launch and 41 million dollars and 27 employees pre-launch.
ya, it applies to a team of founders living off their savings who need to push their product out and get quick feedback from initial users to set their product/service in the right direction.
A team of 20+ people with $41 million in the bank has the luxury of not having to worry about missing a rent check and they have the resources to do thorough QA testing and run a beta program to get initial feedback (maybe color ran a beta program I'm not sure).
Color definitely has the resources to run a 6 month beta program to get feedback and test their app....a founding team of two living off their savings may not have the time or money to do this.
A team of 20+ people with $41 million in the bank has the luxury of not having to worry about missing a rent check and they have the resources to do thorough QA testing and run a beta program to get initial feedback (maybe color ran a beta program I'm not sure).
Color definitely has the resources to run a 6 month beta program to get feedback and test their app....a founding team of two living off their savings may not have the time or money to do this.
To be fair, the funding probably came sometime after the app development started.
I tried it as well. I can see the novelty of it -- watch in real-time what people are doing around you. It definitely has a voyeuristic aspect to it.
I think all that money could also be used to consolidate the market a bit -- do we really need 30+ photos apps?
PS - I'm working on a photo app. :-)
I tried it as well. I can see the novelty of it -- watch in real-time what people are doing around you. It definitely has a voyeuristic aspect to it.
I think all that money could also be used to consolidate the market a bit -- do we really need 30+ photos apps?
PS - I'm working on a photo app. :-)
Facebook valuation is only $20/user each year (profit).
Simple Valuation Breakdown: Take $80 billion and divide it by an EBITDA multiple of 10 = $8 billion. Divide that by 400m users, for $20 profit/user each year.
EDIT: EBITDA: Earning before income tax depreciation and amortization.
Simple Valuation Breakdown: Take $80 billion and divide it by an EBITDA multiple of 10 = $8 billion. Divide that by 400m users, for $20 profit/user each year.
EDIT: EBITDA: Earning before income tax depreciation and amortization.
i doubt Color will burst the bubble, but it sure seems to be a strong indicator that there is a bubble of some sort...
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Assuming the premise of your title is correct, that the bubble bursts.. what would this mean?
Funding dries up because all these ideas cant make money. Valuations plummet - nobody hires and we have bust 2.0.
except it is different because this time around we have a glut of seasoned developers that can build a hell of a lot of stuff.
So I cant see this burst being the same -- but I see a lot of stuff being built for no / little funding.
Funding dries up because all these ideas cant make money. Valuations plummet - nobody hires and we have bust 2.0.
except it is different because this time around we have a glut of seasoned developers that can build a hell of a lot of stuff.
So I cant see this burst being the same -- but I see a lot of stuff being built for no / little funding.
-Friend showed me app on iPhone
-Noticed similarities between Color and Path, does not provide any usefulness to me
-Realized I can now creep on people nearby without having to ask their name and friending them on facebook
-Excitement grew with media frenzy over Color and a few friends downloading app
-Downloaded app
-Constantly crashed when uploading photo
-App lost its novelty
-App deleted from phone
-Startup that created app has 41MM funding