I got into a Twitter debate with Marc Andreesen of Netscape (the inventor of the commercial web browser) and Andreesen Horowitz (the VC fund that financed Facebook, Twitter, Skype & Zynga) fame.
He spit out what was mostly common sense, yet still flew in the face of what is taught in school, most text books and by most B school teachers. Here’s how it went down…
1/A few common fallacies about valuation of public and private technology companies:
— Marc Andreessen (@pmarca) April 17, 2014
2/First, ask any MBA how to value tech companies, she’ll say “discounted cash flow, just like any other company”: http://t.co/xbvruoYB0Z
— Marc Andreessen (@pmarca) April 17, 2014
3/Problem: For new & rapidly growing tech co’s, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.
— Marc Andreessen (@pmarca) April 17, 2014
4/You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions.
— Marc Andreessen (@pmarca) April 17, 2014
5/Related to fact that tech co’s don’t have stable products like soup or brick companies; future cash flows will come from future products.
— Marc Andreessen (@pmarca) April 17, 2014
6/Instead, smart tech investor thinks about: A future product roadmap/opp’y, B bottoms-up market size & growth, C talent and skill of team.
— Marc Andreessen (@pmarca) April 17, 2014
7/Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen.
— Marc Andreessen (@pmarca) April 17, 2014
8/Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous.
— Marc Andreessen (@pmarca) April 17, 2014
9/Doesn’t mean cash flow doesn’t matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash.
— Marc Andreessen (@pmarca) April 17, 2014
10/Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow–lagging not leading indicator.
— Marc Andreessen (@pmarca) April 17, 2014
RT @pmarca: “common fallacies in valuation of private tech companies” media falsely assume preferred & common valuations are comparable. NOT
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca on false assumptions re: tech co. Valuations, startup that got a $8m premoney prefd would have gotten $2m val if done in common
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca re: bad ASSumptions in tech co. value, overpriced paper = poor proxy, even for debased fed reserve notes, ex #FB $19b buy WhatsApp
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca re: bad tech co. Valuation notions, economically #FB probably paid less than $10b for WhatsApp users, paid ~nothing for tech & co.
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
RT @pmarca: “For new & rapidly growing tech co’s, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.” True
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca a other big problem with DCF is its difficult to measure reinvestment vs actual expense early on & tends to mischaracterize both
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca pay $19b in Federal Reserve Notes (USD) for my startup and I’ll gladly walk you through it (devious chuckle in the background d) 🙂
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@pmarca I’m strong believer in spreadsheet investing, but you need reliable numbers input in models & those don’t exist in tech startups
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
RT @pmarca: ”current cashflow based on past, not future prods & profit often breeds complacence, bureaucracy” See http://t.co/7MF17HiyHR
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@ReggieMiddleton: “Don’t be surprised if shortly after April 15th #BTC prices start to level off or rise.”” What’s today’s date & BTC price?
— ReggieMiddleton (@ReggieMiddleton) April 17, 2014
@lex_looper well said.
U should check @ReggieMiddleton ‘s thoughts on critial education,
that makes people more than just employees,on RT
— Canary ina Democracy (@highqoo) April 15, 2014
15/Which goes right back to the start: Who are the people, what are the products, and how big is the market. That’s the formula.
— Marc Andreessen (@pmarca) April 17, 2014
via Zero Hedge http://ift.tt/1eEgHLT Reggie Middleton