No one doubts that Amazon's customers love them and that Amazon is growing revenue at an incredible rate.
The question is when and if will this revenue growth translate into increasing margins? Revenue growth without profit has very little value (see Groupon) and the nature of their current businesses make it difficult to establish a competitive position where you can increase margins by charging a premium versus your competitors.
For reference - Wal-Mart has operating margins of 6x those of Amazon, has 8x as much revenue as Amazon yet is only valued at 2x that of Amazon. It would take Amazon almost 8 years of nearly 30% growth in revenue and profit margin to match Wal-Mart, a company which trades at a PE in the low teens.
Zynga is structured such that Mark Pincus has a majority of the voting shares (50.15% to be exact). This means he cannot be fired nor can any takeover occur without his consent.
HN is focusing far too much on the employee stock options. Once any company gets into a "dire financial situation", the options are already completely worthless.
The worse alternative would have been to not restructure and just shut down the company leaving everyone without stock options, jobs and probably without severance either.
How exactly does screwing the employees out of stock options help the company not shut down? Outstanding stock options have zero effect on a company's profitability/burn rate.
In any event, OnLive might as well just shut down anyway. It has completely poisoned its name and nobody worth a damn would go work there after this stunt. And it's far too ambitious a project to have any chance to thrive with B-level engineering talent working on it.
LPs commit money to new funds before the first investment is ever made. What type of information does the seller (VC) have that the buyer (LP) does not?
Not totally correct. VC firms often have many concurrent funds. So while they're investing out of fund 1, they're raising for fund 2.
And they're using Fund 1 early returns (often paper returns) to make the case for why the LP should invest in Fund 2.
Felix Salmon summed up the phenomena well here:
"In reality, reported returns peak very early on, in month 16 — which just happens to coincide with the point at which the GPs tend to start going out on sales calls, trying to raise their next fund. Of course, at month 16, none of the returns are realized: they’re driven instead by increases in portfolio-company valuations, and those valuations are set by the GPs themselves."
One of the challenges is that the buyer (LP) is usually managing billions of dollars (e.g. a pension fund or large endowment), and venture is only a tiny fraction (a couple of percent) of his total asset base. It's difficult for those LPs to have expertise in an asset class that is such a small portion of the portfolio. The obvious objective criteria is past performance but understanding the potential of a team requires a deeper understanding of what makes firms successful.
The studies have been done, and there is a much stronger correlation between past performance and future performance in private equity than in the public markets. In the public markets for active fund managers, there is almost no correlation. For vc funds, there is a decent correlation. My hypothesis is that the reason for the difference is information inefficiency. In the public markets, everyone is oerating with the same information, so it's hard to create a sustained advantage. In the private markets, one fund may have access to information (seeing companies no one else sees, knowing customer or acquirers, etc). Success often begets success because funds with successes get positive press which leads more entrepreneurs to go to them.
> The studies have been done, and there is a much stronger correlation between past performance and future performance in private equity than in the public markets.
I can't find links to the papers themselves, but the research was published by Lerner and Stahlman at HBS. They looked at firms that had top quartile venture funds and then looked to see what percentage of them remained in the top quartile in the subsequent fund. For public market managers, the measure was the same but on a year over year basis rather than fund over fund.
My interpretation is that OP is not arguing that BigCo's aren't currently making money.
Instead he's saying that the amount of resources being pumped into the ecosystem (financing, incubators, startups) is significantly larger than what is required.
That the market as a whole won't grow fast enough to satisfy the needs of all the investment capital being deployed.
I think the OP misses that it's like this not only in the tech sector, but many others. With the fed more than doubling the monetary base in the last couple years, that new money has to go somewhere... It goes into blowing bubbles.
Technically the Fed hasn't actually doubled the money in circulation, it has mostly just printed dollars to prop up bad assets. So the bubble there already inflated, and now the Fed is just refusing to let it pop and deflate (which it should).
Hmm. Maybe if the economy inflates at differing rates it's not just because of monetary policy?
It's hard to reason about inflation because different goods do tend to inflate at differing rates. Perhaps we should measure the change in inflationary rates before and after some specific event.
First they say that 56% of companies started in 2004 were still in business in 2010. Then they reference the VC rule of thumb that 4 of 5 companies will flounder and dismiss VC companies as being "riskier". But then for their argument on making "real money" as an entrepreneur they reference the same VC companies that they already dismissed as being riskier and having a failure rate far higher than the 44% the article led off with.
> First they say that 56% of companies started in 2004 were still in business in 2010. Then they reference the VC rule of thumb that 4 of 5 companies will flounder and dismiss VC companies as being "riskier".
The fact that having VCs lowers your chance of success seems lost on them.
It is perhaps due to a conflict of interest: Harvard is invested in several VC funds.
Having lived in Silicon Valley, Seattle and Austin, my estimation is that the amount of money required for a family to live the same lifestyle (owning similar level home, access to good schools, reasonable commute, etc.) in Austin as in Silicon Valley / SF is at least 2x. I'd estimate the differential to be significantly less for someone single or DINK.
To simplify - Spotify can never be profitable because they do not create or own the product they are selling. Also, the product they are selling is not a commodity so they cannot source alternate suppliers.
The question is when and if will this revenue growth translate into increasing margins? Revenue growth without profit has very little value (see Groupon) and the nature of their current businesses make it difficult to establish a competitive position where you can increase margins by charging a premium versus your competitors.
For reference - Wal-Mart has operating margins of 6x those of Amazon, has 8x as much revenue as Amazon yet is only valued at 2x that of Amazon. It would take Amazon almost 8 years of nearly 30% growth in revenue and profit margin to match Wal-Mart, a company which trades at a PE in the low teens.