The Art of Tweeting Tech Bubbles

These “valuation” numbers ($4 billion for Snapchat, $3.8 billion for Pinterest) are not accurate. Companies calculate these numbers by multiplying the per-share price of their *most senior tranche* of preferred stock, times the total number of shares outstanding. But preferred stock is more valuable than common stock. (Also, more valuable than less-senior preferred stock.) The less-senior share classes simply aren’t worth as much.

No investor has taken an action that suggests they value Snapchat at $4 billion. What has happened is that some (unnamed) investors are said to be mulling an as-yet-unconsummated purchase of preferred stock at terms so that if the company were later purchased for more than $4 billion, it would become worth it for those investors to convert their shares to common stock to share in the upside.

That doesn’t mean anybody thinks Snapchat is worth $4 billion today. Privately-held companies publish these inflated numbers to get press attention (and to attract engineering talent), but the Times ought to be better than to accept them credulously. At the same time as Snapchat is telling the press it’s worth $4 billion, the company is telling the IRS, via a 409(a) valuation, that it is worth as little as possible — most likely a valuation of less than $300 million. That number may not be particularly reliable either, as companies are incentivized to set them as low as possible to reduce their employees’ tax burden. But you can’t have it both ways.

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Another Bubble?
The venture industry has always been about foisting big ideas and often big scams onto the investment bankers and pension funds and then ultimately, at IPO dumps it onto Wall Street to “the little old ladies” and the day traders and other poor saps who lose their money to investment companies pushing mutual funds with fees. The main street investors are naive as to think they can make money in the stock market. The money is gone by the time the little people *can* get in. And the VCs and their “friends” get out before the thing tanks. The difference now is that some SV VCs got the idea in the mid-1990s that if you show no revenue, then there is no way to measure the success of the company. Now you are selling speculation which I believe is against the law but no one ever talks about it until they get caught. The true measure of a company is the revenue that it can and does bring in. Get a true valuation and not speculation. Put your support behind real companies and not apps and toys that are springing up like so many colorful tulips.

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