Because the world has changed.
And it started with Facebook. And then continued with Airbnb, Uber, Alibaba, Tesla, and more.
Before Facebook, investors basically believed a $100 billion+ valuation for an internet / tech company was sort of a “once in a generation” experience. Intel for semiconductors. Microsoft for PC software. Google for the Internet.
Google was viewed as the >one< big winner from “The Internet”. A once-in-a-lifetime type investment — that you might make once in your lifetime. If you were extremely good and lucky.
Look back at The Social Network. “A Billion” seemed like a lot in 2010.
Facebook did almost sell, apparently, to Yahoo! for about one billion.
But then the Facebook IPO changed some investors’ perspective on everything … especially for folks like Founders Fund that had invested in Facebook early.
Not overnight. But once Mobile revenue kicked in at Facebook, everyone realized we had another Google on our hands.
Now, Facebook is worth over $400 billion.
And so some investors, some of the ones really going for it, started to come up with a thesis that every year a $100b+ internet/tech company might be created. Iconiq, Founders Fund, Formation8, and other “new age” funds had a “crazy” thesis at least one $100b+ start-up would be born every year, or at least, once per fund.
And if that was true — investing at $1b or $1.8b would be “cheap”. If you picked right.
Uber and Airbnb took off and approached $100b in valuations in the private markets at least (Founders’ Fund made an amazing investment in Airbnb, no coincidence here). Everyone that thought Airbnb was crazy expensive when it raised at $1b … realized it might be cheap at $10b if it could be worth $100b+. Stripe and Slack showed insane growth could happen in B2B, too. Netflix and Amazon went into massive acceleration mode, especially from a market-cap perspective. AWS became a $100b+ business on its own.
Unicorns went from rare, to common place. There are hundreds of start-ups valued at $1b+ today.
This is radically different from not just the “old days” (Intel was worth < $100m when it IPO’d. Adobe raised less than $10m in its IPO).
It’s even radically different from 2011. Look at the market cap tear Amazon went on since then, to a $400b+ market cap:
The internet did change everything, once again, around 2013. Enough investors began to believe in regular, almost predictable, creation of $100b+ market cap start-ups.
So let’s fast-forward to today and Quora.
Is Quora worth $1.8 billion today, with almost no material revenue? Maybe not.
But that’s not the question the new investors are asking. They are asking: does it have a shot at being worth $100 billion+ some day?
Imagine you have a $1b fund/portfolio, carved into 10 $100m checks. You do 10 investments at a $1.8 billion valuation, like Quora, and buy say 5% of each company. And …
- One of these investments ends up IPO’ing and is worth $100b. This returns 5x the fund ($5b / $1b fund). And 20x if it’s really the next Facebook ($400b).
- One of these investments IPO’s and is worth $6b. This returns $200m in profits to the fund. Or maybe a lot more if it’s the next WhatsApp (sold for $20b).
- Two of these investments end up being sold, and the investors get a little more than their money back. Together, they return $100m to the fund.
- Three IPO or are sold, but at less than $1.8b. So the investors lose some money. No material returns.
- Three basically fail. The investors lose most, or maybe even, all their money. Say $300m is lost here (3 $100m bets).
This fund, which does 10 investments at $1.8b valuation per investment, yields $5.3b in gross gains (and $300m in losses) on a $1b fund. Or 5x overall.
>> So the bet is that Quora is one of the 10 companies this year that has a shot at being worth $100b. <<
If that’s right.
It’s a good investment.
Even if today, $1.8b doesn’t totally make sense.