Frothy Valuations, Bubbles and the Role of Venture Capital

I just read a very interesting piece on Snapchat’s next round.  The gist is that Snapchat, like so many companies in Silicon Valley, has the power to command stratospheric valuations and onerous terms from its eager investors.  The implication, of course, is that Snapchat isn’t worth whatever Silicon Valley says it is.

This is all completely true, narrowly speaking.  Snapchat, after all, hasn’t started making real money.  In fact, the platform is so young that it’s unclear what it really is.  Is Snapchat a communications platform?  Is it an entertainment product for tweens and listless 20 somethings?  Is it 2020’s dominant mobile news distribution platform?  Nobody knows.  Not even Paul Graham.  And because nobody knows what it is, or what it will become, Snapchat is pure potential.  It’s like a magical, ethereal substance that hasn’t taken a concrete, limited form.

Behind all the bull, and all the posturing, this is what venture investing is all about: Finding companies that are pure potential, companies bright enough to see and behold but too hard to scientifically measure.  Think about this for a minute:  If you can measure a company’s future precisely, how could it be special?  It couldn’t be.  It would be just another public company grinding away to beat analysts’ quarterly expectations.

So, when someone complains that no one knows what Snapchat is worth, go ahead, nod and smile.  Agree, if you must.  But in your private thoughts, know that venture investing requires a willingness to make big bets.

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