I posted this in another thread but repeating here since more relevant to this story as well:
One of the things that goes unmentioned is that with the right feedback loops companies can ramp up quickly like never before is true. But those same loops are in place for the site to die down very quickly too.
In the valuation for such companies analysts often use a multiple times revenue (or users etc). This multiple is based on the old school model that it took time for companies to die, for competitors to emerge etc. Doubt that is true anymore. One bad move that pisses off the community and people will leave in droves too.
Social media sites have different network effects though. As the community gets larger they get watered down. They lose their individuality. Social networks on the other hand only increase in value as they get larger.
I have a harder time imagining people all of a sudden abandoning the place where they've stored all their photos with comments and tags, especially since they can't easily get them out.
Death is not zero. Death is a lack of growth. Large multiple are only justified under the assumption of a growing market. Stable/declining markets do not have a 25x multiple.
Not quite. Take MySpace again: if they can monetize well the traffic they have left, then they are worth quite a bit, despite the fact that their traffic is shrinking.
Growth in early stages is a good indicator of the potential to make money later. As growth stops, it's time to actually make money from the peak you attained. You are not dead at all then, you just can't delay any longer making actual revenue.
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I posted this in another thread but repeating here since more relevant to this story as well:
One of the things that goes unmentioned is that with the right feedback loops companies can ramp up quickly like never before is true. But those same loops are in place for the site to die down very quickly too.
In the valuation for such companies analysts often use a multiple times revenue (or users etc). This multiple is based on the old school model that it took time for companies to die, for competitors to emerge etc. Doubt that is true anymore. One bad move that pisses off the community and people will leave in droves too.
Digg anyone?
Social media sites have different network effects though. As the community gets larger they get watered down. They lose their individuality. Social networks on the other hand only increase in value as they get larger.
I have a harder time imagining people all of a sudden abandoning the place where they've stored all their photos with comments and tags, especially since they can't easily get them out.
Yeah, because MySpace is totally dead right? Oh wait, it's still the 51st largest site on the web. Takes a while to die online too, it seems.
Death is not zero. Death is a lack of growth. Large multiple are only justified under the assumption of a growing market. Stable/declining markets do not have a 25x multiple.
Not quite. Take MySpace again: if they can monetize well the traffic they have left, then they are worth quite a bit, despite the fact that their traffic is shrinking.
Growth in early stages is a good indicator of the potential to make money later. As growth stops, it's time to actually make money from the peak you attained. You are not dead at all then, you just can't delay any longer making actual revenue.
In finance-speak, industries with rapid change that are difficult to forecast should be valued at very high discount rates.
This requires even more extraordinary growth rates to justify a given valuation, since future cash flows become worth that much less.