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Comment by lifeisstillgood | Hacker News Reader

But the statement "40 companies worth 1 bn+ each" implies that the clever people think each company is a really sellable at 1 bn

Otherwise should we change the definition of "valuation" ?

Edit: it is difficult not to sound snarky on this subject. If a respected investor's first reaction is to see beyond the individual companies and into the whole (and I agree tech startups will produce billions of value in The next five years) that's good - but it reflects a jargon problem perhaps - if the sophisticated investor sees a group of billion dollar valuations and thinks I will invest in them all and come out ahead it is a different thought process to the layman - that a valuation of a billion means it is worth that much.

While we should allow for a degree of sophistication investing in startups, it is still a stretch of jargon to make Humpty Dumpty proud

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To say that each of the 40 companies will be worth at least 1 billion is indeed unlikely.

But all that is required for the investors to be "rational" is for the total value of all 40 companies to exceed 40 billion.

So if two companies end up worth 25 billion each and the rest are worthless, that'll still have made it all worthwhile (assuming as an investor you diversified across all 40 companies).

In this scenario, we could rationally say that "each of the 40 companies had a 5% chance (2 out of 40) of being worth 25 billion dollars, which made them worth 25/20 = 1.25 billion dollars each".

But that is not what a common dictionary reading of "40 companies all with a valuation of over 1billion" means.

Yes, that is how a sophisticated investor (who has all 40 companies in their portfolio) will see it.

It is not what a layperson will read - and that is likely to be a problem - jargon should not conflict with natural interpretation, it should complement it.

It doesn't mean that they think someone would buy the company for $1B now. It means that they purchased some stock for a price equivalent to buying all of the stock for $1B, and that they believe that this is a good bet to make given their risk tolerance, the possible outcomes for the company, and the likelihood of those outcomes.

I think that's what I mean - I hear "company valued at 1 bn dollars" and I have to do this mental and linguistic gymnastics leap.

A list of 40 companies valued individually at 1 bn is a bubble, a portfolio of companies only a fraction of which will generate significant returns is a sensible investment spread.

But that is not what the words used mean when I look in a dictionary. Especially as few investors have all of these in their portfolio (if any).

The verbal gymnastics required to differentiate between what VC's seem to mean by valuation and the common-sense use of the term is one of the key things that makes this a bubble.

VC's are okay buying a share of a company as-if the company were worth a billion+ because they (rightly) believe that they can (frequently) turn around and exit in an IPO and get a significant return by convincing others that the company is worth a lot of money – never mind that the long-term financials and competitive advantages aren't there to back that valuation up.

As a (relatively) short-run money making scheme, many of the VC's have it spot-on, but at some point, if the markets can't sustain the aggregate valuations of all of these multi-billion dollar valuations, the IPO values will dry-up and someone's going to be left holding the bag. That is to say, the bubble will burst at some point if it's not carefully deflated.

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