I was reading about what looks to be a 10B valuation for Airbnb, a company that I heard about for the first time. Helping people find spare rooms and couches to sleep on, their solution seems to work just like you would book a hotel room. The key difference being of course that Airbnb does not own any of the real estate being offered; it just brings together seekers and providers of rooms for hire.
Yet at 10B, it is being valued higher than the likes of Wyndham and Hyatt. Simply amazing. After all it is just a website, albeit a really well-designed one.
There has obviously been a long list of such sky-high valuations. WhatsApp is a great example.
What seems to be driving the feeding frenzy? In this era of sub-zero interest rates, there is obviously the case to be made of capital desperately seeking higher returns. But that does not tell the whole story. And while attracting eye balls (Groundhog Day, anyone?) and bringing in young people are great, they don’t really explain what looks like a valuation run amok.
Instead a common thread appears to be that they all hold the potential of delivering significant social value.
Take Airbnb for instance. In today’s economy, with lots of people being unemployed or under employed and struggling to pay their bills, a service that lets them take what they already own namely their homes and monetize these assets is clearly filling a huge social void.
So if you have a really innovative tech idea (being tech based just seems to make it easier to implement it without a lot of fuss) that (a) no one has thought of before and (b) is accompanied by a compelling social construct, it seems that high valuation will follow.
At the risk of gross oversimplification, perhaps one could say that valuation = financial value + social value. With the latter vastly exceeding the former.
If you take any of the recent tech startups – WhatsApp (need to communicate cheaply and globally with loved ones), Instagram (sharing pictures and videos for free with family and friends), the social value is undeniable. Google is arguably the undisputed king of this space; its services have clearly transformed the lives of ordinary folks. The social value that Google has delivered is staggering, to say the least.
A related question is about what are the barriers to entry. What stops a whole bunch of wannabes from usurping the leader’s place? I guess the answer lies in the first mover advantage coupled with superb design and execution and compelling marketing and branding.
How does one compute social value? That is an entire subject by itself, something I am not competent to address.
However the interesting thing is that the market seems to have set a lot of stock in companies that are out to improve the lot of fellow human beings and do it in a smart, business-oriented way.
Evidently humanity pays big dividends!