In current times and the new tech age that we are in guys like Warren Buffet and the other old guards of the main stream business economy find themselves at odds with the valuations that the new age tech companies are getting (talks happen in billions of dollars in some cases). They have given out their apprehensions and astonishment through guarded statements across the media, but despite being from a technology space myself, I don’t see this raising of eyebrows completely unfounded.
Some typical characteristics of these companies which are considered juicy targets for investors can be listed out as follows – they are small in size (even from a tech company perspective), they are typically founded by a team of two or three people who come from technology backgrounds and experience or are college drop outs from renowned universities (this seems to have become a trend of sorts). They would typically have a single product and the company would have gone through the process of incubation, angel investments and some other formats (there are far too many these days) to get their initial funding and investments. But more importantly, their product or service would either be free to use or work on a very minimal subscription model. The product would fit into the category of web or mobile applications for sure (no body is looking at anything else…aren’t we) and it would have created some initial flutter and subsequently gaining momentum on it adoption and use. But the product would be cloud based and there are a handful of people running the show.
Yet the product would be lapped up by a digital company or a social media behemoth who would put in a huge sum of cash and stock to leave no options for the founders to reconsider or look elsewhere. So one has to think what is it that the buying company saw… there is nothing tangible, no plants, no machinery, no huge pool of talent. Well… it’s the value of the consumers that are using that product, it’s the rate at which that product is acquiring new customers and the product’s ability to stay in use. All of this points to one thing only… the consumers who are present there as a username and password and nothing more. If it’s a free product they are not even generating revenue but only adding to the infrastructure cost, considering you have to expand resources to manage the load.
So, in current digital day and age, it’s the intangibles that are valued more than the intangibles.
Stay connected, will keep evolving this further, hope you had a good read.