In this podcast we explain the differences between investor valuations and public/private market valuations. Listen to learn more!
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Transcript if you prefer to read
Hi, guys! Welcome to episode 4 of the AskAlex podcast. Today we have a question from Jonathan who asks “Is Kylie Jenner’s cosmetic company really worth $400 million?”
Wow, that is pretty amazing but if you actually look at the numbers that Kylie’s doing, she’s not doing too badly. Let me pull up something from the news here. So, her company is called Kylie Cosmetics and she’s done $420 million in sales in only 18 months. And they’re projecting to do revenue of 1 billion of sales by 2022. Her most successful launch to date was a 2016 holiday collection release in 21st of November which made the company nearly $19 million that day alone. So, there are a couple of reports around that the company may be worth of $400 million but I haven’t quite seen that confirmed. But look, it doesn’t matter.
Best way to kinda think about this is explained valuations in 3 buckets. You have investor valuations; you have private market valuations and public market valuations. So, let’s do the first one; investor valuations. So let’s say you have an idea and you’re a Standford grad in Computer Science, you’re like
“We’re building this cool little social local mobile app.”
So, you say “I wanna raise $1 million.”
Okay, so what’s your valuation? Say, “Well, we’re willing to be deluded 20-25%. So, say $4 million.”
Your company isn’t actually worth 4 million. Just the investors saying they’re willing to invest at that valuation.
That investment valuation number thus become more important at the later stage of the company. Obviously, because the investors are gonna have liquidation preferences. They wanna make sure that the value of the company is worth at least more than the liquidation preferences. But it’s basically bullshit, investors valuations don’t mean anything.
Now, the second one is private market valuation. How do this happen? Well, let’s say you build that little company that we talked about before and a private equity company or a competitor is willing to purchase you for it and they say “We will buy you for $400 million.” So what, thank you very much and you sell. That valuation is real cause someone bought you for $400 million.
Now the 3rd bucket are public market valuations and that’s when you IPO you go on the stock exchange like the; NYSE, NASDAQ. After you IPO, well your investment bank will set up a price basically go on the public market. So, Google, Facebook you can actually see what the market capitalization is of one of those companies and that is the public market valuation.
So, let’s come back to investor valuations. So, Mashable’s last valuation by investors was $250 million and you know what, couple weeks back they just sold for $50 million. So, who was right? The investor or the acquirer? Well, clearly the acquirer. So, the investors thought its worth $250 million in terms of investing in it but the acquirer is only thinking it’s worth $50 million. Now, let’s look at Theranos, investors threw masses amount of money into that company and valued it at billions and you know what? Total bullshit. Nothing there. Thank you very much.
Ultimately startups are just outsourced innovation for corporates. So, it’s worth what an acquirer will pay for it. You know? Is jet really worth $3.3 billion? Who cares what investors think? Walmart paid 3.3 billion for it. So, it’s worth that to them. It just so happened that Walmart has got real issues with Amazon and doesn’t know what to do and how to compete with them. That was a $3.3 billion option value worth to them. Same goes for Whatsapp, for Instagram, for Youtube, you know acquired by Facebook or Google respectively. Whatsapp and Instagram were a response to Facebook not having a mobile strategy. Google obviously saw that video was going to be huge for them so they bought up Youtube.
So, coming back to the original question “Is Kylie Jenner’s cosmetic company really worth $400 million?” Hmm. No. I don’t wanna talk about the fundamentals of it, well I probably will, but that is again like an investor valuation until someone actually puts down an offer for it and buys the company. It’s actually not worth anything. It’s just speculation. Is it worth $400 million? Possibly actually, I mean she’s doing good bloody numbers, I mean seriously, Kylie is a machine that is incredible. I mean, I’ve got a lot of respect, I mean I don’t know if she’s actually executing on it but her marketing game is obviously fantastic.
So, thanks for that interesting question. A little bit of a nebulous answer but really the fundamental difference is companies are only worth what someone’s actually willing to buy it for otherwise it’s just a speculation from investors. Okay, guys. That was great. If you have a question you like to ask yourself head over to alexanderjarvis.com/askalex and you can ask your own question. Thanks, guys. Thanks for spending time with me, I really appreciate it.
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