The Most Valuable Start-Ups - April 01, 2016

The Most Valuable Start-Ups

Start-up is probably the most used buzzword lately with a good reason: companies can change whole industries in years. For the same reason they also tend to attract money like magnets through venture capitals, or later through stock exchanges. But start-ups are risky business, even big ones can have their problems.

The most valuable company is the San Francisco based online car sharing service, Uber. Since its 2009 foundation, it now has basically worldwide operation, stirring anger of traditional taxi services at several cities, including Paris, London and even Jakarta. Governments around the world are trying to create regulations for the car sharing service. Nonetheless, the privately held company is evaluated at $51 billion. It’s even more interesting to know that Uber reached this growth faster than Facebook.

Infographic: The 10 Most Valuable Start-Ups in the World | Statista

 

Other companies include Xiaomi, the China based smartphone manufacturer, which is relatively unknown in the western part of the world, but an important factor in the eastern market. They also started their expansion in Europe and the US. (They even drafted former Google Android executive, Hugo Barra for the task.)

Airbnb – an Uber like service for apartments targeting tourists – is valued at $25b. As Uber influenced taxis, Airbnb is changing hoteling and lending industries. No wonder: we can rent a whole apartment for days or weeks cheaper than a hotel room and even feel cosier. WeWork at the 7th place is almost like Airbnb but they are offering self-owned offices for start-ups and individuals.

There is Snapchat as well, an image messaging mobile application valued at $16b. They are privately held at the moment as well, and they are finding ways to generate revenue through ads.

As we can see, lots of these companies (and other successful start-ups) are privately held, so it is hard to invest in them directly. Mostly venture capitals put their money in them, and they know one thing: investing in start-ups is a risky business. Sometimes they can win big, but they are also ready to lose several times before finding the real deal.

Of course, we can wait with investing until IPOs – going on the stock market – but there’s no guarantee that everything will go smoothly there. It’s enough to remember the 2000 Dot-com bubble, which when bursted took down companies in the blink of an eye, or shocked big firms deeply. Cisco’s stock declined 86%, eBay.com’s and Amazon.com’s stock lost more than 90% of their value. These companies have recovered in long years, but the risk is obvious.

The other problem with start-ups is revenue generating. As we can see, Snapchat is trying to do it, just like other companies. Twitter, one of the biggest social networks for example still loses money, even with rising revenue, as of July 28, 2015. So the returns are not obvious all the time.

Start-ups and IT companies obviously have great potential, but they also hold great risks. Venture capitals know this, and they consider losses when investing. Even companies after IPOs can lose most of their valuation, therefore they turn out to be bad investments. There are the speculative bubbles as well, which can hurt the IT sector too.

Investing in these companies can be a good idea, and capital finds its way to them in environment with negative interest rates, but risk management is at utmost importance. Without diversification even a start-up that seems to be perfect can be a bad investment.