“The Disney of Web3” is a great elevator pitch, but also a highly speculative one. "The Google of corporate spending" is less speculative: It’s growing now.
“While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
― Benjamin Graham
Ramping It Up
When skeptics make their case against crypto by citing particularly egregious examples of silly valuations, scammy ponzinomics or outright frauds, crypto’s defenders like to counter by citing things in traditional finance that are equally expensive, scammy or fraudulent.
It’s an effective line of counterattack: Compared to GameStop, pretty much anything looks reasonable.
Recently, the crypto skeptics have had an additional critique: The seemingly indiscriminate funding of Web3 projects by venture capitalists is presented as evidence that DeFi is mostly for ponzis.
This line of attack is harder to counter, as most of us cannot immediately cite examples of similarly overpriced VC investments in TradFi: We know the winners from their ballyhooed IPOs, but most of the losers go anonymously to zero.
So it’s hard to say how VC valuations in crypto compare to those in TradFi.
Last week, though, I came across Exhibit A for seemingly irrational exuberance in traditional finance: the Ramp Business Corporation.
Recently written up by Packy McCormick in his great substack Not Boring, Ramp is the hot new thing in startups: It offers a type of credit card that promises to automate spending for businesses in a way that could make it the Google of corporate spending.
(Every startup needs an elevator pitch, and “the Google of corporate spending” is a great one.)
Its latest funding round valued Ramp at as much as 100x sales.
100x!
Not earnings. Sales!
If a company, any company, can be worth 100x sales, then, well, it feels like anything can be worth anything.
Which is crypto investors’ favorite retort to accusations of ponzinomics in digital assets: Valuation is a meme!
And it does sometimes feel that way.
But if nothing else, the valuations that buyers assign to investments at least gives us an idea of what the market is expecting.
Investing is largely about narratives, and valuations tell the story.
Consider the recent funding round for Yuga Labs: As per a leaked pitch deck, the raise valued the creator of Bored Ape Yacht Club at 9x 2022 sales.
9x forward sales is a rich valuation — usually reserved for fast-growing, high margin SAAS companies.
So far, Yuga’s sales are generated mostly by the company’s 2.5% cut of all secondary transactions in BAYC NFTs.
That’s a business with SAAS-like margins (near 100%!) but not growth: OpenSea data shows that activity in BAYC has fallen as of late, which means sales at Yuga are falling, too.
Investors think it’s worth 9x sales for a reason, however: Yuga Labs plans to justify that multiple by creating games and a metaverse centered around its collection of NFTs.
As it rolls up prominent NFT properties, Yuga Labs could become the Disney of Web3.
“The Disney of Web3” is a great elevator pitch, but also a highly speculative one.
Ramp, the Google of corporate spending, is less speculative: It’s growing now.
To justify that lofty multiple, you “only” have to extrapolate current growth out for 10 or 20 years.
Value investors scoff at that type of DCF modeling, of course.
But, with Ramp, at least there is growth to extrapolate.
In crypto, you are often paying for the idea of growth.
Valuation is Not a Meme
The Ramp and Yuga funding rounds are just two data points. I don’t know what multiples are generally being paid by crypto VCs.
But I think those two examples illustrate a key difference between Web2 and Web3 investing.
Ramp gets a crazy high multiple because it's growing, now, into a potentially huge TAM.
Yuga Labs, in contrast, is not growing. It might! And it might have a big TAM to grow into, too.
But "can it keep growing?" is an easier question to ask than "can it start growing?"
That's likely why VCs assign a much higher multiple to Ramp than to Yuga.
Yuga’s 9x sales multiple still represents an optimistic take on its prospects, however. It's a lot to pay for something that may or may not grow into what may or may not be a big market.
It could prove to be a special case: With BAYC and cryptopunks and meebits, Yuga really may become the Disney of Web3.
But transforming from what is basically an art project into the Disney of Web3 is no small task.
Which is why my bet for who the Disney of Web3 will be is...Disney.
And it’s also why, given the choice, I’d probably take Ramp on 100x sales over Yuga on 9x.
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