Why do apps like Snapchat, Whatsapp, Uber, Airbnb, Dropbox require so much funding and have such a high valuation? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Fred Stevens-Smith, CEO of Rainforest QA, YC S12, YC application reviewer, on Quora:

There's a tendency for humans to scorn things we don't understand. Sadly, this is the way it is with the technology economy. So let's unpack the question and see that the huge funding rounds and valuations that we're seeing are completely logical.

Why do apps like XYZ require so much funding?

There are two answers to this question.

  1. You know the commonly-held belief that it's cheap to create a software business today? It's true! You know what is also true? It's really expensive to scale a business--any business. Once the company has found product market fit, it goes into land-grab mode. All of the companies mentioned were in land-grab mode when they raised their rounds.
  2. Because they can. Who doesn't want more cash reserves? After all, [entity display="startups" type="section" active="false" key="/startups" natural_id="channel_4section_124"]startups[/entity] only die because they run out of money. As the CEO of a company, if you're offered $500m at minimal dilution (aka high valuation) it's usually a prudent decision to extend your runway and take the money.

Why do apps like XYZ have such a high valuation?

It can help to see valuation as a price. So just like any other good, a high price is the product of limited supply, exceptional demand, or both.

So high valuations (prices) for these companies are a logical product of:

  • Constricted supply. There are not many 'brand name' private software companies to invest in.
  • Unconstricted demand. There are a lot of investors looking to pour money into private companies.

Digging into both is probably interesting, but outside of the scope of this question.

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Published on: Jun 16, 2017