$904 million is the revenue in the industry per year. Valuation is the "present value" of all future revenue, i.e. what all of the profits the company is "expected" to ever make are worth today.

To give an example, if I were to give you $100 every year for all of time, you would certainly pay more than $100 today. Maybe even $500. And if I were to say I would give you $100 the first year, then 10% more every year such that you'd get 100, 110, 121, 133.10, etc... you should be willing to pay a lot more because in 30 years you'd be getting $1700 / year and growing.

That's why businesses that are expected to make money for a long time are worth a lot, and those who are expected to last a long time and make an increasing amount of money every year are worth so much more today.

Valuations are generally at an equivalent of what you would get investing the money elsewhere. For example, if you believed you could get 5% on your money elsewhere, you may be willing to value a company at 20x it's profit (price to earnings).

In cases where the market is growing then you may be willing to give a higher multiple in the belief that your future returns will be higher. In cases where there is high growth and little profit, some investors choose to use a multiple on revenue instead. Revenue multiples of 5x-20x are pretty common for high growth companies. (Price to Sales)

I am leaving risk adjustment out of this explanation on purpose, but if you are interested look up "efficient frontier".

I understand this concept, but never heard it explained quite this way. Thanks for this concise example and especially for the connection with the "efficient frontier".

There can be several logical reasons for this. 1, investors expect the company to merge to other verticals (outside of business file-sharing). 2, their current business is already outside business sharing (with consumers). 3, the number is just for a time period (like $904 million per year) and their valuation is over a much longer period (e.g. decades). Any many other reasons...

> 3, the number is just for a time period (like $904 million per year) and their valuation is over a much longer period (e.g. decades)

Okay, so this along with your sister the comment from raldi points at what I probably missed: The duration for which the valuation is made is unspecified, at least in this article. Thanks for pointing this out.

You don't "specify a duration" for the valuation: an infinite duration is baked in the valuation itself through the time value of money. If the annual interest rate is 10%, 100$ in 1 year is worth 90$ today, 100$ in 10 years is worth about 35$ today and so on. Of course, in the case of company valuations, you have to also account for the uncertainty (both on the upside and downside) of the future cash flows.

Actually, replace 90 by 91 (100 / 1.1), and 35 by 38.5 (100/1.1^10)

Valuations are instantaneous. It is, roughly speaking, how much a buyer would have to pay to buy the company right now. That's easy to do with public companies because it is just "trading price * number of shares". Venture-backed companies typically use their last investment round for valuation, where, if they had $100M invested in the company for a 1% stake, you multiply that by 100 to get the $10B valuation.

It is likely an inflated number, but it's hard to tell because it isn't in an open market. It could be $1M or it could be $100B.

Incidentally, "trading price * number of shares" almost always understates the selling price when a public company is bought, and it almost always overstates the selling price when a company is liquidated (technically, shares are worth zero when a company is liquidated, but I mean how the share-price usually free-falls in a very short period right before a firesale). The reason for this is that trading price, by definition, is set by the most marginal buyers and sellers, those who most want to get rid of their shares or most want to acquire new shares. The actual shareholder body consists of a large range of individuals with a large range of selling prices. To acquire a full company, a buyer needs to start convincing less marginal shareholders to sell, and usually needs to pay a premium (sometimes up to 50% over market cap). To get rid of a company that has suddenly started heading for bankruptcy, shareholders need to sell into a market of much less willing buyers, and so they need to offer a significant discount.

But that's missing the broader point that it's not useful to try to define a category like "business file sharing" and then pigeon-hole a company like DropBox into it. It's like people wondering how Uber could be valued so much larger than the total taxi industry. Well, the opportunity is much, much larger even without moving into adjacencies.

It's like being 1000 miles down the road and going 60MPH. There's nothing inherently contradictory about the first number being bigger than the second.

(Of course, the calculation for a business valuation is a lot more complex than a simple distance = rate * time.)

The investors believe that the market will grow at least 10x, and that Dropbox will capture a great deal of that market.

Also, when people speak of a market, they're speaking annually.

Pro tip: whenever you read "$XX billion dollar market", replace it in your head with "It's big (obviously) but we basically made up a number to make it sound like we know what we're talking about".

That and company value is the present value of all future earnings, where "industry size" is typically understood to be an annual revenue number. Apples and oranges.

Probably because: -$904M is the market size today, but we all know it is growing -$904M is the annual revenue number, not the amount of revenue to be generated for all time in that market.

Businesses are theoretically valued at NPV of future earnings, so it's entirely plausible to get to a $10B valuation on the back of a huge market share in a fast-growing ~$1B/yr market.

People expect this market to grow rapidly which is accounted for in the higher valuation.