You know, when Reddit priced its stock
market debut in March of 2024, the
headline valuation was about $6.4
billion. Its sales in the previous year
$84 million. And after expenses, [music]
it had lost almost $91 million. In
September 2025, Anthropic, the company
behind Claude, announced a valuation of
183 billion. Its latest revenue pace
worked out to a little over 5 billion a
year. That's sales before expenses. and
an estimate based on its recent pace
rather than a full year's money already
collected. Then there's Thinking
Machines Lab. [music] In July 2025, it
raised money at a $12 billion valuation,
but at the time it had no revenue and
hadn't released a product. So, we've
gone from a business losing money to one
priced far above its sales to one worth
of billions before it had anything to
sell at all. Like, I mean, who decides
these [music] prices? What exactly are
investors buying? And how much money
would those businesses eventually have
to make for any of this to [music] make
any sense? The first surprise is the
biggest number in the headline usually
isn't the amount anyone paid. So, let's
get into it. Number one, did somebody
actually pay $183 billion? In that
anthropic funding round, investors put
in $13 billion.
>> [music]
>> The 183 billion was the value placed on
the company after that investment.
Nobody [music] actually bought the whole
business for 183 billion. Now, here's a
smaller version just to illustrate this.
If you invest $1 million in exchange for
10% of a company, that deal puts a $10
million value on the whole thing. But
only 1 million changed hands. The
founder might still own the other 90%.
So, on paper, that's a $9 million stake.
They can't open up their banking app and
spend that money. No. To turn it into
cash, they would have to sell shares and
find someone willing and able to buy
them. Private investment deals can also
give new investors [music] protections
the founder doesn't have. So even that
headline price doesn't necessarily mean
every share comes with the same deal.
Once a company trades on the stock
market, you can see this repricing
happen all day. Take the share price,
multiply it by the shares outstanding,
and you have its market capitalization.
That's the figure usually meant when
someone says a public company is worth
$100 billion. You don't need all of
those shares to change hands for that
number to move. Or think of your home. A
similar house down the street sells for
less than expected. You haven't sold
yours, but the price you could
reasonably ask for it might have just
fallen. That's the part behind the
headlines saying $1 trillion was wiped
off the stock market. A trillion dollars
hasn't been withdrawn from company bank
accounts. No, the market has marked down
what investors shares are worth. [music]
But saying nobody lost anything would
also be wrong. If your shares were worth
$100,000 yesterday and only 80,000
today, you have less wealth. If you sell
it now, you get less cash. Hold on. And
you still own an asset that currently
commands a lower price. It might
recover, but it might not. And that
[music] lost 20 grand didn't necessarily
land in somebody else's pocket. No,
prices can fall without an equal amount
of cash moving to a winner. So, when a
company gets a huge valuation, the
useful first question is how much
ownership actually changed hands and at
what price? Then comes the harder
question. [music] Why would anyone agree
to that price? Which leads us to number
two. How can investors put a price on
something that barely makes money? Well,
think of it this way. You wouldn't
expect an apartment to cost only what it
collects in [music] rent this year.
You're buying something that could keep
earning for decades. And the same idea
applies to a business. [music] The
trouble is that with an apartment, you
can usually inspect the place and find
out what tenants are paying. But with a
young company, a lot of what you're
buying, well, it hasn't happened yet.
[music] Investors have to work backward
from a future they think is possible.
How many customers could this business
reach? What could it charge them?
[music] And after paying everyone needed
to deliver the product, how much would
remain? A company can lose money while
still building something valuable. For
example, developing a drug takes
spending before there's a treatment to
sell. Building a factory costs money
before the first finished product leaves
it. An online service might spend
heavily to attract customers who then
pay for years. But the explanation has
to survive a fairly blunt question. Does
serving more customers eventually leave
more money or just create a bigger bill?
If a customer pays $20 a month and costs
[music]
$25 a month to serve, adding another
million customers makes the problem
larger until something changes. Maybe
costs can fall. Maybe customers will
accept a higher price. Those are claims
investors need evidence for. On the
other hand, suppose customers pay more
than the cost to serve, but the business
is spending heavily on launching in new
countries. The overall loss might hide a
working business underneath the
expansion. That deserves a different
conversation. This is why the word loss
tells you less than you think. You still
need to know what's causing it and what
would make it stop. For a business
without a product, there's much less to
check. Investors might be backing the
team's experience, an early technical
breakthrough, or their belief that the
market will be enormous one day.
Thinking Machines founder had previously
been OpenAI's chief technology officer
and that background helps to explain the
interest in the company, but it doesn't
establish what the new business will
earn. Investors also look at what
similar companies sell for. If other
businesses are priced at 20 times annual
sales, that can become a reference point
in negotiations. But if the whole group
is overpriced, copying the group won't
save you. Eventually, the price needs
some connection to money. the owners can
receive. You can sell your stake to
another investor before that happens and
they can sell to somebody else. But as
you keep passing it along, you're also
passing along the question of what the
company will actually earn. And once you
put a number on that, the skill gets
pretty interesting. But before we get
into how big the company would have to
become in order to justify that price, I
wanted to let you know that inside the
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see you on the inside. But for now,
number three. How big would it have to
become to justify the price? So let's
build a fictional $100 billion company,
shall we? We'll leave the real companies
out of this calculation so we can see
exactly what we're assuming. So suppose
investors would value the business at 20
times its yearly profit once it's
matured. Now that's a price we're
choosing for this example, okay? Not a
rule for every industry. So at that
price, it would need $5 billion in
yearly profit to be worth $100 billion.
Now, already that's a very different
target from $5 billion in sales. So, if
the company keeps 20 cents of profit
from every dollar customers spend, it
needs $25 billion in annual sales to
make that $5 billion. But what if it
only keeps 5? Well, now it needs $100
billion in sales. Same profit target,
four times as much business. That's why
this is going to be a huge market just
isn't enough here. You need to know how
much of the market the company can win
and how much money it can keep once it's
won. Put that $25 billion sales target
into subscriptions. At $20 a month, you
need about 104 million paying customers,
all paying for the full year. Free users
don't count toward that number. And
neither do people who try it out for a
month and then cancel. You could charge
businesses much more and need fewer
customers, but then you would have to
convince those businesses that the
product is worth the larger bill. There
isn't a way around the sales target just
by changing who pays it. And then
there's another problem. We've worked
out what could support a $1 billion
price once the company is earning $5
billion, but we haven't justified paying
$100 billion today for a company that
might get there eventually in 10 years.
Just imagine investing $100 today,
receiving no payments, and selling for
$100 a decade later. You got your
dollars back, but that's it. You've
spent 10 years taking a risk for no gain
whatsoever, while inflation reduced what
those dollars could even buy. To double
your money over those 10 years, the
company would need to be worth $200
billion, assuming your ownership doesn't
shrink and there are no payouts along
the way. [music] At the same 20 times
profit price, that would require $10
billion in yearly profit. Even doubling
over 10 years works out to only about
7.2% a year before tax. For an uncertain
young business, well, an investor might
want considerably more. This is what can
get buried underneath an exciting
valuation. The company might have become
enormous just to reach the price
investors are already paying. to reward
them for all the weight and the risk. It
might have to go much further than that.
And profit still isn't automatically
cash available for the owners to spend.
No, some of it needs to go into
equipment, inventory, or keeping the
business competitive. A more complete
valuation has to account for all of
that, too. The math doesn't tell us
whether our fictional company will
succeed or not. No, it tells us what
we're asking it to accomplish.
Number four, if it's worth $183 billion,
why does it still need your money? Well,
to put it plainly, because a valuation
does not pay salaries. A business can
have a huge price attached to its shares
and still be running short on cash. It
needs actual money from customers,
lenders, investors, or selling assets to
pay its bills. And when someone buys
shares, a company doesn't always get the
money. Buy newly issued shares from the
business and your money goes into the
business before fees. But buy existing
shares from a founder, employee, or
another investor, and it goes to that
seller. The company can have a headline
grabbing transaction without receiving a
dollar from that sale. Reddit's IPO
included both. It sold new shares to
raise money, while existing shareholders
also sold some of theirs. Reddit
explicitly said it would receive none of
the proceeds from those shareholder
sales. Most ordinary stock market trades
work that second way. When you buy
shares through your brokerage account,
you're generally paying somebody who
already owns them. [music] For a company
that's spending more cash than it brings
in, raising new money buys time. Suppose
it has $2 billion available and uses up
$1 billion that year. If that pace stays
unchanged, it has roughly 2 years before
the cash runs out. [music] During that
time, it needs to reduce the shortfall,
borrow or persuade investors to put in
more. A high valuation can make that
easier because it lets the company raise
money while giving away a smaller
ownership stake. But existing owners
might still end up with a smaller
percentage. Imagine a company has 100
shares and you own 10. You own 10% of
it. Now it creates another 25 shares and
sells them to new investors. You still
have your 10, but now there are 125
altogether. So your stake is 8%. That's
dilution. It doesn't automatically make
you poorer, but the new money could help
to build a much more valuable company
and your smaller percentage could be
worth more in the end. But this matters
when you're estimating your future
payoff. You can't assume you'll own the
same percentage after years of
fundraising, unless you account for
those new shares or the extra money you
would need to invest to maintain your
stake. The company might reach the
future everyone hoped for and have a lot
more owners sharing it by that point.
And number [music] five, how can the
company succeed and you still lose
money? Let's go back to our fictional
business. Okay, you invested at a $100
billion valuation because you expected
it to become enormously profitable.
Years later, it makes $2 billion a year.
That's a remarkable business. It [music]
has paying customers, valuable products,
and more profit than most founders could
dream of. But if investors now price it
at the same 20 times annual profit, it's
worth $40 billion. You paid at a $100
billion valuation. The business became
profitable but your investment still
fell in value. [music] And that's the
danger in treating the line this
technology will be important as the
whole investment argument. [music]
Something can become part of everyday
life without the company you banked on
earning enough to justify your price.
Competitors might force prices down.
Customers might love the service but
refuse to pay that much for it. The
company might need to spend far more
than expected to keep its lead. Or it
could deliver almost everything
investors wanted just several years
[music] late. That's more time waiting,
potentially more fundraising, and more
opportunities for something else to go
wrong. You also don't get to choose what
the next buyer will pay for each dollar
of profit. Our example held at 20 times
just to keep the math simple. If
investors became less optimistic, well,
they might offer a lower multiple even
as profits grow. So when you see a
company worth billions while barely
making any money, there are several
possibilities at play. Investors may
have good reasons to expect huge
earnings. They might be paying for a
risky chance at those earnings. Or they
might have become so excited about the
future that almost no realistic outcome
would reward the price they are paying.
[music] The headline alone isn't going
to tell you which one it is, but you can
make it much less mysterious. [music]
Find out how much money was actually
invested. Ask what the company would
need to earn to support that valuation.
Then [music] ask how long that'll take
and how much more funding it'll need
along the way. By then, $183 billion
stops being a number you're supposed to
be impressed by. By that point, you can
start judging what has to happen for
somebody to get their money back with a
return actually worth waiting for. All
right, that's a wrap for today, Alexa.
We'll see you back here next time. So
until then, take care, my