WhatsApp acquisition by Facebook: $19 billion.

Everyone thought Zuckerberg overpaid.

The numbers at the time:

  • 55 employees
  • $20M annual revenue
  • Minimal profits
  • $345 million per employee
  • $40 per user

The critics calculated:

$$ \text{Revenue Multiple} = \frac{$19B}{$20M} = 950x $$

“Insane valuation! Facebook wasted billions!”

But Zuckerberg saw different numbers:

  • 450M daily active users (growing 20% annually)
  • Network effects getting stronger
  • WhatsApp replacing SMS globally
  • Engagement higher than Facebook Messenger

He calculated the NPV (Net Present Value) differently:

His math:

  • Future users: 2B+ (within 5 years)
  • Revenue per user: $10/year (via business API)
  • Projected revenue: $20B annually
  • Operating margin: 60%
  • EBITDA: $12B

Present value of future cash flows exceeded $19B.

The result?

By 2020:

  • 2 billion users (prediction: ✓)
  • WhatsApp Business API generating billions
  • Network effects made it irreplaceable
  • Strategic value to Facebook: immeasurable

Zuckerberg understood something critics didn’t:

Valuation isn’t about today’s numbers. It’s about the present value of future cash flows.

Let’s learn the investment math that separates great acquisitions from terrible ones.

Part 1: The $1B Exit That Lost Money - How Returns Really Work

2015.

A startup raised four rounds:

Round Valuation Amount Raised Dilution
Seed $5M $500K 10%
Series A $20M $5M 25%
Series B $100M $20M 20%
Series C $300M $50M 16.7%

Founders started with 100% ownership.

After four rounds:

  • Founders: 100% × (1-0.1) × (1-0.25) × (1-0.2) × (1-0.167) = 50% ownership
  • Investors: 50%

2020: Company sells for $1 billion!

Headlines: “Massive success! $1B exit!”

But let’s calculate actual returns:

Founder equity: $$ \text{Founder Payout} = $1B \times 50% = $500M $$

Sounds amazing, right?

But investors had liquidation preferences:

Liquidation Preferences:

  • Series C: $50M × 2x = $100M (gets paid first)
  • Series B: $20M × 1.5x = $30M
  • Series A: $5M × 1x = $5M
  • Seed: $500K × 1x = $500K

Total preferences: $135.5M

After preferences paid: $$ \text{Remaining} = $1B - $135.5M = $864.5M $$

Split 50/50:

  • Founders: $432.25M
  • Investors: $432.25M + $135.5M = $567.75M

Founder actual return: $$ \text{ROI} = \frac{$432.25M - $75.5M \text{ (capital raised)}}{$75.5M} = 473% $$

Wait, that’s still amazing!

But consider:

  • 8 years of work
  • Massive dilution
  • Could have sold at Series B for $100M (their 80% = $80M)
  • Waited 5 more years for $432M

Was it worth it?

This is why you need to understand: IRR (Internal Rate of Return).

Part 2: Investment Decision Metrics - NPV, IRR, and Payback Period

1. Net Present Value (NPV) - The King of Investment Decisions

NPV answers: “How much is this investment worth today?”

The formula:

$$ NPV = \sum_{t=0}^{n} \frac{CF_t}{(1 + r)^t} - \text{Initial Investment} $$

Where:

  • $CF_t$ = Cash flow in period $t$
  • $r$ = Discount rate (required return)
  • $t$ = Time period

Example: Should you build a new product?

Investment: $500,000

Expected cash flows:

  • Year 1: $100,000
  • Year 2: $200,000
  • Year 3: $300,000
  • Year 4: $400,000

Discount rate: 15% (your required return)

Calculate NPV:

$$ NPV = \frac{$100K}{(1.15)^1} + \frac{$200K}{(1.15)^2} + \frac{$300K}{(1.15)^3} + \frac{$400K}{(1.15)^4} - $500K $$

$$ NPV = $86,957 + $151,229 + $197,262 + $228,700 - $500,000 $$

$$ NPV = $664,148 - $500,000 = $164,148 $$

Decision: NPV > 0, so invest!

Why NPV is powerful:

  • Accounts for time value of money ($1 today > $1 tomorrow)
  • Gives absolute dollar value of investment
  • Easy to compare multiple projects

Decision Rule:

  • NPV > 0: Invest (creates value)
  • NPV < 0: Don’t invest (destroys value)
  • NPV = 0: Indifferent (breaks even)
%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph LR A["Investment: -$500K"] --> B["Year 1: +$100K
PV: $87K"] B --> C["Year 2: +$200K
PV: $151K"] C --> D["Year 3: +$300K
PV: $197K"] D --> E["Year 4: +$400K
PV: $229K"] E --> F["NPV: $164K
✓ INVEST"] style A fill:#ff6b6b style F fill:#51cf66

2. Internal Rate of Return (IRR) - The Return Percentage

IRR answers: “What’s the annual return on this investment?”

IRR is the discount rate where NPV = 0.

$$ 0 = \sum_{t=0}^{n} \frac{CF_t}{(1 + IRR)^t} $$

Using the same example:

  • Investment: $500,000
  • Cash flows: $100K, $200K, $300K, $400K

IRR = 24.8%

Decision Rule:

  • If IRR > Required Return (15%): Invest
  • If IRR < Required Return: Don’t invest

IRR is great for:

  • Comparing different-sized investments
  • Communicating returns to stakeholders
  • Benchmarking against alternatives

Example: Comparing two projects

Project Investment IRR NPV @ 15%
A $500K 24.8% $164K
B $1M 18% $120K

Which is better?

IRR says: Project A (24.8% > 18%)

NPV says: Project A ($164K > $120K)

Both agree: Project A wins!

3. Payback Period - When Do You Break Even?

Payback Period answers: “How long until I get my money back?”

$$ \text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Flow}} $$

Simple version (uniform cash flows):

Investment: $500K, Annual cash flow: $150K

$$ \text{Payback} = \frac{$500K}{$150K} = 3.33 \text{ years} $$

For non-uniform cash flows, cumulative approach:

Year Cash Flow Cumulative CF
0 -$500K -$500K
1 $100K -$400K
2 $200K -$200K
3 $300K $100K ✓

Payback period: Between Year 2 and Year 3

$$ \text{Exact payback} = 2 + \frac{$200K}{$300K} = 2.67 \text{ years} $$

Decision Rule:

  • Shorter payback = Lower risk
  • Longer payback = Higher risk

Typical targets:

  • SaaS: < 12 months
  • Hardware: < 24 months
  • Infrastructure: < 36 months

Part 3: Return Metrics Compared - ROI, ROE, ROIC, ROA

Four different “returns,” each measuring something different.

1. ROI (Return on Investment) - For Projects

Used for: Evaluating specific projects or campaigns

$$ ROI = \frac{\text{Gain from Investment} - \text{Cost of Investment}}{\text{Cost of Investment}} \times 100% $$

Example: Marketing campaign

  • Spend: $50,000
  • Revenue generated: $200,000
  • Profit margin: 30%
  • Profit: $60,000

$$ ROI = \frac{$60,000 - $50,000}{$50,000} \times 100% = 20% $$

When to use: Project decisions, marketing campaigns, equipment purchases

2. ROE (Return on Equity) - For Shareholders

Used for: Measuring returns to shareholders

$$ ROE = \frac{\text{Net Income}}{\text{Shareholders’ Equity}} \times 100% $$

Example:

  • Net income: $5M
  • Shareholders’ equity: $25M

$$ ROE = \frac{$5M}{$25M} \times 100% = 20% $$

What it means: Every dollar of equity generates $0.20 in profit

Benchmark:

  • Excellent: > 20%
  • Good: 15-20%
  • Average: 10-15%
  • Poor: < 10%

3. ROIC (Return on Invested Capital) - For Operations

Used for: Measuring operational efficiency

$$ ROIC = \frac{\text{NOPAT}}{\text{Invested Capital}} \times 100% $$

Where:

  • NOPAT = Net Operating Profit After Tax
  • Invested Capital = Debt + Equity - Cash

Example:

  • NOPAT: $10M
  • Invested capital: $50M

$$ ROIC = \frac{$10M}{$50M} \times 100% = 20% $$

Why ROIC matters more than profit margin:

Amazon’s magic:

  • Net margin: 3% (looks terrible)
  • ROIC: 26% (actually excellent!)

How?

Capital efficiency:

  • Customers pay immediately (cash basis)
  • Suppliers get paid in 90 days
  • Negative working capital = free cash to invest
  • Each dollar generates returns quickly

Benchmark:

  • Excellent: > 20%
  • Good: 15-20%
  • Average: 10-15%
  • Poor: < 10%

ROIC > Cost of Capital = Value creation

4. ROA (Return on Assets) - For Asset Efficiency

Used for: Asset-heavy businesses

$$ ROA = \frac{\text{Net Income}}{\text{Total Assets}} \times 100% $$

Example:

  • Net income: $5M
  • Total assets: $100M

$$ ROA = \frac{$5M}{$100M} \times 100% = 5% $$

When ROA matters:

  • Manufacturing (machinery, factories)
  • Real estate (properties)
  • Retail (inventory, stores)

Benchmark (varies by industry):

  • Software: 10-20%
  • Retail: 5-10%
  • Manufacturing: 3-7%

Comparison Table: When to Use Each Metric

Metric What It Measures Best For Example
ROI Project return Specific investments Marketing campaign, equipment
ROE Shareholder return Investor perspective Public companies, stock analysis
ROIC Operating efficiency Core business quality Capital allocation, M&A
ROA Asset efficiency Asset-heavy businesses Manufacturing, real estate
%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph TD A[Return Metrics] --> B[ROI: Projects] A --> C[ROE: Shareholders] A --> D[ROIC: Operations] A --> E[ROA: Assets] B --> F["Gain / Cost
Marketing, Campaigns"] C --> G["Net Income / Equity
Investor Returns"] D --> H["NOPAT / Capital
Operating Efficiency"] E --> I["Net Income / Assets
Asset Utilization"] style B fill:#4dabf7 style C fill:#51cf66 style D fill:#ffd43b style E fill:#ff6b6b

Part 4: Valuation Multiples - How Investors Value Companies

Two approaches to valuation:

  1. Multiples (quick, comparable)
  2. DCF (detailed, fundamental)

1. Revenue Multiples - For Growth Companies

$$ \text{Valuation} = \text{Revenue} \times \text{Multiple} $$

SaaS companies:

  • Early-stage: 10-15x ARR
  • Growth-stage: 15-25x ARR
  • Mature: 5-10x ARR

E-commerce:

  • High-margin (>30%): 2-4x revenue
  • Low-margin (<15%): 0.5-1.5x revenue

Example: SaaS valuation

  • ARR: $10M
  • Growth rate: 50%
  • Net revenue retention: 110%
  • Multiple: 20x

$$ \text{Valuation} = $10M \times 20 = $200M $$

What drives higher multiples:

  • Higher growth rate (>50%)
  • Better retention (NRR >110%)
  • Lower CAC payback (<12 months)
  • Expanding margins

2. EBITDA Multiples - For Profitable Companies

$$ \text{Valuation} = \text{EBITDA} \times \text{Multiple} $$

By industry:

  • Software: 15-25x EBITDA
  • SaaS: 10-20x EBITDA
  • E-commerce: 8-12x EBITDA
  • Retail: 6-10x EBITDA
  • Manufacturing: 5-8x EBITDA

Example: E-commerce company

  • Revenue: $50M
  • EBITDA: $10M (20% margin)
  • Multiple: 10x

$$ \text{Valuation} = $10M \times 10 = $100M $$

When to use revenue vs EBITDA multiples:

Stage Revenue Multiple EBITDA Multiple
Pre-revenue N/A N/A (use other metrics)
Early revenue ✓ Yes Usually negative
Growth ✓ Yes Sometimes
Profitable Maybe ✓ Yes (primary)
Mature Rarely ✓ Yes (primary)

3. Discounted Cash Flow (DCF) - The Fundamental Approach

DCF values a company based on future cash flows.

$$ \text{Valuation} = \sum_{t=1}^{n} \frac{FCF_t}{(1 + WACC)^t} + \frac{TV}{(1 + WACC)^n} $$

Where:

  • $FCF$ = Free Cash Flow
  • $WACC$ = Weighted Average Cost of Capital
  • $TV$ = Terminal Value

Simplified 5-year DCF example:

Year Revenue FCF Margin FCF Discount Factor (10%) PV
1 $10M 10% $1M 0.909 $0.91M
2 $15M 15% $2.25M 0.826 $1.86M
3 $22M 20% $4.4M 0.751 $3.30M
4 $30M 22% $6.6M 0.683 $4.51M
5 $40M 25% $10M 0.621 $6.21M

Total PV of 5 years: $16.79M

Terminal Value (Year 5):

$$ TV = \frac{FCF_5 \times (1 + g)}{WACC - g} $$

Where $g$ = perpetual growth rate (2-3%)

$$ TV = \frac{$10M \times 1.03}{0.10 - 0.03} = $147.1M $$

$$ PV \text{ of } TV = \frac{$147.1M}{(1.10)^5} = $91.3M $$

Total valuation:

$$ \text{Value} = $16.79M + $91.3M = $108.1M $$

Part 5: Amazon’s Capital Efficiency - The ROIC Masterclass

Amazon’s financials (typical year):

  • Revenue: $500B
  • Net margin: 3% ($15B profit)
  • Most people: “Only 3%? That’s terrible!”

But here’s the magic:

  • ROIC: 26%
  • Cash conversion cycle: -30 days (negative!)

How negative CCC works:

%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% sequenceDiagram participant Customer participant Amazon participant Supplier Note over Customer,Supplier: Day 0 Customer->>Amazon: Pays $100 immediately Note over Customer,Supplier: Day 30 Amazon->>Amazon: Uses $100 for 30 days Note over Customer,Supplier: Day 30 Amazon->>Supplier: Pays supplier $80 Note over Amazon: Amazon had free use of $100
for 30 days before paying supplier

Cash conversion cycle:

$$ CCC = DIO + DSO - DPO $$

Where:

  • DIO = Days Inventory Outstanding
  • DSO = Days Sales Outstanding
  • DPO = Days Payables Outstanding

Amazon’s numbers:

  • DIO: 30 days (inventory sits 30 days)
  • DSO: 20 days (customers pay in 20 days)
  • DPO: 80 days (pays suppliers in 80 days)

$$ CCC = 30 + 20 - 80 = -30 \text{ days} $$

Negative CCC = Free financing from suppliers!

This is why ROIC > 26% despite 3% margin:

$$ ROIC = \frac{\text{NOPAT}}{\text{Invested Capital}} $$

Low invested capital due to:

  1. Negative working capital (suppliers finance inventory)
  2. Asset-light model (AWS uses customer data centers initially)
  3. Fast inventory turns

Lesson: Margins don’t tell the whole story. Capital efficiency does.

Part 6: Cap Table Math - How Dilution Works

Founder starting point: 100% ownership

Round 1 - Seed: $500K at $5M pre-money

$$ \text{Post-money} = $5M + $500K = $5.5M $$

$$ \text{Dilution} = \frac{$500K}{$5.5M} = 9.1% $$

Founder ownership: 90.9%

Round 2 - Series A: $5M at $20M pre-money

$$ \text{Post-money} = $20M + $5M = $25M $$

$$ \text{New investor} = \frac{$5M}{$25M} = 20% $$

Everyone else diluted:

  • Founder: 90.9% × (1 - 0.20) = 72.7%
  • Seed investors: 9.1% × (1 - 0.20) = 7.3%

Full cap table progression:

Round Pre-money Raised Post-money New Dilution Founder %
Start - - - - 100%
Seed $5M $500K $5.5M 9.1% 90.9%
Series A $20M $5M $25M 20% 72.7%
Series B $100M $20M $120M 16.7% 60.6%
Series C $300M $50M $350M 14.3% 51.9%

After raising $75.5M, founder owns 51.9%

If exit = $1B:

$$ \text{Founder value} = $1B \times 51.9% = $519M $$

(Assuming no liquidation preferences)

Part 7: Decision Framework - Should You Invest?

Investment Decision Tree

%%{init: {'theme':'dark', 'themeVariables': {'primaryTextColor':'#fff','secondaryTextColor':'#fff','tertiaryTextColor':'#fff','textColor':'#fff','nodeTextColor':'#fff'}}}%% graph TD A[Investment Opportunity] --> B{NPV > 0?} B -->|No| C[Reject] B -->|Yes| D{IRR > Required Return?} D -->|No| E[Reject] D -->|Yes| F{Payback < Target?} F -->|No| G[High Risk - Careful] F -->|Yes| H{Best Alternative?} H -->|No| I[Compare Options] H -->|Yes| J[INVEST ✓] style C fill:#ff6b6b style E fill:#ff6b6b style G fill:#ffd43b style J fill:#51cf66

When to Take Investment vs Bootstrap

Take investment when:

  1. Market timing matters (winner-take-most)
  2. Capital intensive (need scale fast)
  3. Network effects (first-mover advantage)
  4. Long payback periods (need cash to survive)

Bootstrap when:

  1. Fast payback (profitable quickly)
  2. Low capital needs (service business)
  3. Niche market (size doesn’t require scale)
  4. High margins (cash-generative)

Example decisions:

Business Type Decision Reason
SaaS Platform Take investment Long payback, network effects
Consulting Bootstrap Immediate revenue, low overhead
Marketplace Take investment Need liquidity on both sides
E-commerce Bootstrap first Test unit economics, then raise
B2B Software Take investment Sales cycles long, need runway

Part 8: Real Examples - Learning from Success and Failure

Success: Facebook’s Instagram Acquisition ($1B)

2012 numbers:

  • Users: 30M (growing 30M/month)
  • Revenue: $0
  • Employees: 13
  • Price: $1 billion

Critics said: "$1B for an app with zero revenue?!"

Facebook’s math:

  • User growth: 30M new users/month
  • Mobile-first (Facebook struggling on mobile)
  • Visual content (future of social)
  • Network effects growing
  • Cost to build competitor: >$1B
  • Strategic value: Eliminate competitor

Result:

  • 2023: 2+ billion users
  • Estimated value: $100B+
  • 100x return in 11 years
  • IRR: ~50% annually

Failure: Yahoo’s Alibaba Sale

2005: Yahoo invests $1B in Alibaba for 40%

2012: Yahoo sells half its stake (20%) for $7.1B

  • Gain: $7.1B on $500M invested
  • ROI: 1,320%
  • Sounds amazing!

But…

2014: Alibaba IPO

  • Market cap: $230B
  • Yahoo’s remaining 20% worth: $46B
  • If Yahoo held all 40%: $92B

By selling early, Yahoo missed out on:

$$ \text{Opportunity cost} = $92B - ($7.1B + $46B) = $38.9B $$

Lesson: Sometimes the best investment decision is doing nothing.

Success: Sequoia’s WhatsApp Investment

2011: Sequoia invests $8M in WhatsApp Series A

2014: Facebook acquires WhatsApp for $19B

  • Sequoia’s stake: ~20%
  • Return: $3B+
  • 375x return in 3 years
  • IRR: >300% annually

Why it worked:

  • Network effects (viral K-factor)
  • Global expansion (2B addressable market)
  • Low churn (high engagement)
  • WhatsApp replacing SMS
  • Mobile-first positioning

Part 9: Key Takeaways - Your Investment Toolkit

1. Always Calculate NPV First

  • Accounts for time value of money
  • Gives absolute value created
  • NPV > 0 = Good investment

2. Use IRR to Compare Alternatives

  • Shows percentage return
  • Easy to benchmark
  • Must exceed required return

3. Context Matters for Return Metrics

  • ROI: For projects
  • ROE: For shareholders
  • ROIC: For operations (most important!)
  • ROA: For asset-heavy businesses

4. Valuation is an Art and Science

  • Revenue multiples for growth
  • EBITDA multiples for profit
  • DCF for fundamental value
  • Compare all three

5. Capital Efficiency > Profit Margin

  • Amazon: 3% margin, 26% ROIC
  • Negative CCC = Free money
  • Focus on capital turnover

6. Dilution Compounds

  • Each round dilutes everyone
  • Know your ownership % at exit
  • Calculate real returns, not just valuation

7. Consider Opportunity Cost

  • Every investment has alternatives
  • Compare IRR across options
  • Sometimes best move is waiting

Part 10: Your Investment Calculator

Use this framework for any investment decision:

Investment: $________
Expected cash flows:
  Year 1: $________
  Year 2: $________
  Year 3: $________
  Year 4: $________
  Year 5: $________

Discount rate (required return): _____%

Calculate:
1. NPV = Σ(CF / (1+r)^t) - Investment
   → If NPV > 0: Good

2. IRR = Rate where NPV = 0
   → If IRR > Required Return: Good

3. Payback = Cumulative CF breakeven
   → If Payback < Target: Good

4. Compare to alternatives
   → Choose highest NPV/IRR

Decision: ☐ Invest  ☐ Pass

Series Navigation

Previous: Cash Flow & Financial Health

Next: Industry-Specific Metrics: SaaS, E-commerce & Marketplaces

Full Series: Business Math Series

Further Reading

Books:

  • Valuation by McKinsey & Company
  • Investment Valuation by Aswath Damodaran
  • The Outsiders by William Thorndike (ROIC focus)

Online Resources:

  • Damodaran’s valuation spreadsheets (stern.nyu.edu)
  • Invested Capital calculator templates
  • DCF modeling guides

Next up: Learn industry-specific metrics for SaaS, E-commerce, and Marketplaces. Each industry has unique KPIs that matter most for valuation and growth.

Happy investing! 📈