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Tell HN: The truth about how startups are valued
Startups are valued in ever increasing numbers because people say so then make it real by giving each other money to prove its real.
Here's how they are actually valued:
Seed stage: Startup company to Angel "we are worth $1m"
Angel: You ARE worth $1m. If I give you some money it will anchor the value and prove it true because I agreed.
Series A: Startup company to VC "we are worth $10m"
VC: You ARE worth $10m. If I give you some money it will anchor the value and prove it true because I agreed.
Series B: Startup company to VC "we are worth $100m"
VC: You ARE worth $100m. If I give you some money it will anchor the value and prove it true because I agreed.
Series C: Startup company to VC "we are worth $1b"
VC: You ARE worth $1b. If I give you some money it will anchor the value and prove it true because I agreed.
IPO in a bubble Startup company to public markets "we are worth $10b"
Public markets (when it's not a downturn): You ARE worth $10b. Take our money.
IPO in a correction Startup company to public markets "we are worth $10b"
Public markets (when it's not a downturn): No you aren't. Here, take somewhat less of our money.
That's how money is conjured out of thin air. I say I have some thin air worth $100. You agree with the value and give me $10 for 10% of it. The next guy both agrees and can see the increasing value of thin air, and can see there's another stage of people coming who will buy in at a higher valuation. So he buys 10% of the thin air at 10 times the value. Next folks come along and want in on the opportunity of thin air. etc etc
- StevenJK 11y agoExactly. It is a totally arbitrary process. Valuations have nothing to do with real economic value or real profits of a company. We see it all the time. In fact, valuations and the subsequent "exit" venues (IPOs, acquisitions, etc..) can be thought of as a form of money laundering in which money is collected from the public and funneled into the pockets of VCs. If you have the power to create the hype, you can "value" anything at any amount you like.
- hoodoof 11y ago>> We see it all the time. Who is "we"?
- meric 11y agoUnless it's a mining startup, the kind I invest in. The ones who have almost finished their mine, and will start producing within the year. I value them using a good rule of thumb: If they're priced less than cash at bank plus expected earnings within the first year, and their mine plan is solid, then it's a good buy. If they make it through the year, making the expected profit, their share price will triple. A one year old gold mine is priced generally at three times earnings. Occasionally they're wrong AND I'm wrong about the mine plan they had, and the costs of mining each ounce of gold is much greater than thought, the mine runs out of cash in a month or two and everything crash and burns and I lose all I invested in. Or the gold price just falls hard. I've made 30%+ per year for the past several years doing this. Requires a good eye on the reports to figure out if the directors of the company are credible.