April 30, 2012

VC’s: Mark-to-Mystery Valuation

The Mark-to-mystery valuations used by VC’s – a startup should have zero revenue, so any valuation can be justified.
Nick Bilton talks about zero revenue companies. 
Look how well this worked for Instagram, which had $0 in revenue and was purchased for $1 billion.

Although most companies are not acquired for 10 figures, there have been dozens of multimillion-dollar acquisitions of start-ups that make no money whatsoever. The acquisitions of YouTube, FriendFeed, Zite, Hot Potato, Beluga, GroupMe, TweetDeck and Dodgeball are just a few samples involving companies with little to no revenues.

“V.C.’s can create this mark-to-mystery valuation because as long as there are no numbers, I can have whatever mark I want for an external valuation of a start-up,” Mr. Kedrosky said.

And, Jeffrey Pfeffer of Stanford GSB - 
“These companies are simply being founded to be bought,” he added. “With the exception of a select few, Silicon Valley has spawned no real companies over the past decade. Even now, as the value of eyeballs has gone down, people are buying concepts, not companies.”

There are indeed a lot of fluff companies and VC’s around and they disappear regularly. But, in aggregate, the many iterations (of companies) also yield a few great companies that transform their industry.

Tags: mark to mystery valuations, how VC’s set valuations, zero revenue startups