"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts"
The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.
Would you share examples of what you’re describing?
Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options.
Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
> Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it?
In the examples I provided:
- Magic Leap outright lied about their technology (remember their jumping whale video?)
- Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money.
- Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars
And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.
That's just how markets work, always have. Nothing special about tech companies, the same phenomenon is seen with anything bought and sold in a free market. Eg. https://en.wikipedia.org/wiki/Tulip_mania
The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.