[madaxe]

Bingo. Valuations should be based on.... drumroll profits and retained value - EBITDA. When we started basing valuations on arbitrary "well if facebook are $100bn, X must be $y", we set sail for another glorious future of people losing their shirts.

Frankly, it just pisses me off - we're a profitable business which has grown 150% YOY for 6 years, and our value is barely £3M, based on our profits and growth. Why an infant company with little discernable revenue should have an astronomical value is beyond me.

[jon_dahl]

You're ultimately right, though future EBITDA (or future dividends) is more interesting than current EBITDA. Otherwise a pre-launch startup with no revenue and interesting technology would be worth $0, and a declining company with $1B of EBITDA would be worth the same as a growing company with $1B.

The question is whether Instagram can eventually contribute enough to Facebook's bottom line to justify the $1B valuation. Its current (lack of) revenues obviously don't get it there, but it's the future that matters.

[arethuza]

Valuations are based on what someone else might pay - and they might pay a few billion for Pinterest.

[grey-area]

That's precisely the sort of bubble economics that the parent was objecting to. The objection is to speculation as opposed to investment - investment expects a steady return based on real profits/assets, speculation expects a greater fool to come along later and pay more for this asset, regardless of what it might actually be worth based on revenue/assets alone.

In a bubble (tulips, houses, stock markets) there seems to be an unending supply of greater fools, until all of a sudden there isn't, and someone (who of course expected to find some other fool to sell to) is left picking up the tab for assets which are now close to worthless.

If your valuations are based on what someone else might pay in future, you are speculating, and will be lucky if you manage to get out before other people realise the assets you have bought are not worth $1B or whatever you paid for them. If on the other hand you bought because there is a steady income stream from an investment which will eventually pay off the investment and add returns, and thus underpins the price, you don't have to worry about whether this is a bubble or not.

[chucknelson]

Agreed. We can't justify these prices by going "well, that is the perceived value by population X, so it's OK!". Sure, market forces are fine, but when market forces start to be influenced more by hype and popularity than actual business fundamentals, we should shake ourselves and snap out of it.

This has already happened so many times in different markets and the SAME market in the late 90s. I guess it's human nature to just fall in the same trap eventually? Money makes us foolish?

[arethuza]

"If your valuations are based on what someone else might pay in future, you are speculating"

Isn't that what angels and VCs always do then?

[grey-area]

Pretty much, yes, though you could argue that the best ones speculate not on what others will be prepared to pay for a company in the future, but on what they think a company could earn.

Pinterest, Instagram etc will likely never earn enough to pay back their current crazy valuations, so their valuations are the first kind of speculation, not the latter. Personally I feel Facebook is also in this group, and is overvalued right now, given their current and likely future revenue.

[wtvanhest]

Frankly, it just pisses me off - we're a profitable business which has grown 150% YOY for 6 years, and our value is barely £3M, based on our profits and growth. Why an infant company with little discernable revenue should have an astronomical value is beyond me.

Having a £3M business is insanely awesome. If you want an answer to your question about why your business isn't worth $1.5B, please give detials on your business and people will surely tell you.