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About this: "When Cowboy Ventures founder Aileen Lee coined the term unicorn as a label for such corporate creatures in a November 2013 TechCrunch blog post, just 39 of the past decade’s VC-backed U.S. software startups had topped the $1 billion valuation mark. Now, casting a wider net, Fortune counts more than 80 startups that have been valued at $1 billion or more by venture capitalists." Again, this is because interests rate, in general, are very low, much lower now than they were during the original Dot Com boom, which is why valuations are higher. The math on this is simple. Suppose you have a company that makes $1 million in profits. The question then is, at what point does it make sense to invest in something else? When prevailing interest rates are 10%, then $1 million is 10% of $10,000,000, so the company is worth $10,000,000 (excluding a million other factors for the sake of a simple model). If the company demands more than $10,000,000 to buy it, then it makes sense to invest in something else instead. If a company wants less than $10,000,000 for ownership, then it is a hot deal. But when prevailing interest rates drop to 1%, as now, and since $1 million is 1% of $100,000,000, then for same level of profit, the value of the company has gone from $10,000,000 to to $100,000,000. Again, there are a million other factors you could consider (do you trust the management, can they scale, how fast are they growing) but I'm going with a simple model here to demonstrate the basic driving force of modern valuations: when interest rates go down, valuations go up. Of course, that doesn't explain why a web startup with no profits would be valued more than, say, a mature company like GE, which has known profits. Some of the wilder valuations are obviously being driven by speculation about wild growth rates. |