Venture Capital Math:  Does the Start-Up Whole Equal the Sum of Its Parts?

If I sold you 4% of my start-up company for $40,000, does that make my company worth $1 million?

airbnbBy Silicon Valley math, the answer is “yes.”

Now, add three zeroes, and you have the (tenuous) case for lodging start-up Airbnb being worth a cool $10 billion (it is in negotiations to sell a 4% stake for $400 million).

“Valuation by Extrapolation”

Might there be a flaw in this approach?

I can see two:

One.  You don’t know what the whole company is worth . . . until you try to sell the whole company (or at least a significant chunk of it). 

With Facebook now trading at a lofty $68 a share, it’s easy to forget that its IPO price of $38 promptly crashed and burned, falling all the way to $19 a share before rallying.

Two.  “The law of small stakes” (my term).

Exactly how small can an equity stake be before this exercise in “valuation-by-extrapolation” breaks down?

Is a company that sold a 1% stake for $1 million worth $100 million?

Taken to its absurd conclusion, all you have to do to create a company “worth” $1 billion is sell one share (out of 10 million outstanding) for $100.

Maybe that’s next . . .  

P.S.:  For the uninitiated, “Airbnb” is the truncated form of “Airbed & breakfast.”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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