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?
By 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.”