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2. The bond and equity markets are based on sound regulation, transparency, and quarterly statements. Facebook has none of those things when it operates in the dark of the secondary markets.

3. Again, these premiums are based on outstanding shares traded under the transparency of the public stock market. See Secondary Suckers for a nice take on the perils of the secondary market: http://www.homethinking.com/brontemedia/2010/09/17/secondary...

4. Do you have their P&L handy to back that up? If the valuation was so wonderful and they were raking in the profits, then taking series E funding three months ago doesn't make much sense.

> The bond and equity markets are based on sound regulation, transparency...

Presumably subprime mortgage backed securities are the exception that proves the rule...

The stock market is well regulated but the bond markets a lot less so, hence that's where Wall Street makes big profits (when times are good.) They make serious profits as 'market makers' (standing between buyers and sellers) with bonds.

You view the bid/ask spread as an indicator of poor regulation? Not actually true.

The spread reflects the willingness of firms to compete as market makers. More firms competing means a smaller spread.

The spread also reflects the risk associated with the market maker holding inventory. The more perceived risk, the bigger the spread.

Exception that proves the rule means that since their is an exception a rule must exist.

For instance - Tonight we got an exception and are allowed to stay out till 11pm, would imply that there exists a rule that forbids them staying out that late. Hence the exception proves the rule.

Point of order... It wasn't a series E, it was $120 million in purchases on the secondary market

http://techcrunch.com/2010/06/28/elevation-invests-another-1...

This is an extremely important point, germane to the conversation.. The $120mm was not a funding round -- it was liquidity for founders. Huge difference, and it invalidates much of dhh's original analysis.

These are all valid points, but they are logically equivalent to saying "I don't understand why anyone pays $12 for a Ke$ha album".

You may not agree on the worth of the album or of the shares, and nobody is forcing you to buy either one. That some people do consider it a good price is enough to result in a market price for both, on the basis of which many decisions are made.

Well, no, it's like saying "I don't understand why anyone pays $12,000 for a Ke$ha album." If the price was broadly reasonable, there would be no argument. But if the price gets outlandish, then someone needs to call B.S.

And yes, this happens now and then for ordinary, exchange-traded companies. Usually, it results in the exchange suspending trading for the company for a bit. Sometimes, it requires someone to call B.S. In an ordinary, regulated market, one or the other of those actions restores sense, gets the price back somewhere within shouting distance of reasonable.

Not true, b/c as far as I know nobody is buying Ke$ha albums at $12K, while there are many investing in FB, hence the notion of a market price.

Not sure what phenomenon you're referring to in your second paragraph.

Actually I don't understand why anyone buys a Ke$ha album at any price...

Do YOU have their P&L handy to back up YOUR statements about how they have no idea how to monetize their users? Or is that only a valid critique of people who are arguing with you?

Maybe the equity markets. The bond markets not so much.

Also, Sharepost currently has 3 positions for sale at valuations between 33 and 44 billion. The total outstanding shares for sale represent 0.001% at 44B.

That's pretty close to the 0.000000001% that put our $100B valuation on paper: http://37signals.com/svn/posts/1941-press-release-37signals-...

But hey, you better snatch these shares up quickly. It's rare that you get a chance to a clear shot at a company where "profit is almost certainly growing at a rate that will make their valuation reasonable". How much can I get you down for, Joel?

If you're selling another 0.000000001% of 37signals, put me down at $10. Being a minority shareholder of 37signals and putting "increased the value of 37signals 10x" on the CV has far more than $10 of cachet ;-) (as Microsoft realized with FB).

6 orders of magnitude is not pretty close.

His $1 trade was in jest. The point is, both are very small numbers compared to 100%, or even 1%.

Uh, Joel, have you bought any Facebook stock on Sharespost?

Valuing Facebook just by the market price on Sharespost is like predicting the outcome of an election when only 1% of the votes have been counted. Maybe those votes are a representative sampling, maybe not.

I'm inclined to think not, because you have to be an accredited investor, ie already wealthy, to buy pre-IPO shares. Facebook's investors are there for the potential upside and are more comfortable with risk than Joe Blow saving for retirement or his kid's college education.

So Sharespost prices will be higher because (PROB_FB_DIES * NEG_UTILITY_FORME_IF_IT_DOES) will be less negative for millionaires than for the middle-class people or conservative mutual fund managers who will buy most of Facebook's equity when the company goes public.

I'm inclined to think not, because you have to be an accredited investor

You "only" need $1 million in net assets (minus the house due to recent law I believe) to be an accredited investor. I would really be surprised if Joel didn't have at least that much.

Predicting the outcome of the election when only 1% of the votes have been counted is sometimes known as polling.

http://www.sharespost.com/companies/facebook

I think the simple summary of your point is this: Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them.

Facebook is worth $26 billion. That doesn't mean that buying it at a valuation of $26 billion is a good investment. Worth and my estimation of what it will be worth in the future two are different things.

That is sharespost's estimate of Facebook's worth, not what Facebook is actually worth. Hopefully if this thread was a little less heated, at the basics this is a discussion on estimating the present worth of Facebook.

A decent estimate would include the expected future worth, whether it is based on expert analysis or a market's expectations. I don't think any estimate here could be categorized as what "it will be worth in the future".

"Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them."

I agree with this, but there is a difference between the market being willing to pay $26 billion for a company, and minority investors being willing to pay $26 billion/0.03. Only the former establishes the actual* value.

Now, now. Let's be reasonable. No one is valuing Facebook at $866.67 billion.

/pedantry

Estimation beats market cap when it comes to the sustainable value, which only comes from hard-earned cash, not crazy bomb-passing games you can observe in every bubble scene. I do think that FB can be traded around $50 billion and may be $500 billion (Who cares? Most of investors-speculators don't care about its paper worth on the market.) if another dot-com bubble forms. However, what would be its sustainable value? How will it generate its profit to justify its valuation? Until it's on its verified earnings statement, it's just another bomb-passing game. Who really care whether it's $5 billion, or $500 billion, if one believes he can pass his bomb to the enthusiastic guy beside him?

I know you were being facetious, but agricultural derivatives are totally different from equities. But we do also have a stock exchange and options exchange in Chicago, you know.

Anyway, the primary reason that your point 3 is true is because of basic supply and demand. It is harder to buy all the shares than to buy a few. When it's perceived there's a very small number of shares available--I don't know if this is true, but it does seem like investors are clamoring to invest in Facebook--share price will be higher than if that were not the case. In particular, perceived scarcity can share prices artificially high. The idea of getting a slice of the pie before someone else does was a big factor in the dot-com bubble, for instance.

Sheesh, did this topic hit close to home or something? Someone needs to chill and lay off Chicagoans, or red bull, or something..

Doesn't it come down to who comes up with the price and what their motivation for investing is?

When a VC invests in a company, they're looking for a big exit. Essentially, they're trying to predict how much the company might IPO or get acquired for. A public investor is trying to predict the rise in future profits of the company. The difference in motivation matters when you consider a hypothetical.

Suppose the company is guaranteed to have stagnant or falling profits. Does that discourage the VC? Not necessarily. They don't care about whether the company can make money. They care about whether they can keep building perceived value in the eyes of anyone who would want to acquire. A public investor, however, would not put their money in that company (at least not for long).

Therefore, I think David's main point is sound - VC's are more likely to over-value your company than the market is. We also know this to be true because of what happened in the early 2000's.

Hi Joel, ex stock analyst here. What you say re minority trades is correct in so far as that is the way market valuations are calculated. However, what David says is also correct: just because someone pays X for a tiny fraction of the company doesn't mean someone else will pay the same for all of it.

Wily investors always look for meaningful volumes before taking big jumps/declines in share prices seriously.

One of the easiest ways to ramp a stock (apart from getting your journalist buddy to write a puff piece) is to continually lift the offer for small volumes.

As Joel points out, it's tautological. How many companies would buy up Google for it's current market valuation? Apple? Since no buyers have tried to do that, are they ipso facto no actually worth that market cap?

Yes, but Google's valuation is confirmed by trading volumes.

In the early days of computerized trading it was quite common for even quite liquid stocks to be suspended limit up/down because of programming bugs.

But by Joel's logic, the market has 'spoken' and these companies are now worth 10% more/less than 30 seconds prior, when in fact all that has happened is some faulty code just ripped through the book on minimal volumes.

The point is that 'true' valuations are validated by significant volumes. Hence Google's valuation is real. Depending on your viewpoint, the size of the recent transactions in FB may or may not be material - and I think this is the point that David was making.

2.

You need some amount of liquidity to make a meaningful valuation. Lack of liquidity leads to price volatility. Think May 6 flash crash.

Hey! Ad-hominem the 37 signals if you must, but leave Chicago out of it!