How to Value Your Startup Business (2011) | Hacker News Reader

How to Value Your Startup Business (2011)

redrocketvc.blogspot.com.ar

25 pointswslh9 comments

>"The more scarce a supply (e.g., your equity in a hot new patented technology business), the higher the demand"

Ooof. That's not any economics I've heard of.

you've never heard of scarcity or the illusion of scarcity driving up demand at higher prices, or causing the market to clear at higher prices? Today nobody wants bitcoin at ten thousand, even though some people might still want it if it started clearing at that price: the reason this isn't happening, then, is that bitcoins are not scarce enough to reach that price. The existing demand is met by supply at a lower price. In sum, even if the investor sentiment were exactly the same, it would definitely be true that "The more scarce a supply, the higher the [prices cleared by existing] demand", or to some extent the higher actual demand. (Nobody would pay for a gallon of air today - but if people perceived it as being a bit scarce, maybe some people would even without its becoming actually scarcer.)

I was just trying to draw the exact distinction you make. Scarcity of supply leads to higher price given demand, NOT a shift in the demand curve. Perhaps I'm nitpicking, but the language used in the article suggested a misunderstanding of econ fundamentals.

I don't mind his informal language given the context. He's not citing an exact mechanism, just heuristics/results.

I think, very respectfully, that you are a bit mistaken where you write "leads to higher price given demand, NOT a shift in the demand curve". It actually does both. And not only does an actual scarcity of supply often lead to a shift in the demand curve - even the illusion or impression of a scarcity of supply does so.[1]

Beyond that, the price is higher given demand - but another way to read "the higher the demand" is "the greater the volumes that clear at the usual price points." Given that he's talking about valuations, that's not the one he means.

It's unclear exactly what he means formally with "The more scarce a supply (e.g., your equity in a hot new patented technology business), the higher the demand", whether he's talking about a shift in demand curve due to a response to the knowledge or illusion of scarcity (which is a real effect) or just the normal price adjustment given a static demand curve. Either way, he's not being that formal, and the result is the same: you can get a higher price.

Of course, this isn't true of everything that is scarce. If Mars, Inc stops the sale of red M&M's, the existing supply doesn't shoot up in price. That's why he stated 'hot new patented technology business.' Presumably, some people want in at "any price", and so he's probably talking about just moving along the static demand curve. But the other way you could read it is just as valid IMHO.

[1] a gallon of air doesn't cost anything, and it's free in limitless quantities to anyone. Everyone knows this. Correspondingly, you could not sell a gallon of air for any nonzero amount. However, by convincing people that it is scarce, or about to be, you can shift the demand curve at a higher price-point up, and sell air at that price point (even though in fact it is still available free.)

This literally happens all the time in every industry. (Driving up demand through bluffing scarcity, or even causing actual scarcity by not releasing any supply at any price, in order to 'drive up demand'. Sometimes you can get something to sell for $100 by making it impossible to get and advertising this fact - even though during the impossible-to-get period it couldn't actually sell even for $10 if it were available. Thus you are demonstrably shifting the demand curve through creating artificial scarcity - as though the demand at all prices were higher. Which works since it leads to the same outcome - "unavailability", which I suppose consumers factor into their judgment of willingness to pay, which I guess depends fair market price, scarcity, whatever.)

I see your point logicallee. Thank you for the civility and thorough explanation.

no problem - I'm not an economist, but thought I could follow the article and thought it made sense, as far as it went.

If there is no revenue then you can also take a top-down approach by looking at the number of potential customers in your market you expect to capture. Then base the valuation off of that expected future revenue scenario. VC funding just helps you get to that future destination, ultimately giving your investors their 10x return.

Along with the idea of creating demand, I'm a proponent of bootstrapping until you get investors wanting to invest in you. Leads to a much better outcome for the company.

There is not one bit of useful information in this article. It's just an breezy overview.

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