Silicon Valley’s math is getting fuzzy again.
Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.
Consider Facebook, the popular but financially unproven social networking site, which is reportedly being valued by investors at up to $15 billion. That is nearly half the value of Yahoo, a company with 38 times as many employees and, based on estimates of Facebook’s income, 32 times more revenue. Google, which recently surged past $600 a share, is now worth more than IBM, a company with eight times more revenue.
More broadly, Internet start-ups are drawing investment based on their ability to build an audience, not bring in revenue – the very alchemy that many say led to the inflating and undoing of the dot-com bubble.
The surge in the perceived value of some start-ups has even surprised some entrepreneurs who are benefiting from it.
A year ago, Yahoo invested in Right Media, a New York company developing an online advertising network. Yahoo’s investment valued the company at $200 million. Six months later, when Yahoo acquired Right Media outright, the purchase price had swelled to $850 million.