Facebook Valuation

FastCompany posted this interesting article about Facebook valuation.

Venture Capitalists and others value non-public companies by the amount of the last investment or trade. In Facebook’s case, the last trade was rumored to value the entire company at 35 to 50 billion dollars. An example, if 10% of the company gets sold for 10 cents, then the entire company must be worth 1 dollar. In this case, people are willing to pay exorbitant amounts for shares of Facebook. Since there is such a restricted supply of these shares, and the demand is so great, the result is a stratospheric valuation of the entire company. There is a fascinating story over at Bloomberg on how trading in Facebook derivatives has taken off.

Current Facebook shareholders gain the most out of this scheme. However, it is sort of like a pyramid scheme – at some point they will run out of investors willing to pay such high premiums. If the stock ever does go public, and it will because of SEC regulations, the valuation should adjust downwards to reflect the intrinsic value.