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Comment by esschul | Hacker News Reader

Are they just pulling these numbers out of the air? Let me rephrase, what goes into the calculation when they estimate the value of a company like LinkedIn?

Sure in the article they say 70 million users + a healthy economy. But $2 billion ? I think I've heard estimates all ranging from $5 to $15 billion for facebook. That's 500 million users.

So the secret formula is:

500 million users / 70 million users = 7

15 / 7 = 2.1 or about 2 billion if you like.

What really determines the value?

1) Amount of users, and loyal users.

2) Amount of cash they are generating

3) Amount of cash they have tucked away

4) Growth

5) If anyone wants to buy them

Any other factors?

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LinkedIn has a much more sophisticated, educated, wealthier and more focussed user base. They also have a strong and consistent revenue stream that is diversified.

Valuation is hard, especially for startups. People view Facebook, for example, as an "option" on whatever smart business can be built out of 500 million address books and the world's largest photo-sharing service. FB can tax companies like Zynga in order to extract most of the economic profit those folks make.

In this case, though, it's a lot simpler.

    (Value of shares purchased) / (Percentage of shares purchased) = Market value of 100% of shares.

It's the same way you'd calculate the market value of, e.g., Google. Share price times shares outstanding. In Google's case, the market is more 'efficient' in the sense that it's easier to buy and sell, and there's more information. But private company stocks offer a different kind of efficiency: the amount of research, compared to the size of transactions, is far higher. Ask a typical economist, and that's inefficiency; but ask Warren Buffett, and it's not.

I'm going to pick a nit and say its not

"Value of Shares Purchased" but (Price of Shares Purchased) / (Per...

Interestingly it looks as though each user for both services is valued about the same: Linked-In: $2b/70m users = $28.57 per user. Facebook: $15b/500m users = $30 per user.

I think the prevailing thought is that that $15b valuation for Facebook was always a bit of a red herring. More recent investments put it at around $10b.

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