The subheading in the article is telling, and doesn't appear to demonstrate anything I would describe as "bursting"
> The ChatGPT maker’s latest funding round values it at $1.25 trillion, less than its $1.4 trillion target
> The ChatGPT maker’s latest funding round values it at $1.25 trillion, less than its $1.4 trillion target
Number go down, or even not go up as much as expected, is not good. These valuations are entirely matters of confidence. When that goes away…
Number might go down more. Number might go up more. Number might even be a better buy today than yesterday, or number may be far worse.
1.25 is still a number. It hasn't burst.
This Adam Smith?
Adam Smith was against Joint Stock Companies (aka: the predecessor to the modern company). Specifically, he believed that shareholders will never watch over the money with the same care as a merchant who watches his own money.
So? OAI isn't on any stock exchange right now. Their value is not determined purely by supply and demand.
I always kind of suspected that those are somehow derived numbers, but arbitrary for the most part.
The implication is they had to sell more of the company for cheaper than they wanted if they only hit 1.25 instead of 1.4.
So you elect to raise some money by selling portions of that thing.
You mention this to me and it turns out that I'm more interested buying partial ownership of that thing than I am in retaining my own pile of money.
We haggle on price, and capabilities, and projected economics, and whatever else.
Eventually, we come to an agreement wherein:
You agree to sell me 10% of the thing, and I agree to pay you 1 million dollars for that 10% share. We know, with precision, that the value of that portion is 1 million dollars because that's what you and I agreed that it is worth.
This can be extrapolated to show that the thing (all 100% of it) is valued at 10 million dollars.
---
And this value can change over time. If the next buyer likes the thing even more than I do, then they might be willing to pay even more for a chunk of it and the valuation therefore trends upward beyond 10 million. But if they instead like it less, then the valuation can decrease to below 10 million.
At some point, if the thing is performing well, maybe I can sell my 10% share for 2 million dollars. I hypothetically walk away from it with an extra million bucks that you'll never see, but this sale increases the valuation of your thing.
Or maybe the thing turns out to be a bust, and the best deal I can get by selling my 10% share is fifty bucks from some dude with a pickup truck and a back-yard scrap metal operation. The valuation of your thing is now clearly in the toilet, but you get to keep the million bucks I gave you (or whatever it was you spent it on). I lose $999,950.
My question is about that part. I assume in the end it's mostly "I feel it's worth a super-lot of money" and the numbers that are being produced in the process and put on slides to derive the final two numbers are mostly a rationalizing of that fact.
The seller wants as much as they can get, and at this scale they're willing to bend reality to get it. The buyer wants to feel (they don't know the future; they can only feel around for it) that they're going to get paid handsomely for investing.
It may involve an elaborate and formal presentation with slides and such. It might instead involve some bourbon and a round of golf in some very beautiful place, and then a trip to the titty bar after an opulent supper if the buyer still isn't sufficiently suaded.
It may involve all of these things, and also a petting zoo.
And when none of that is working: Cocaine[1].
However it happens: Once the price is established and the deal is completed, the price becomes the price. The value of the greater thing can then be extrapolated from that price.
At a smaller scale, it's functionally kind of like an eBay auction for some particular widget or other. The seller wants as much as they can get, the buyer wants to pay as little as they can, and when the timer runs out: The winning bid sets the price, and also sets the precedent for other similar widgets that are sold in the wake of this sale. Savvy buyers will pay attention to what these widgets have sold for previously and act accordingly.
The quote below is about valuing the bond market in the 1980s. Obviously, it's meant as a cynical answer to your question, but maybe there's a kernel of truth there, too.
"He'd lean across to Lewie [Ranieri] and ask, 'How do you like 'em, Lewie?' (referring to the bond market). Lewie would say, 'I like 'em a lot!' And Mario would say, 'Yeah, I like 'em, too, I like 'em, too.' Fifteen minutes later he'd lean across again to Lewie and ask, 'How do you like 'em now, Lewie?' Lewie would say, 'Don't like 'em at all.' And Mario would say, 'I don't like 'em neither, I don't like 'em neither.'
Taken from Michael Lewis's Liar's Poker.