Rails Inventor DHH Was Right About Facebook, After All

February 5, 2012 11:25 pm

We had spotted an interesting argument on Facebook’s valuation in September 2010 – from 37signals and rails founder DHH. Basically, the argument was that Facebook was not worth 33 Billion Dollars.

“In other words, the valuation is resting on the flawed assumption that Facebook could actually ever get 33 times as much money to change hands if they wanted to. There’s just no way, no how that’s happening right now. If it could, they’d IPO tomorrow.

So the Facebook valuation based on minority investments is in my mind a complete joke in the sense that there was $33,000,000,000 dollars on the table. Irrational investor exuberance indeed.”

DHH was right, after all, How so true. Facebook is actually worth much more now, thrice that number?

We had got that wrong as well. We had concluded on our Facebook valuation analysis as below:

“So here is why we think extending the SecondMarket numbers to value the whole of Facebook valuation is a stretch:

1. The auctions have seen a miniscule part of Facebook shares
2. The market is a private market, accessible to a very select few, with a possible positive bias towards net economy
3. Tools to make negative bets (e.g. derivatives to short facebook) are not available
4. The firm is not IPOed yet to say a miniscule volume can be extended to the company’s valuation.”

Our conclusion was safe – but it was wrong.

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