How Start-up Valuation Works

Last week Facebook bought WhatsApp for $16 billion in cash and stock. WhatsApp Inc. was incorporated in California in the summer 2009, which makes the company less than  five years old. It has hardly left the start-up phase.

The transaction is the largest purchase of a company backed by venture capitalists ever and the deal happened only months after a venture capital financing round valued WhatsApp Inc. at $1.5 billion. I wanted to understand how the valuation of internet start-up’s work and I found the graph below, which was published on the internet in July 2013 by FundersAndFounders. I think it is a very good illustration of how start-up funding and valuation works. The key is the dream of future revenue, based on comparison with other hyped companies. How realistic that is is another story.


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