Nick Bilton for the NYTimes:
Yet an even more bizarre activity in the Valley than shushing the talk of a bubble is how some start-ups are advised by investors not to make money. This concept might sound ridiculous from a business standpoint, but for investors, it fuels the get-richer-quicker mentality that exists here. “It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues,” explained Paul Kedrosky, a venture investor and entrepreneur. “Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations.”
It is indeed difficult to put a value on a company that does not have revenues. It makes it easier or less head-spinning to look at valuations that way. There is no tangible base to the valuation so how can you tell if it is overpriced?
When small start-ups I’ve spoken with do make money, they often find it difficult to recruit additional investment because most venture capitalists — and often the entrepreneurs they finance — are not interested in building viable long-term businesses. Rather, they’re interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.
I guess it isn’t true for all investors (I hope so), but it makes a lot of sense. A lot of start-ups out there do not have a business model yet.