Twitter May or May Not Be Worth $10 Billion, but Who Believes Valuations Anyway?

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I love when people get upset about the valuation of a particular company. A fine example of the genre was posted today at the Wall Street Journal. The target: Twitter. The argument is basically that the company doesn't make enough money for people to value it so highly. Felix Salmon does a great job of providing the counterargument, but I want to make a broader point.

Valuations are fictions. Within some boundaries and particularly with growth companies, companies are worth as much as they are because people think they are worth as much as they are. How much growth a company may undergo is pretty much anybody's guess, although you'll find plenty of people saying they've figured it all out.

There is no central truth about how much a company should be worth that some access while others are in the dark. People create plausible stories out of the available evidence and then place their bets.That's all that's going on. There are more and less plausible stories (as Salmon notes) but they are all stories. To take an extreme example, who could have told us what would happen to Apple back on July 10, 2006?

AAPL chart.png

If I have a real pet peeve, it is behaving like we know more about the future than we do. Quantification -- now with more precision! -- tends to obscure the fact that assumptions matter more than anything. Good management (as if one could easily make that call) gets one multiple on its revenue while bad management gets a lower one. We celebrate Dell's rigor, and then we find out it was a sham. Yet still we don't learn the lesson that our guesses about reality are just that.

At their best, the valuation battles are good because they sharpen our thinking about why we think one company or another will grow. But usually they seem like proxy battles over whether, say, Twitter is a total waste of time.

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Alexis C. Madrigal

Alexis Madrigal is the deputy editor of TheAtlantic.com. He's the author of Powering the Dream: The History and Promise of Green Technology. More

The New York Observer has called Madrigal "for all intents and purposes, the perfect modern reporter." He co-founded Longshot magazine, a high-speed media experiment that garnered attention from The New York Times, The Wall Street Journal, and the BBC. While at Wired.com, he built Wired Science into one of the most popular blogs in the world. The site was nominated for best magazine blog by the MPA and best science website in the 2009 Webby Awards. He also co-founded Haiti ReWired, a groundbreaking community dedicated to the discussion of technology, infrastructure, and the future of Haiti.

He's spoken at Stanford, CalTech, Berkeley, SXSW, E3, and the National Renewable Energy Laboratory, and his writing was anthologized in Best Technology Writing 2010 (Yale University Press).

Madrigal is a visiting scholar at the University of California at Berkeley's Office for the History of Science and Technology. Born in Mexico City, he grew up in the exurbs north of Portland, Oregon, and now lives in Oakland.

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