I have been a fan of Groupons for a while. I first heard about them this past summer when I was suppose to signup for a rock climbing class. Groupons was spun out of another startup and has already been ripped off by other cough, cough living social cough. Groupons has even taken their concept a step further with live off groupon, pretty interesting.

But how in the world can a business be worth over a billion dollars in under 18 months?. This just blows my mind!

This question came up recently as I was working on creating a evaluations of a profitable 6 month startup (Yes 6 month!) that I recently launched. I am always amazed at how someone can put a value on a company that is less than a year old or one that has not even produced a penny.

Then again, do evaluatins really matter though, aka Twitter? How much money have they made versus how much money they have raised?

The most interesting insight I saw with Twitter in regards to valuation was listening to Tim Ferris. He is an angel investor in twitter and recently discussed when you have a large valuation you can’t just try and produce a revenue because the moment you bring in money and establish revenue your valuation will start to reflect it. This means twitter would need to be pushing at least a hundred million a month in revenue to sustain their valuation.

This is 2010 and not 2005. In my opinion, startups need to start with real revenue models that create a profitable business in the short term or a high margin business allowing the business to raise money on PPC and make it back in volume.

Perfect examples are the the ladders and the new billion dollar valuation that we started with, Groupons. They leverage PPC since they have established a lifetime value for a customer. Once you have a basic model, it’s just a matter of spending as much as possible squeezing out that revenue/spend.

What do you think about valuation, should startups just be judge on revenue or short term profits?

Business Gifts