Skype and Hype

The Stalwart blog takes me (at least I think its me) to task for using theories like Metcalfe’s law and Reed’s law to value companies.

The Stalwart ties this into the Skype deal, which he thinks was way overvalued by eBay.

That got me thinking a bit and I’d like to explain.

We believe the only way you can value companies is using a reasonable multiple of cash flow.

When we think about value creation, that’s how we think.

And generally we invest at a value that is a fraction (some would say a tiny fraction) of the exit values we think are obtainable in the next five to six years using a reasonable multiple of cash flow.

So why am I blogging about Skype and talking up these theories like Reed’s law?

Because its very instructive to learn from the moves that others are making and have made and understand how value is being created.

And theories like Reed’s law help bring clarity into debates about whether to keep systems closed or open them up.

There are a lot of people claiming Web 2.0 is a bunch of hype being fostered by the VC community in order to create another bubble which we can all profit from.

There is certainly plenty of hype going around and maybe this blog is adding to it in some ways.

But that is not my goal.

My goal is to have a conversation about the things I am seeing and the analysis I am reading and figure out what makes sense and what does not.

Once we do that, we can apply it to the investments we make.

And hopefully we’ll make some money the old fashioned way in the process.

As I wrote in my Bubble 2.0 post six months ago:

If you were at the first party, then you should never forget how it felt when it was over. 

Drink responsibly this time.