Is Speculating On What Private Companies Are Worth A Good Idea?

Robert Scoble wrote a post at 4am on the road in Indianapolis last night proclaiming that Twitter is "probably worth $5bn to $10bn." This is not the first time that someone has used a blog post to speculate on what a private company is worth. Facebook is probably the poster child for this activity.

Earlier this year TechCrunch posted that Facebook had received a term sheet valuing it at $2bn. Not much more than a month later, Facebook announced that it had taken an investment from Digital Sky that valued the company at $10bn.

Is all this speculation good or bad? I'm honestly not sure. But I think we will see more of it, not less. This morning Howard Lindzon noted on his blog that Stocktwits has established tickers for Facebook and Twitter. So now you can tweet about what you think about $fbook and $twit, the stocks not the companies.

At the same time as all this speculation is raging in the blogs (and even traditional media), we have secondary markets cropping up like SecondMarket, Sharespost, and a bunch more. I've even read research reports on Sharespost about private companies that attempt to project revenues and earnings and do valuations.

On one hand, I think the transparency into the world of private investments is good. Entrepreneurs benefit from having their companies discussed and valued in "the market".

But I think all the focus on what a company is worth can be bad. These companies are private for a reason. Most of them aren't mature enough to be public companies. They often don't have full management teams and some don't even have revenues. The focus inside these companies needs to be on building the company, the product, and the business. And endless discussions about what their company is worth can be terribly distracting.

I saw this in action back in the late 90s when a bunch of our portfolio companies went public before they were ready. The employees spent too much time focused on the stock price and too little time focused on the business. Many employees starting counting their net worth in stock that was not liquid and eventually was worth pennies on the dollar of what they thought it was worth.

At the end of the day, this speculation about what companies are worth is useful if everyone keeps it in context. It's a lot like fantasy baseball. Your team might be doing great, but at the end of the day, you really don't own a major league baseball team. It's just a game.

But in the case of startups and company building, it isn't always a game. When your company grows up, becomes a real business, and goes public, you can reap the benefits of all the work you've done. Just don't count the chickens before they roost.