So there are a bunch of Web 2.0 bloggers, err reporters, who love to make estimates about what a business is worth in M&A. My favorite is when they say, for example, “BigInternetCo paid $X for company Y so company Z (which is, for example, 1/10th the size of company Y) is clearly worth $X/10” (or similar).

The two biggest errors in this statement:

1) The internet is about scale. If company Y is growing faster or somehow easier to plug into the BigInternetCo platform it’s worth a multiple of the competitor because when you buy a company you are calculating the present value of future cash flows. And if it’s growing very quickly or has achieved a certain scale, it’s going to get a valuation premium to lesser players. To extrapolate, the 100th largest dating site may not be worth 1/100th of the largest one — it could be worth 1/10th or 1/10,000th based upon the dynamics of its growth and the industry.

2) If BigInternetCo can monetize a user session 5x > than anyone else then they can afford to pay a premium for a user over someone who cannot monetize in the same way. So again, when valuing a company don’t compare it to what BigInternetCo bought because they might be able to pay more because they can make more.

okay, enough “blind item” venting for the night