>If it was $10, no one would buy it and if it was $0.01, they'd run out of supply. //
Do you think? Milk is a pretty much fixed use rate for homes I feel - low cost milk is probably more a loss-leader than anything else. If there's a crisis in the dairy industry those who can afford to pay $10 probably will for quite a time. The reason my supermarket doesn't charge more is competition. Milk is fungible, largely, hence competition plays a more important role [we buy Organic milk wherever possible however]. Most tech isn't so fungible.
I guess how that feeds in to your valuation analysis is that USP is important? Even if your business amounts to just another messaging app, or another photo app, you can have a USP - like Whatsapp's user base?
... if milk were 1¢ I'd take up cheese making; cheese is so expensive.
Generally speaking valuation is speculative. Think of it this way - a gallon of milk is priced at $3 because that's the price people are willing to pay for it. If it was $10, no one would buy it and if it was $0.01, they'd run out of supply. Same thing goes for business. The valuation is whatever people are willing to pay for it. If I buy milk for $3 it's because I know if I consume foods right now it will give me energy so I can do more things later in the day. Some people create a story speculating that a particular gallon of milk has the ability to give you twice the energy, so they'd price it at $6. These stories turn out to be true sometimes and sometimes not. Hence, why today valuations are considered crazy because everyone is painting a unicorn story.
A few factors go into valuing a company, which potentially aid the craze:
1. There is extremely low liquidity in non-public markets for investing. In other words, you don't have a millions of people in the US investing in startups every day. In a perfectly elastic market, valuations are 100% correct. Due to the high liquidity and number of actors, public markets are much better at reaching perfect elasticity whereas private markets are not. In other words, less actors dictating how much they are willing to pay for something means higher deviations from the true price.
2. Many tech companies are irregularly (irregular in relation to existing companies) evaluated today because they do not follow traditional investment metrics. This is largely set by precedence. When Facebook and Google IPO'd, the investing community was fairly clueless as to how to evaluate these companies. The metric they've chose is DAU/MAU because it translates into how much attention "land" they can acquire to resell to advertisers and hence increase revenues and profits. Now that these are "the metrics" it means every other "tech startup" is in a land grab to attain those numbers quicker anf faster than before. This is why Instagram and WhatsApp had such high valuations...their DAU/MAU's were crazy high and growing at faster rates than Facebook itself.
Generally, the larger investing community values companies based on earnings. EBITDA is usually a popular metric to do this, but one metric can't dictate everything about the valuation. Valuations are based on a series of metrics, a multiplier, all based on the speculative return of buying the business. So for example, a company a one-year $1.1m budgeted forecast might be speculate to be worth $5mil simply because the revenue growth trajectory means they can return. Now add in a multiplier of 2.2x because your team is a group of badasses and your contracts last 3 years, and bam your company is worth $11mil.
Because tech markets have high growth potential (Uber is quoting to having had doubled their growth every 6 months) it means the valuations are abnormally higher than many other businesses. How many hair salons do you know that are doubling revenue every 6 months and have relative businesses who have shown similarly consistent growth in that market?
All things being equal, the question ultimately becomes "what part of the hockey stick am I on?".