

Hedge fund invests in LinkedIn at more than $2 Billion valuation - 1gor
http://noir.bloomberg.com/apps/news?pid=20601087&sid=auVv0Szp.SIo&pos=5

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adamt
When you see deals like this it is often not reported what liquidation
preferences or other the investor is getting.

E.g. If Hedge Fund X puts in a $20M investment for 1% it might seem expensive,
but not if they have a 3x liquidation preference that guarantees them a profit
on any trade sale above $20m in value, and most likely on an IPO.

Similarly it helps LinkedIn set a price point with any future IPO plans.

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Sukotto
I'm unfamiliar with this kind of math. Would someone please walk me through
the steps here to understand what this actually means?

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burningout
He means that if linkedin would be sold for 60 million, they would get the
first 60 million. Then afterwards the normal shareholders are served until the
initial ratio is reached.

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startingup
I am noticing a trend lately where private market valuations seem higher than
what equivalent public companies get. Of course, it is hard to find a public
company equivalent of Facebook or LinkedIn, but I would say Google can be a
good proxy for FB or LI.

This is puzzling at first: if private parties thought public markets were
undervalued, why won't they directly invest in already public companies?

I believe the answer has to be that private parties believe private companies
are relatively undervalued compared to what "they should be" in public markets
- in other words, they are not undervalued compared to currently public
companies, but they are undervalued compared to some notion of what they ought
to be as public companies themselves.

This idea is not surprising - after all every start-up investment, almost by
definition, reflects the investor's bet that they found something that is
"relatively undervalued compared to its eventual public status."

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mark_l_watson
Makes some sense to me: LinkedIn really provides a great service, so to my
non-business, humble programmer mindset, this equates to value. Personally, I
get many times the utility from LinkedIn than from Facebook - no comparison!

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paraschopra
Can you detail how it benefits you? I somehow fail to get any benefit out of
my LinkedIn account. How do you typically use it?

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mark_l_watson
Good questions: check colleagues' info at start of new gigs, many people from
my working past have contacted me through LinkedIn, and the email traffic on a
few interest groups is low volume and of reasonably good value.

I have never used LinkedIn for its original function: finding a contact point
in a company through a mutual connection. The reason for this is that it is so
easy to simply email someone, introduce yourself, and try to say something
interesting enough to them that they will spend a few minutes getting
acquainted.

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esschul
Are they just pulling these numbers out of the air? Let me rephrase, what goes
into the calculation when they estimate the value of a company like LinkedIn?

Sure in the article they say 70 million users + a healthy economy. But $2
billion ? I think I've heard estimates all ranging from $5 to $15 billion for
facebook. That's 500 million users.

So the secret formula is:

 _500 million users / 70 million users = 7_

 _15 / 7 = 2.1_ or about 2 billion if you like.

What really determines the value?

1) Amount of users, and loyal users.

2) Amount of cash they are generating

3) Amount of cash they have tucked away

4) Growth

5) If anyone wants to buy them

Any other factors?

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byrneseyeview
Valuation is hard, especially for startups. People view Facebook, for example,
as an "option" on whatever smart business can be built out of 500 million
address books and the world's largest photo-sharing service. FB can tax
companies like Zynga in order to extract most of the economic profit those
folks make.

In this case, though, it's a lot simpler.

    
    
        (Value of shares purchased) / (Percentage of shares purchased) = Market value of 100% of shares.
    

It's the same way you'd calculate the market value of, e.g., Google. Share
price times shares outstanding. In Google's case, the market is more
'efficient' in the sense that it's easier to buy and sell, and there's more
information. But private company stocks offer a different kind of efficiency:
the amount of research, compared to the size of transactions, is far higher.
Ask a typical economist, and that's inefficiency; but ask Warren Buffett, and
it's not.

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mikeryan
I'm going to pick a nit and say its not

"Value of Shares Purchased" but (Price of Shares Purchased) / (Per...

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robryan
Is linkedin really worth that much?

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weego
The detail gives you a clue:

The purchase, at $21.50 a share for about a 1 percent stake, was from existing
shareholders and doesn’t represent new investment

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blacksmythe
It is true that existing shareholders might not price the round fairly if they
have ulterior motives on the pricing.

However, frequently insider funding rounds are at realistic valuations, or
even unrealisticly low valuations, to force all existing shareholders to
participate or be diluted.

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derekc
Should be worth more than $2b.

