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There are a lot of things you have to know to make sense of a deal like this.

(1) You have to know what Twitter's financials look like. You can speculate, but since they're not public, you don't know. It may be the case that based on the financials, the growth, and a few simple spreadsheets, KPCB figured out a valuation that makes them comfortable buying at $3.7b.

(2) You have to know what the investor's goal is. Different VCs have different funds with different models. Funds that invest in late stage companies don't expect to make huge returns. They might see a path to a risk-free exit at $5 billion in two years. Investing at $3.7b for an exit in two years at $5b is a great investment for certain types of investors. Other types of investors are investing earlier stage and need 10x or 20x returns to make up for the complete failures in their portfolio.

(3) When talking about large companies with user bases the size of Twitter or Facebook, the very size of the user base can make the common stock much more valuable in a public offering. Think about how many dentists and lawyers are going to invest in Facebook on the day of its IPO because "everybody they know uses Facebook." Meanwhile, another, much more profitable B2B company that only has 1000 customers can be completely invisible to the public at large so the demand for their stock in an IPO would be weaker.

(4) $10b exits may be rare, but Twitter is a rare company. You don't see a lot of companies getting 8% of online Americans in a year or two.

(5) There is a very short list of investors with the midas touch. The very fact that they are investing in something makes it more valuable. John Doerr is certainly in this category. He can invest in Brown Paper Bags and make money simply because so many other investors trust him and will buy anything he buys.

(6) It might not be a sensible deal. The people investing in it might be idiots.

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