Getty Images/Paul Zimmerman
The Instagram cofounders
Instagram had no revenue, but for some reason Facebook decided the company was worth spending a billion dollars on.
Earlier this year, Pinterest sold $200 million in stock to new and current investors for less than 10% of the company, effectively valuing it at $2.5 billion. Pinterest still has yet to generate any revenue, but investors are betting that the social pinboard startup could be the next Facebook.
“The general public doesn’t understand start-ups at all,” Buchheit recently told Nathaniel Rich of The New York Times. “They’re mystified how a company with no revenue can be worth a billion dollars. It’s because of this power law: If a company has a 1 percent chance of being a hundred-billion-dollar company, then it’s worth about a billion dollars. That kind of thing doesn’t happen in your normal life experience. If I get a cup of tea, it’s a cup of tea — there isn’t a chance that it’s actually made out of solid gold. But that’s how this works.”
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