As this round of “Bigger Fool” Musical Chairs gets underway, it’s kind of fun to spot the first seller to argue that a ‘New Paradigm’ is in play, changing traditional valuation rules. Careful though, they’re tricky, and you may be so dazzled by the superficial appeal of the argument that when the music stops you’re the one left holding the Skype .. er .. bag.
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One of these new funded companies ($10 million in vc money) was asked about their business model – where the revenue would be derived from? The answer was that they were a Web 2.0 company that will be attracting a large amount of traffic because of the value they add consumers.
To me, that sounded like Web 1.0 of the late 90′s. And like you I called that the greater fool theory. Like baseball teams in the States that lose money, you count on the greater fool who wants to be an owner of a sports team buying you out. With VC it’s who will be the greater fool investing more money at a higher valuation.