Beware mega-unicorn paper valuations

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

There's a famous old post going around Twitter this week by entrepreneur and developer David Heinemeier Hansson (@DHH). DHH is a critic of certain elements of the startup world, especially wild valuations. This entry from him is, in my view, a classic of the genre.

The post in question is titled Facebook is not worth $33,000,000,000," and was written back in 2010.

You can already imagine who might find the post irksome - namely folks who are in the business of putting capital into high-growth companies. This sort of snark, though not precisely recent, is a good example of how posts like the Facebook entry are read on Twitter.

If you take a moment to actually read DHH's blog, however, you'll find that the first part of his argument is that selling a minute slice of a company at a high price, thus revaluing" the company at a new, stratospheric valuation, is a little silly. DHH didn't like that by selling a few percentage points of itself, Facebook's worth was pegged at $33 billion. We've seen some similarly-small-dollar, high-valuation rounds recently that could be scooted into the same bucket.

It's a somewhat fair point.

But what struck me this morning while re-reading the DHH piece was that his second two points are useful rubrics for framing the modern, post-unicorn era. DHH wrote that profits matter, companies are ultimately valued on them, and that companies that don't scale financial results as they add customers (or users) aren't great.