Actually I don't understand why this valuation is being considered null/void. It _is_ a simple issue of "extrapolation". (whether the stock is over-priced is a separate issue).

If this firm spent 6.5m on 0.01% of common stock, and assuming there is no other value tied up in the deal - i.e. it's a simple share purchase - then yes that values the firm at $70bn or whatever. The investor is expecting to get his money back, he hopes the firm will IPO at this value or higher.

This is a separate issue to the actual valuation. You (and me) might well consider such a valuation absurd. But that's where it's trading. C'est la vie.

Edit: ah ok, I got his argument - he's saying that a 0.01% trade is too small a trade to value facebook as a whole with. He could be right (altho $6.5m is not to sneezed at). But a $50m trade _would_ give confidence around a valuation ;)

     It _is_ a simple issue of "extrapolation". 
    (whether the stock is over-priced is a separate issue).

I agree, but that's not how "extrapolation" should work.

Considering how kick-ass and promising Google was before its IPO and what Facebook is right now, it's clearly an overpriced company, especially in the context of the current economic recession which is far from over and might even bring further surprises down the road (Greece, Spain, Portugal defaulting, etc...)

Based on this valuation, Facebook (pre-IPO) right now is in the same league as Google and Apple, which is absurd.

Of course, markets aren't always rational. That's why we have bubbles and economic recessions. What can I say; most people dream about investing $1 and getting $3000 back.

The most rigorous methods of valuation are usually reserved for publicly traded companies, in which financial statements and reporting can be examined thoroughly by a large number of analysts. In other words: actual company assets, liabilities, and equity can be assigned values. These fundamentals can be analyzed pretty tangibly, serving as the partial basis -- along with other performance metrics, and market and industry analysis -- for estimations of future performance.

The going gets tougher for privately held and traded companies. Transactional volume, secondary market pricing, liquidity, exit options and timing, etc., are usually the bases for valuation in the case of entities like FB. To be fair, analysis of the company's fundamentals does take place -- but it is inherently limited, due to the limited publicly available documentation and knowledge from which to work. Hence, a large degree of speculation is baked into the value. We needn't conflate speculation-qua-speculation with "irrational" speculation, as the press often does. Indeed, sometimes speculative valuations prove conservative. Nevertheless, speculation exists in this case because most analysts have no other choice.

The same way you sensibly value anything else: what the market will bear. In other words, it's worth whatever someone is willing to pay for it.

Mr Warren Buffett knows how to do it. He says anyone can learn the essence of what he practiced for decades as investing style from a book written by his university teacher Benjamin Graham. The book is called "The Intelligent Investor". Mr Buffett has described it as "by far the best book on investing ever written" and it is available from Amazon.

For good valuation information check out the mergers & acquisition literature (Finance, Accounting, Business textbooks), and the "value investing" literature (Ben Graham's Intelligent Investor, Seth Klarman's Margin of Safety, etc).

I think the article missed the point though -- net worth isn't about liquidation price so much as the cost of getting to your position at a given moment... which forbes seems to have done a decent job calculating...