How are the valuations for companies like Instagram and Tumblr established?

1 ANSWERS

1. Victor Strong
   

    Valuations for such startups are based on what people or companies pay for a portion or all of the company. This is not something new, as the current stock price (per share in the company) multiplied by the number of shares has always represented the value of a company. This is usually based on valuation techniques such as discounted cash flow, which looks are past and present earnings of a company and projects the value of future earnings against an interest rate that could be earned via a different investment (bonds for example). 

   
   

   The tricky thing about Instagram and Tumblr is that both companies were valued at $1 billion plus without having the revenues or profits to match. What they do have however is a massive following and earnings potential around that following. The companies that invested in Instagram (Facebook) and Tumblr (Yahoo) both bought based on potential earnings.

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