It was actually very easy to justify the valuations of many (but not all) internet companies in the first "bubble" although not by naive net present value calculations. The key is to model scaling up as a call option on a future larger version of the firm; you only get the larger version if your company ends up valuable. With a standard checking account type model the only ways to increase value are to increase cash flows or decrease your discount rate, but with an option other avenues become available.
For example, the lower the strike price of the option, the more valuable. So Webvan = enormous initial outlay = high strike price = bad, whereas two college kids in the Yscraper = low strike = good. Another way to increase the value of an option, and I think this is the critical one for the first boom, is to increase the uncertainty of the value of the underlying asset i.e. the hypothetical larger version of the company. In the boom, that uncertainty was huge, we will all be buying pet food online next year, will Google manage all commerce of any kind in five, etc.
So, interestingly, the very fact the wisdom of the crowd had no clue what Web 1.0 business should be worth may have driven the high valuations in the first place.
In the second boom it appears 1. Strikes are lower, 2. Uncertainty is lower = affect on valuations is ambiguous. That's basically the conclusion of article as well as I see it, just approached from a different viewpoint.
For example, the lower the strike price of the option, the more valuable. So Webvan = enormous initial outlay = high strike price = bad, whereas two college kids in the Yscraper = low strike = good. Another way to increase the value of an option, and I think this is the critical one for the first boom, is to increase the uncertainty of the value of the underlying asset i.e. the hypothetical larger version of the company. In the boom, that uncertainty was huge, we will all be buying pet food online next year, will Google manage all commerce of any kind in five, etc.
So, interestingly, the very fact the wisdom of the crowd had no clue what Web 1.0 business should be worth may have driven the high valuations in the first place.
In the second boom it appears 1. Strikes are lower, 2. Uncertainty is lower = affect on valuations is ambiguous. That's basically the conclusion of article as well as I see it, just approached from a different viewpoint.