Something is worth exactly what someone else is willing to pay for it. But does that mean that a purchase of eg 5% of a company at a high valuation makes that company worth 100% of that valuation? Probably not. Makes for interesting reading though.
I might really want to invest in you, so I'll blow the valuation up. I might even be the only person willing to pay that price. But that doesn't mean I want to buy you outright at the valuation.
In practice that doesn't happen. In these late-stage rounds, there is not usually a single investor willing to pay way more than other investors. And even if there were, the company would think twice before selling at that price, because it would just set them up for their next round or IPO to be a down round, which would not be good.
But see, that's kind of the thing--how a valuation is computed and what that actually means are two different things. For instance, let's say I put $10,000 down on a house in 2007 that's worth $500,000. Is that house really worth $500,000, or is that valuation a side effect of easy lending? I guess it depends on when you calculate that worth.
But take 5 companies that have a combined valuation of $5 billion according to their last round. My point is simply this: those companies together are not actually worth 5 billion dollars, in that you cannot find someone to buy them at that price. You can sell portions, sure. But you end up with less than the 5 billion quoted in NYT.
But as pg points out, in practice, nobody is trying to buy companies that way, and there are many other factors at work. And hey, maybe 4 of those companies go out of business but one of them is the new new thing--then it just doesn't matter and you've been successful as an investor in super risky businesses. But even still, there's a difference between the cost of part of something versus the cost of the whole--same difference between paper wealth and actual wealth.
Dave makes a very valid point, which is that the market is often illiquid. Pinterest and AirBnB have $1.5-2.5B valuations right now, but how quickly do you think they could find an acquirer at that price? Quora's last round priced them at $400M, but I bet you'd be hard pressed to find someone who's willing to buy them at that price in the next 3-6 months.
Investors who invest in a company at a valuation of a billion or more don't care about potential acquirers anymore, because an investment at that kind of valuation is a bet that the company will go public.
