Diagram of the typical financing cycle for a s...Image via WikipediaAlbert Wenger has an interesting post about Valuation of startup companies and the main challenge in valuation of company on the exponential growth path. I could not agree more, this is the same problem that I have highlighted several times with my posts on Power Law and the failure of extrapolations and the Normal Probability Distribution. Albert points out a practical challenge from both sides of the venture table, as an entrepreneur you are not sure how long you need the funding to hit that inflection point and as an investor you are struggling to make sure you are not paying too much for a business that might not pan out. The solution is actually “common sense” but of course “Common Sense” is never “Common Practice”, I digress, the solution is to get to a sustainable model where your revenues/cash flows funds the company… you grow your customers base, revenue and cash position… Problem solved! Really, is it that simple, YES it is. 

StartupImage via Wikipedia

Of course all those companies that are building their business model on the Hope that they will draw enough crowd onto their site where in they can monetize the traffic with ads are working on a loosing premise. I know Huffington Post just got paid etc but there are so many content aggregators why only Huff Post got bought out? why not the others? once again the theory of the power law works here. So my take on this is very simple, entrepreneurs should focus on creating value by solving some problem for which someone is willing to pay a price for. If the universe of those willing to pay are price is HUGE then you are onto something.

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