Forbes is reporting that Facebook’s Zuckerberg is now richer than the Google’s Sergey and Larry. How did that happen? By using the most naive form of financial extrapolation and calling it fact.
Here’s how the financial alchemy works: GSV Capital spent $6.5 million to buy 225,000 shares at ~$30/share. That amounts to buying about 0.01% of Facebook. They purchased these shares at a 40% premium over the last big valuation that put Facebook to be worth $50 billion.
So if you extrapolate that the premium paid for 0.01% of the company is the same premium someone else would pay for 100% of the company, you get that Facebook is now worth $70 billion. So the relatively modest investment of $6.5M snowballs into a $20 billion creation of “wealth”. That’s a 3076 wealth leverage! Put one dollar in, get $3,076 out.
Now anyone with an iota of critical thinking would perhaps question whether a stock purchase of 0.01% is representative for the worth of the company at large, but not Forbes. They simply accept this fantasy 1:3000 transformation as fact and serves it up as the foundation of an article that then goes on to place Zuckerberg as the 3rd riches techie in the world.
That is grossly irresponsible financial reporting. But hey, Forbes is on a roll these days.
Unfortunately, it’s not exactly an isolated case either. Remember the cover of BusinessWeek from 2006? It had a happy Kevin Rose on the cover with the headline: “How This Kid Made $60 Million In 18 Months”. Anyone wants to ask Kevin how much of that paper money he got to keep as Digg tanked? I’ll bet you a buck that it wasn’t $60 million — or anything close to that.
We used the same math to value 37signals at $100 billion in 2009. It was meant as a joke, but I guess Forbes thought of it as a blueprint.