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.

Donovan McNutt, Founder & President of GeekDesk, on his company’s story:

The beginning

This business started when I was a 17-year-old kid — I went innertubing in the snow with a friend of mine, the snow was icy, we got off course and ended up flying across a ravine in an accident bad enough that it broke her pelvis and darn near broke my back. I ended up with a rib broken loose from my sternum, and the vertebrae connected to that rib pretty much knocked silly. It didn’t affect me that much until I was older, but by the time I was in my 30s, back pain was a fairly recurring problem for me. That was what drove me to look for a better way to work as a programmer.

When I first started looking for better ways of working (in terms of sitting/standing), I kept coming across these fixed diagram pictures showing “the proper way to sit at a computer” — usually spouted by supposed ergonomic experts. You know the type I’m talking about — feet flat on the floor, elbows at perfect right angles, etc. For me, my body was saying something much simpler: “MOVE!” It was telling me to change position once in a while. I pretty much had to ignore the experts at the time to trust that intuition.

GeekDesk started with around $20,000 and some well-leveraged relationships. I already had a reasonably steady stream of income from a small consulting business, and long ago learned how to live pretty modestly. So we didn’t need to make a whole lot of money right out of the gate. We don’t share revenues or employee count figures, but we qualified for this profile (profitable and over $1M in revenues) last year with significant room to spare. And so far this year, sales are averaging between two and three times what they were last year.

I love who we sell our products to. Every week, it seems like somebody I’ve heard of buys a desk or we get some great feedback from someone whose life was changed by just being able to stand up once in a while. I can’t really name names but some of my personal programming superheroes have purchased desks from us. It’s all I can do to not reach out and say “Hey, thanks! We think you are really cool!” It’s fun to be able to produce something that people you greatly admire find useful.

How we work

We don’t have a conventional “office” of any kind. Our work environment is what I’d describe as flexible, down-to-earth, and human. I’ve been self-employed most of my adult life (I’m in my mid-40s now) and never cared much for the typical corporate environment. Our culture reflects that. I’d like to think Scott Adams wouldn’t find very much fodder for his Dilbert cartoon strip here.

In general, we try to give our team a lot of room to move and encourage people to think for themselves, focusing on the overarching values and vision more than policy and procedure. I’m not much of a taskmaster — in fact, I actually hate telling people what to do all day — so I have found that it helps if I surround myself with people who “get it,” are generally proactive, and can think for themselves. They can take my occasional “sidelines coaching” input and run with it in such a way that, given their specific gifts and talents, they completely blow out of the water anything I would ever be able to do by myself.

I like to keep the organization as “flat” as possible. Wherever possible, I like to see people working side-by-side rather than over/under. Sometimes this frustrates people, because they want positional authority; It’s more “efficient.” I prefer relational authority. It’s more effective.

When you start cutting corners, customers can’t always tell. But employees usually can. And that can be just as bad.

In this Mixergy interview, Jim McCarthy, the co-founder of Goldstar, talks about his days working at Noah’s Bagels and recalls a corner cutting moment that revealed a deeper change in the culture there:

The culture of Noah’s began to change…There was a point where the management of Noah’s said, “Only 7% of our customers keep kosher.” But having kosher in the store means we can’t have a ham sandwich or even a turkey and cheese sandwich. So the logic went, “OK. If we lose the 7%, because we’re not kosher, we’ll replace it by selling these other things.”

I remember at the time thinking, “That’s not how it is going to work,” and saying, “That’s now how it is going to work,” and it did not, in fact work. Because you’ve taken the 7% of people who love you, think of you in a way that brings goose bumps to them, and told them to, “Go to hell.” You’ve told them to leave your store. And more importantly, you’ve said to the employees, “Remember how we used to stand for something other than just selling bagels and cream cheese? We don’t stand for that any more.”

That type of “employees will notice even if customers don’t” thinking came in part from a story McCarthy had heard about Starbucks’ Howard Shultz:

There was a point, I think in the 80′s, where somebody came to Starbucks’ Howard Shultz, and coffee bean prices were going through the roof, and it was a threat to the survival of the company because the cost of coffee is a big part of their business. So of course somebody comes to Howard and says: “You know, if we just kind of kick down from the top grade of beans to this one, everything’s cool, and we’ve done a survey right here, that says only, let’s just say, 7% of customers can tell the difference between the best coffee and the second best coffee.” And his response was, “No, we’re not going to do that, we’re going to find some other way to get through the price crisis. Because even if nobody noticed, the employees will notice.”

It’s a good lesson: You’re not just sending out a message externally, you’re sending one out internally too. If your employees don’t believe it, the whole plan falls apart.

On Scotland’s North East coast, a craft beer startup is trying to brew a revolution. “The idea to start our own brewery certainly wasn’t something we consciously set out to do,” says James Watt, who founded BrewDog along with his school pal Martin Dickie. It all began when the two were discussing beer monotony (“the stuffy ales and fizzy yellow lagers”) and how often supermarket and big brand beers taste the same.

Dickie had just finished a degree in brewing so the duo decided to try and create their own beer. The goal was to make something a class apart from “the stuffy ales and fizzy yellow lagers” that dominate the UK market. Watt: “I guess like any good idea it just had this natural flow about it that just kept rolling and has never really stopped.”

Dickie (left) and Watt.

A makeshift brewery
After their discussion, the pair set up a “sketchy” makeshift brewery in Dickie’s garage and created the first batch of what is now known as Punk IPA. They took the pilot beer to a series of open tastings and were discovered by beer guru Michael Jackson (“The Beer Hunter,” not “The King of Pop”) at an event in Glasgow. Upon tasting the beer, he told them to quit their jobs and go into brewing fulltime. And that’s exactly what they did.   Both were only 24-years-old at the time, the pair took the plunge and leased a building. Watt: “We somehow managed to scrape together £10,000 of personal savings between us along with a £30,000 bank loan which we lied to get. We found that turning up at the bank wearing a suit whilst pointing at a series of useless numbers on a spreadsheet is the best way to get a business loan.”

The beginning stages involved a lot of long hours. “The first year involved living, eating and sleeping at the brewery — a drafty warehouse on Fraserburgh’s coastline,” says Watt. “Exposed to the elements and running short on funds, Martin and I often worked 20 hour shifts, both to stay afloat but also to stay warm.”   Within a year, a buzz began to form around their beers. Some people attacked their “reckless and irresponsible” approach to brewing. Others saw their beers as wildly innovative and providing a much-needed shakeup to the outmoded classic beer world. “Many people are still making their mind up over which brush to tar us with,” explains Watt.

Scaling up
The rocketing demand meant the company had to deal with scaling issues — specifically: maintaing quality control while brewing more beer. “We are all about the beer quality, not about how much beer we make,” says Watt. “We live and die by what is in the bottle and what is in people’s glass. We want to ensure every single beer that leaves our brewery is a true reflection of our beer philosophy and the beer we can make it. To have this much control is just not possible when you scale up too fast.”

So even though the company was profitable and turning over £1.8m (around $2.8m), it reevaluated its plans. Watt explains, “We needed to completely reinvisage the way we financed our company in order to hire talented staffers and boost the amount of beer we were able to produce whilst ensuring we still sourced the best, rarest, and most obscure ingredients.” In the midst of 2009’s post-recession climate, BrewDog opted for a completely alternative business model called “Equity for Punks.”

“Equity for Punks turned the concept of business ownership on its head,” according to Watt. “Despite having run the business for just two years, we took the unprecedented step to become a PLC. Then we offered the public the opportunity to buy shares (just under 5% of the company) in BrewDog. We managed to raise over £700,000 in extra funds as a means to growing BrewDog even further. Over 1,300 people bought into BrewDog’s vision of a craft beer future that offered people more choice.”

Now the company exports 700,000 bottles per month to over 27 countries worldwide. 2010 revenue was £3.5m with profits of £300k. There are 65 staffers and locations include a brewery, three bars, and a restaurant.

Exit Interview is a Signal vs. Noise series that talks to founders to see what happens after companies get acquired.

Webshots
Webshots has been acquired multiple times. Webshots Founder Nick Wilder:

Webshots has quite a sordid history: we sold it to Excite@Home in 1999, they went bankrupt, we bought it back (97% off) in 2002, and sold it again to CNET in 2004. American Greetings bought it from CNET about two years ago.

After buying it back from Excite, we immediately figured out how to make it profitable and worked our asses off for a couple years. We had great growth, product development, and a huge profit margin, which made us an attractive acquisition.

CNET, despite being a company with great assets, was a disaster. They broke apart our team (engineering moved somewhere, ad sales went elsewhere, etc). They tried to move us to different server platforms. We accomplished absolutely nothing in the year I worked there. I quit on my 365th day, which was my part of the deal. The product seriously suffered, and users started dropping us for the newer photo sharing sites that were simply better.

Webshots has been in steep decline ever since, and it’s depressing to see your baby wither away. According to Alexa, it was once a top-20 ranked property (1999-2003 was the high); Now it’s around 1000.

It’s depressing to see your baby wither away.

TripUp
TripUp was acquired by SideStep in July 2007. TripUp Founder Samuel Rogoway:

SideStep’s acquisition of TripUp was bittersweet. On the one hand, we realized a successful exit in a market that was becoming increasingly saturated with travel social networks. Sidestep also had exciting plans for integrating and expanding our community features, which our users would have loved. On the other hand, Kayak subsequently acquired Sidestep and phased out TripUp, which was sad.

I think Kayak missed a big opportunity to integrate interactive community features into their metasearch platform. Interacting with like-minded travelers and locals to plan and experience your trip offers value that traditional user generated content and editorial content cannot provide.

I think Kayak missed a big opportunity.

GrandCentral
GrandCentral (now Google Voice) was acquired by Google in July 2007 (rumored price: $50 million). GrandCentral Founder (and currently Entrepreneur in Residence at Google Ventures) Craig Walker:

When you get acquired, you have a sense that there is some grand plan of exactly what you are expected to do at the new company and that everybody knows what this is. In reality, it was a lot more chaotic than that. There was nobody telling us what we had to do. We were empowered to figure out the best course for GrandCentral (aka Google Voice) within the company and we got a lot of support at every turn.

It’s difficult to say what would have happened had we not sold. We definitely would have raised a pretty substantial Series B and would have continued to innovate at a rapid pace. We likely would have been able to roll out more features more quickly (one of the side effects of being part of Google is that everything you do must be able to support millions and millions of users immediately, which does slow down the pace of innovation at a start up), but would have lost out on the ability to quickly reach tens of millions of users. At the end of the day, more users were definitely better off due to the acquisition as it got out to many more people.

At the end of the day, more users were definitely better off due to the acquisition.

The only thing I wish that Google would have done differently would have been to tie the product more closely to Gmail early on. We launched this feature last summer (2010) and its been a great hit. Had we done that in 2008, it would have been better.

Jason 30 Jan 2006 — An email from a reader:

At every company I work at, I keep seeing product roadmaps with qtr by qtr delivery of different features – they typically go out 1-2 years. Of course the product roadmap is out-of-date almost immediately because knowledge is constantly gained from market analysis and interaction with customers. My question is do you guys do product roadmaps? If so, do you put times schedules around them? I’d love to see your comments on this stuff…

Our answer: Product roadmaps are dangerous. They close your eyes and often put you on the wrong path.

One of the tenets of the Getting Real process is the idea that the future should drive the future. When you let a product roadmap guide you you let the past drive the future. You’re saying “6 months ago I knew what 18 months from now would look like.” You’re saying “I’m not going to pay attention to now, I’m going to pay attention to then.” You’re saying “I should be working at the Psychic Friends Network.”

Instead of the roadmap, just look out a few weeks at a time. Work on the next most important thing. What’s the point of a long list when you can’t work on everything at once anyway? Finish what’s important now and then figure out what’s important next. One step at a time.

This doesn’t mean you can’t have ideas of where you think your product should go or future features you’d like to implement. This doesn’t mean you shouldn’t have a vision. It does mean that you need to pay attention to reality. Reality is where you’ll find the best answers. And you’re never closer to reality than right now. The further you get from now, the less you know. And the less you know, the worse your decisions will be.

The other problem with roadmaps is the expectations game. People expect you to deliver what you say you will in 4, 5, 6 months. And what if you have a better idea? What if there’s a shift in the market that you need to address? What if what you thought wasn’t what actually happened? Any change in the roadmap nullifies the roadmap. Then the map isn’t a map at all.

Try it. It’s liberating and certainly more satisfying than following a plan you know is outdated.

Our Bootstrapped, Profitable, & Proud series now has its own index page.

Intellum is an Atlanta-based company that offers low-cost solutions for e-learning projects. CEO Chip Ramsey will answer reader questions in the comments section today (6/1/11).

“You may not have heard of us, but chances are you run into people on a daily basis that have,” says Intellum CEO Chip Ramsey (right). “You know the security guard in your building? We probably train him. Walked by a Coke machine recently? There’s a good chance we trained the guy who filled it.”

The company processes millions of student enrollments annually in over 11,000 cities and 65 countries. One day they’ll be in Palo Alto working with Facebook, the next in Atlanta with The Home Depot.

The initial idea
It was a long route to get there, though. It started back in 2000 with Ramsey’s stepfather, who worked for the Occupational Safety and Health Administration (OSHA) and spoke frequently about the difficulty and expense of complying with government regulations. “The initial idea was to build a hosted web app to simplify regulatory compliance and in the process, help employees avoid injuries,” explains Ramsey. “We’ve evolved over the years, but that’s how it started.”

The original funding plan was to raise $500k from investors, but Ramsey’s team fell short of that goal. It instead wound up raising $175k from friends and family. “I would love to drop some sanctimonious rant about how we were too good to take VC funds and were wise beyond our years regarding building a lasting business. But the truth was we did try to go the more traditional fund raising route. We spent months in bars, coffee houses, and hotel lobbies writing our business plan, meeting with whomever would see us, rewriting the business plan, and so on. We tried it all; We just failed. And despite the cursing under our breath that went on after each VC ‘didn’t get it,’ the truth is they were right to turn us down. Three twenty-five year old friends, barely out of college with little work experience and no product to sell probably aren’t the most qualified people to spend the millions of dollars our business plan called for.”

So what happened with that $175k? “We spent it all in three months and, at the end of the day, had nothing to show for it,” admits Ramsey. “The money was spent on salaries and professional services fees — fees for lawyers to draft our PPM and contracts, fees for financial experts to come up with our valuation, fees for programmers to develop software that never worked, and, my personal favorite, fees for consultants to coach us on how to raise money.”

Intellum’s home page today.

Course correction
The evaporating funds meant a change of course was needed. “For months, we had been writing a plan and basing decisions on what investors told us they wanted to see,” explains Ramsey. ”’You need more grey hair.’ Okay, we’ll hire a more experienced CEO, whose salary will burn through all our capital. ‘The mobile web is heating up. You should really have a mobile offering.’ Sure, we’ll waste a month of consulting hours on a prototype even though no one’s phone can actually display it yet. ‘If you were smart, you’d be looking for a big name insurance partner.’ Great idea, we’ll pull some strings and fly all over the place to meet with people, who don’t necessarily understand technology and already have more on their plate than they can handle.”

“We had been writing a plan and basing decisions on what investors told us they wanted to see.”

All that chasing left them living off credit card debt and peanut butter and jelly sandwiches. So the team made a decision: Stop chasing a funding event and figure out how to make money.