20070129_value_function

Interesting article in the MIT Technology Review about measuring the value of a company (startup) by measuring buzz metrics (Twitter activity, Techcrunch mentions, Blog posts, etc.).  Similar to the YouNoodle or KillerStartup goal of predicting a companies value and ability to raise capital based on the historical biographies of the management/founders.

All of this is complete and utter bullshit.

In the article Feld has a quote that hits the mark: "factors like this dramatically oversimplify the drivers of success (and failure) in entrepreneurial ventures.".

Also in the article is a paragraph quoting Josh Lerner: he has published research showing that an entrepreneur's second startup has slightly better odds of succeeding than her first, and that having one successful startup makes a second startup more likely to succeed. "That suggests there are definitely patterns out there that work," Lerner says. "I'm sure if you were really to punch the data, you'd find there were many other patterns."    This statement on the surface seems to suggest that indeed there are data patters that point to a positive result for YouNoodle.  That unfortunately is at best a weak linkage, and at most purposefully misleading.

The issue I have is that the article and the stance by both the popularity and valuation algorithms is that they completely miss the point of how value is created in ANY company, startups, or otherwise.  I’m actually amazed that MIT paid any real attention to it.  I’d assume that The Onion would be a better source to cover the news on this one.  Not my line, but one I like is Peter Drucker’s: “the purpose of any company is to create a customer”.

Value isn’t created by buzz or by the ability of a founder or manager to raise capital, its created by customers parting with their money/resources because what you have to offer is more valuable than their money/resources.

Back to the article’s usage of Lerner’s research: if you extrapolate that a 2nd time team is statistically more successful than a 1st time team.. then why does the 3rd time team bump directly into the Experience Trap I wrote about a few days ago and decline in their ability to succeed and create value?