Valley trick #3: Never base one valuation off another
Now that the New York Post (motto: "Who needs reputability when you've got CAPS?") pumped fresh helium into the YouTube valuation, saying the video company's founders now think it's worth $1.5 billion, bloggers are back to claiming that YouTube could really be worth that much, guys!
TechCrunch blogger Michael Arrington, for example, says YouTube traffic justifies his own crazy valuation. It's a scaled-up version of the recent $65-million purchase of Grouper, "when you look at relative traffic."
I hate to correct a well-educated Valley lawyer who's worked with tech companies since 1995, but how could he even pretend anyone cares about relative traffic?
Let's explain clearly: Sony did not buy Grouper for its traffic. Sony didn't need Grouper's audience (how many of your friends ever heard of Grouper?). It needed Grouper's video-sharing technology, an innovative peer-to-peer system for sharing video over the web and distributing it on many devices. In contrast, YouTube is a vastly trafficked site with a simple, easily replicated technology. Nothing wrong with that — it's just a whole different ballgame.
Who knows whether Arrington is misinformed, fudging, or just drunk. But watch out — anyone who tries to value YouTube based on Grouper's traffic count is not worth reading.
