How do startup valuations work?

Putting a price tag on a young startup is a peculiar practice. While valuation models exist, many agree that it’s more of an art than a science, especially in the absence of revenue — if you’ve ever wondered how Instagram reached a billion dollar valuation without literally ever having made a cent, you’re not alone.

When a company is producing a profit or revenue, valuations can be based on thumb-suck math like five to ten times annual profit, or three to four times revenue. Great, but what if you were a VC in the early days of Twitter, Facebook, Pinterest, or Instagram?

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