Comm101

Recently Facebook had it’s offer to buy snapchat for $3 billion rejected. To me that is an astounding figure. I wondered how a company like snapchat, or Instagram could be valued at such prices without producing any revenue. The apps are free to download, and there is no in-built advertising. After reading up on business valuation I understood that apps like these are no different from something tangible- like a goldmine. Investors invest under the assumption that there is gold under the mountain you’re building your mine on. They are placing more value on the potential of the mine to produce and less on the mine itself. It is the same with Facebook and Instagram, because Facebook could see that it could use Instagram’s massive user base and merge it with it’s services and thus open up more revenue streams.

http://en.wikipedia.org/wiki/Business_valuation

http://www.forbes.com/sites/greatspeculations/2013/10/21/how-instagrams-monetization-can-help-facebook/