MeatyREADS

Prediction Markets

August 27, 2008 – 11:08 pm by BH

From the San Jose Mercury News comes the story of Startup Exchange, a new market valuation tool from TradeVibes designed to make full use of the wisdom of crowds (mercurynews):

A young Mountain View company called TradeVibes is offering a cool 100 grand to anybody with a hankering to invest in hot Internet start-ups.

This is, of course, too good to be true. Then again, Silicon Valley has a way of blurring the lines between the virtual and the actual. The fantasy bucks that TradeVibes is offering may translate into genuine money down the road — not for you, perhaps, but for the companies that win this beauty contest.

“I certainly hope so,” said TradeVibes Chief Executive David Li, who co-founded the company in 2007 with three other PayPal veterans. “The hypothesis is that valuing a start-up is kind of a black art, right?”

Business schools teach arcane methods such as ”discounted cash flows,” Li said. “But given that most start-ups do not have revenue or profit, you can’t really use those methods. We believe in the wisdom of the crowd.”

Startup Exchange provides a new set of data for companies it ranks. Consider: LinkedIn, the professional networking site, recently received $53 million in venture capital that placed a rosy valuation of $1 billion on the company. But the early trading on Startup Exchange put LinkedIn’s value at $862 million.

There’s only fake money on the line, so we’re still a long way from a true predictions market, but still, baby steps in the right direction.