There is a classical school of valuation that has difficulty dealing with Internet companies. Namely, a number of VCs, etc. have recognized that having a large number of passionate (or possibly addicted) users is the ticket to desirability and also valuation. It is better, in this sense, to have an indispensable product that is free or near free, than to have 5% of the population paying you $1K per year.<p>Does this make any sense? Well, given that the stock market largely runs on hype, it makes lots of sense if you are trying to make money (the stated aims of VCs). Large investment banks that underwrite IPOs know that money flows where there is hype and they stand to make a good deal more where there is hype. Not only that, hype is ultimately close to (although certainly not the same as) making a sale.<p>There is an additional wrinkle, social media, which no one knows what to do with, yet is so the subject of so much hype it is sure to attract lots of money. This system clearly is not broken when now big players like Facebook are able to attract money, expand, then once they've captured virtually the entire market and gotten them "addicted," they can capture advertising revenue and a percentage on Farmville-esque games. So social is weird, but the strange system in place, even if it doesn't make sense to the casual observer, seems to be working in some strange way. And it really is different. A good product can capture most of the viable US market in a year or two, which is virtually impossible in other arenas, but this is made possible by rapid growth, which is also made possible by the influx of capital.<p>Ironically, other examples like Lady Gaga are even more driven by the hype machine and can fade even more quite quickly, meaning that if you were investing in her you would be depending almost entirely on hype, while the hype for Linked-In is based on an indispensable product.