First, let's define value vs price. Price is how much the "valuation" is, exit price, maybe even cash flow.<p>Value is how much wealth it creates.<p>PG wrote a lot on this:
<a href="http://paulgraham.com/wealth.html" rel="nofollow">http://paulgraham.com/wealth.html</a><p>Basically build something really valuable, then figure out how to make money from it. Different things have different value.<p>For example, Google is something extremely valuable, but they charge a tiny amount compared to the value they provide. Twitter and Facebook create a lot of wealth too. Even though they seem like toys, they're powerful and influential media sources.<p>What about Wikipedia?<p>Peter Thiel brought up this idea of X% of Y wealth. Something can create 5 billion dollars of wealth, but doesn't monetize well. Examples are Wikipedia and a lot of scientific research jobs.<p>Something very valuable can be bought for cheap. Something can be overpriced and become a "unicorn" without creating that much wealth too.<p>How much money people have also defines its price. If two $50B companies want to buy out a company, it can be sold very expensive. But if the only acquirers are $10M companies, it's going to sell at a few millions max, even if it's the same thing.<p>Acquiring is often used as a way to hire. If something like Facebook dumps $1B on building a messenger, they may not succeed. And then something like WhatsApp comes up and threatens their billion dollar baby. So it makes sense to acquire early to cut out the threat, even at a premium.<p>There's also localization to deal with. Let's say you want an e-commerce company in Indonesia, a huge and lucrative market. Logistics is very crude, laws are complicated, and there's a lot of corruption and bribery to be paid where an American wouldn't even know where to expect. Starting one is extremely risky and difficult. Nobody wants to hire 300 people in a month.<p>This is where it makes sense to acquire at a premium.<p>The reverse goes for talent. Generally companies in Indonesia could not find the same level of talent, because the brilliant people have moved to Sydney, Silicon Valley, and so on. If tech was a key component in their dominance, it's easier to just buy an Australian company than deal with recruiting locals or starting a company in a tech hub.<p>Ego of the acquirer also plays a big factor. Some people just have a lot of money and are in a saturated market where they can't reinvest it in themselves. Usually telcos. They want to dump it into something that makes money, like logistics or e-commerce or SaaS. They usually overestimate their ability and underestimate the difficulty of the task, so they won't pay very much to acquire.<p>Finally, the price of a company goes way up if it can monopolize an industry. This is why Facebook and Twitter is worth do damn much. Nobody will go to another microblogging site if they don't have to. Interestingly, the Chinese have their own versions, which are just as rich.<p>In general,
1. Do important things
2. Do difficult things
3. Do things rich people can't do
4. Network effects