If Web 2.0 needed a publicity agent, BusinessWeek is making a good case for the job in the wake of its latest cover story on Digg and its potential value ($60 million, anyone?). While the story has caused a storm of disbelief, outrage, etc., it has thrust the issue of how Web 2.0  firms are valued firmly into the spotlight. What are the metrics used to determine whether a company is worth $60-million (Digg) or $1-billion (Facebook) or $3-billion (MySpace). Are we talking about page views, unique visitors, page views per unique visitor or time per visitor? What role does revenue play in the valuation game given it seems to be a tool that gets little attention? Without wagging my finger too much, it seems the whole valuation environment has gone back to the dot-com boom. The big exception is nearly all the "hot" start-ups are still private as they anxiously wait for a suitor to snap them up, whereas five or six years ago they did IPOs. Of course, value is determined in different ways. Rupert Murdoch's $580-million deal for MySpace last year much to do with News Corp.'s strategy to quickly establish a foothold on the Web. Aside from these kind of strategic deals, valuation often comes down to revenue and the prospect for profitable growth prospects - or at least it should. As a result, everyone involved in the Web 2.0 world needs to look at where the revenue is going to be generated. Can AdSense really support business models for every Web 2.0 start-up offering a cool, new service? Is it possible to build a business this way even when development, marketing and distribution costs are so low (relatively speaking)? Without getting too dramatic, the valuation game is out of hand because the "tools" people are using are vapor-ish rather than grounded in fundamentals. While BusinessWeek's cover story on Digg is, I guess, entertaining and eye-catching, the magazine should know better than to throw out wild estimates on a company's value when all anyone is doing is guessing.
Update: Fred Wilson has a good post looking at how the last bubble is impact the current investment environment - and some of the similarities that exist. Om Malik offers his take, including a troubling reference to the concept of "vapormillionaire concept".