The allure of young companies leads entrepreneurs, venture capitalists, and other investors to act based on delusional assumptions about future growth. Such participants believe fundamentals don’t matter for these disruptive or innovative new companies because intrinsic value and business value cannot be estimated, discounted cash flow valuations are obsolete and cannot be applied to 21st century companies, and the promise of “big” markets will pay off. Combined with overconfidence, these errors lead to collective overpricing, but wise investors can use fundamentally sound methods to exploit these delusions and make money.
