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Let’s say some kids in your neighborhood have a lemonade stand. You’re impressed by their entrepreneurial spirit so you order a glass and ask them how business is going.

“Great! We sold $20 worth of lemonade.”

“Wow! That’s really good. How much profit did you make?”

“Well, our costs were $17 so we made a $3 profit.”

You come back in a year (let’s suspend reality for a bit) and you want to see how the biz is going.

“We had a great year! We sold $55 worth of lemonade and our cost was just $35, so we made $20.”

This impresses you a lot. After a lengthy discussion of just-in-time inventory, first-mover advantage and Nassim Taleb’s latest, you decide to make the kids an offer for the lemonade stand.

How much would you pay? Say, $400?

Remember, it’s growing fast. How about $700? Maybe $1,000??

Well, it turns out, the kids have hired Goldman and they inform you that the price of the stand is $3,500 and not one penny less.

That’s about the current valuation for Baidu.com.

Posted by edelfenbein at August 29, 2007 11:03 AM