You have to hand it to Henry Blodget. The infamous securities analyst who arguably promulgated more hype in Bubble 1.0 than anybody else on Wall Street seems to have a knack for bubbles.

His blog, Silicon Alley Insider, or SAI, is an increasingly influential force in the tech blogosphere and has given Blodget the ability to establish a front row seat for Bubble 2.0.

To be fair, Blodget, who is banned from the securities industry for life as part of his settlement with the SEC, has actually demonstrated some healthy skepticism at times and SAI is far from the biggest kool aid distributor in the tech blogosphere.

But like the bubble he helped create in the late 1990s, it was too good to last.

And we learned that with the introduction of Blodget’s new SAI25, which is an attempt to “value and rank some of the world’s leading private digital companies“:

“The SAI 25 is not a static brag-sheet, updated and published once a year. On the contrary: it changes as facts and markets change–and, in this industry, they change fast. Private company values change in real-time, just like public-company values, and so will the SAI 25…”

Of course, SAI acknowledges that “valuing companies is a subjective exercise, one that is highly dependent on information.

Because the startups in the SAI25 are all private, it’s difficult to get a full picture of their current health and future prospects. Getting accurate information can also be difficult.

SAI solicits feedback from its readers and admits that valuations could be off considerably because it doesn’t always have “good enough information.

That hasn’t stopped Blodget and his team from trying, however.

They’ve come up with a methodology for valuing private startups in some fashion that is somewhat consistent. This methodology takes into consideration:

  • Implied valuations in recent private financings.
  • Financial performance.
  • Market share and market size.
  • Growth rate.

Sounds reasonable in theory? Yep. But one need only look at the SAI25 to see that theory isn’t always practical.

Topping the SAI25 is Facebook, with a valuation of $9bn. A couple of billion behind is number two Wikipedia, which is operated by a non-profit, making its inclusion on the list a little bit silly. Craigslist, the third most valuable “digital startup,” is worth a whopping $5bn.

Ironically, when Blodget runs the numbers for Craigslist, which will apparently generate about $80m in revenue this year, he comes up with a valuation of $750m but goes on to say…obviously Craigslist is worth a heck of a lot more than that.

So much for a consistent methodology. If the SAI25 was to have any credibility, it is destroyed with a statement like that.

Clearly, Blodget isn’t completely rehabilitated.

Other dubious members of Blodget’s list include Ning ($560m), Slide ($550m), RockYou ($325m), Yelp ($225m), Meebo ($220m), Mahalo ($150m), Digg ($125m), Powerset ($80m) and Twitter ($75m).

What do many of the companies on the SAI have in common? Limited revenues and not a cent of profit.

Meebo, for instance, ranked 29th with a $220m valuation, has reportedly only generated about $1m in revenue since it launched in 2005.

And Powerset, whose valuation Blodget pegs at a modest $80m, hasn’t even launched after years of hype.

At the end of the day, an effort like the SAI25 is an exercise in futility because there is no good way to value these private companies in such a way that they can realistically be looked at in the same fashion as if they were publicly-traded.

After all, there is no way to compare Blodget’s SAI25 to a true prediction market, which is exactly what a stock exchange is.

Blodget states that “we are big believers in the wisdom of the crowd” but apparently Blodget and his team haven’t even read The Wisdom of Crowds because, by any reasonable evaluation, the SAI25 implements none of the criteria laid out by James Surowiecki in his book.

Beyond the fact that the SAI25 is little more than a speculative list masquerading as a serious “index,” however, I would also argue that the SAI25 is an exercise in stupidity.

It has all the trappings of Blodget’s IPO marketing masterpieces of the late 1990s. One need only read the following to see this:

“Like public companies, the value of private companies change in real-time, but there’s no convenient way to track these changes…until now. We’ve created a real-time tool, the SAI 25 Live, that indexes the value of the SAI 25 companies to the NASDAQ. The SAI 25 Live updates the values in real-time (with a 20-minute delay). So if you’re jealous of all your friends at public companies who can recalculate their net worth all day, just check out the SAI 25 Live. This will tell how much your stock options are worth right now.”

Personally, I’d start to worry the minute Henry Blodget starts talking about the value of my stock options because it can only mean one thing – they’ll probably be worthless sooner than later.

When it comes to the D2.0 Index, I won’t pretend to tell you what Facebook, LinkedIn, Habbo Hotel, Stardoll and Zazzle are worth. After all, I wouldn’t be inclined to buy any of them anyway if they went public.

What I can tell you, however, is that Henry Blodget’s stock was just delisted from my exchange because Blodget dropped below the minimum credibility capitalization required.