Valuation of High-Risk High-Technology Ventures

Abstract

The valuation of high-risk technological ventures is more of an art than a science. In the absence of cash flow forecast and in view of the high uncertainty about the successful completion of the venture's R&D effort, it is not possible to apply the Discounted-Cash-Flow (DCF) method, which is the common practice in the valuation of conventional projects or ventures. In the absence of a structured and methodical way for valuating risky innovative technology projects, CEOs, CFOs, investment managers as well venture capital and other investors resort to a variety of methods including gut feeling.

In this paper I present a novel venture-pricing model (VPM) and method for the valuation of risky technological projects. The model may serve both researchers and practitioners (investors, entrepreneurs, C-level executives in well established technological corporation and the like) for the valuation of risky technological ventures and as supporting tool for decision-making and portfolio management.

Keywords: Valuation, Venture Capital, Start up, Hi-Tech, High-Techology, Stochastic Model

JEL Classification: G23, G24, G28, G31, G32, M13, O16, O32