Valuing Startup Companies

Abstract

Although traditional valuation approaches are sometimes used to value technology companies, special techniques are required to compensate for the unique characteristics of these organizations. Due to the nature of the product development and commercialization cycles, and the lack of revenue and earnings metrics for guideline market comparisons, alternative approaches are sometimes necessary. Financial forecasting is difficult and risk rates are high for the application of discounted cash flow models. Probability-adjusted or risk-adjusted forecasts present a more refined analysis of expected future events and thus a more refined estimate of enterprise value . In addition, capital structures are complex and consideration must be given to the preferences of senior securities and dilutive effects of options and warrants when determining the value of common stock. In addition, there appears to be a growing interest in finding ways to better monetize a company’s intellectual property .