Evaluating Investments in Disruptive Technologies

Abstract

A computer simulation model for the valuation of investments in disruptive technologies is developed. Based on the conceptual framework proposed by Christensen (1997) for explaining the Innovator's Dilemma phenomenon, an investment project is divided into two sequential phases representing the evolution of the disruptive technology from an emerging to a mainstream market. In each of these phases, development costs and net commercialization cash flows are modeled using various stochastic processes that interact with each other. As a result, the initial estimate on the value of the project is continuously updated to reflect the stochastic changes of these variables. An example illustrates the usefulness of the model for understanding the effects of cash flow and cost volatilities in the value of a disruptive technology investment.