Valuing Technology Businesses (In-House)

Defining the Problems

• Differences between traditional corporate valuation and technology valuation
• Handling data problems that emerge with early-stage technology companies
• Summary review of valuation techniques and applications to technology start-up businesses
• Valuing early-stage development businesses and projects
• A life cycle view of start-up companies
• Characteristics of start-up technology companies and sectors
• The key challenges with technology start-up companies

Valuing start-up technology companies

• Valuation issues – Intrinsic Value and using DCF
• How to value existing assets in a start-up
• Cash burn and the effect on existing assets
• Estimating cashflows and expenditure patterns
• Evaluating the expected growth rate
• Estimating the market size and rate of maturity development
• Assessing the competitive response
• Combining growth rate with investment intensity and return on investment
• The future of the business – high growth and growth phases
• Applying the appropriate discount rate and varying the rate over time
• Adjusting risk for small fast-growing businesses
• Discount rates for pure equity-financed businesses
• Evaluating the stable growth stage and calculating the terminal value
• Inherent problems of using the DCF model to value technology companies
• Assessing the likelihood of potential failure or dislocation risk and adjusting the valuation figure

Valuation issues – Relative Valuation

• Problems with start-up multiple analysis
• Pitfalls in using multiple approach for technology companies
• Importance of using EBITDA if possible
• Using revenue multiples
• Examining the broad range of possible comparisons
• Using statistical analysis to improve the multiple comparisons
• Determining the starting point – revenue multiples vs profitability multiples vs other multiples
• Which year? – Determining stability for multiple calculation and techniques for “normalising” multiples vs the sector
• Benchmarking using multiples

Valuation issues for a SaaS type business

• Key valuation drivers
• SaaS metrics
• Customer acquisition channels
• Product lifecycle
• SaaS Capital valuation model approach

Using the Real Options Approach

• The problems inherent in using the NPV/DCF approach to valuation
• Defining real options – patent rights, expansion option, abandonment option
• Why real options are more applicable to technology companies
• Basics of real option valuation using binomial trees and a lattice approach
• Financial option pricing (Black Scholes) and the link to real options
• Management options and the value of strategic flexibility
• Using real options approach to improve the understanding of technology valuations

Structuring an exit

• Governance/shareholders agreements in minority and majority acquisition
• Majority versus minority rights
• Stress testing the assumptions