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On Jun 18, 5:26pm, jdfo wrote:
> Subject: Off topic valuation
> A little off the usual topic but anyone here known of a source, book,
> article, etc. where I can obtain the formula(s) for valuing a startup
> company. Company has solid concept but no sales, etc. Have tried many
> sources but so far no success.
>
> Thanks for any input.
One way, is to value the investment as a call option, where the
price of the call is your initial investment, the term is your investment
horizon. At the end of the investment period, the value will vary between
0 (assuming you're not a general partner) and soime big number VMAX.
Payoff curve looks just like an option. The problem here is to figure
out the volatility of the discounted cash flow stream.
Here's a ref:
(quant warning: heavy on math)
http://www.student.nada.kth.se/~f95-obj/rapport/main.html
similar idea, valuing technology investments:
http://www.som.syr.edu/facstaff/mbenaroc/resume/PAPERS/OPM-ISR/WWW-PAPR.html
less math, an example, valuing options with "stranded costs"
http://www.heartland.org/studies/jones.htm
related paper, discusses options models in general (more math)
http://inetarena.com/~doughoch/options/ATBS.html
Here's how I'd do it: I'd construct a probability tree that goes something
like the following: (1) the chance the investment goes to zero in the
first year is X% (say 75%), (2) if it survives to the next year, the
chance it goes to zero declines to Y% (say 50%), and the chance it has
cash flow of C1 is Z% (say 25%) and 2*C! is ZZ% (say 25%), ... etc.
Keep going until you have a tree that covers your investment horizon.
At the end, value the company based upon a reasonable multiple of
cash flow, sales, retained earnings. Weight the various alternatives
using combined probabilities. The expected value (ie, weighted average)
is the present value of the investment.
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