Challenges in valuing early-stage technologies

Describe about the Executive forum of early stage finance and corporate venture?

The decision makers in the technology firms often face a challenge of how to appraise the potential of the business at the early stage of development. The challenge includes a determination of a value which is realistic that a specific technology can be brought up to the organization when compared with the development cost or the cost of acquiring the technology (Aernoud, San José, 2003). Still there is a difficulty which remains with the technology managers to establish an assumption on where to make their decision, as the future application of the early stage technology may not be identified or it have not been clear.

Here the technology as early stage will be categorized on the basis of two factors that are technical and market uncertainty. Technology readiness levels (TRLs) which provides with a nine point measures on the maturity of the technology, which are mostly used in defense sectors and aerospace such as which is used by the United States general accounting office for establishing the best practices in the technology management for the defense projects  (BertoneÌ€che & Knight, 2001). TRLs focus mainly on the development of the technology and for this purpose the early technology is defined as the one which operates in the levels 1-3, the stage before introduction to the sub systems or the components within the new product development programme (Bettignies & Chemla, 2003)

Inspite of numerous techniques and tools, there are many decision makers who are not satisfied when the question arises of appraising and valuing the early stage technologies. Most of the techniques which are available are quantitative and are derived from the financial valuation techniques and the decision theories such as the decision trees, discounted cash flows and real operations (Carver, 2012). The techniques said above enables the decision makers to structure the potential outcomes systematically and their certainties which are underlying. Although when the technologies have high level of maturity they are widely accepted even those whose applications have been clearly defined for the early stage technologies. Those approaches can be contextually naïve but mathematically sophisticated.

Another issue where it is focused is that is more focus is kept on the qualitative aspects of the valuation (Weber & Weber, 2005). The techniques said here attempts to structure the reasoning, a support communication and also serve as an aid to the people who are making the decision like using of the score cards. Many of the firms who are using the formal valuation methods, unless the technology becoming more mature they are relying on the “gut feel.”

Technical and market uncertainty in early-stage technology

Roadmapping approach is another method which can be used. It uses structured visual diagrams to support the strategic dialogue and linking the technology investment to the outcomes of the business (Coyle, 2000).

Although roadmapping is accepted widely for the goal oriented application like the technological and the general strategy.

Another issue which is considered is the quality of the management team. most of the venture funding sources that the ultimate success of the early stage technology company is very much dependent on the management team. The decision makers look for a variety of attributes in the managers and various another factors. The investors of the technology company look for experienced, capable, well educated and credible management these are termed as tangible attributes (Aernoudt & San José, 2003). They also look for intangible attributes such as harmonious and balanced management team. These types of early stage technology companies should have a minimum of competent and a credible chief executive officer, a chief financial officer, a financial manager a vice president of research and development and a vice president of marketing.Funding sources also looks for cohesiveness and integrity in the management (Wessner, 2009).

There are many forms of corporate venturing. at the basic level it can be a financial investment withlarge company who will take an equity stake in a small company. this is done by a fund which is set up separately specifically to invest in the startups and the growth companies in the same way like a traditional venture capital will do.

the investment can also be made indirectly through other trust or capital venture. The firms which are large hopes to make return on the investment when the company is sold off or it is floating on a stock exchange (Gladstone & Gladstone, 2002). The concept of corporate venturing exists in the US for many years when many big companies are having venture capital fund or is offering strategic alliances.

Traditionally corporate venturing has created a good image on the high growth sectors like the pharmaceuticals or the technological companies. The companies which are small can challenge the industry leaders with the new technologies which can revolutionize the market place. The companies which are involved in this are mithKlinebeecham and Intel. Amongst the new companies there are channel5, who is offering with a free advertising to the companies in return for an equity stake in the company. The companies which are the big giants like the British steel, British gas are also involved in this (Gregoriou, Kooli & Kräussl, 2007).

Valuation techniques for early-stage technologies

Advantages-

The main advantage of the corporate venture capital financing is the ability for the company to expand which is not possible if bank loans are taken or any other is applied. This is very much essential for the start-ups with limited operating histories and high upfront costs. Then repayment of the venture capital investors is not an obligation which would have been in case of a bank loan. Rather those who are the investors they are ready to shoulder the investment risk since they believe on future success of the company (Jones, Pollitt & Bek, 2007).

The venture capitalists also provides with an valuable expertise who provides with good industry connections and advice. A venture capital deals includes appointing of a venture capitalist who will be the member of the board of the company. In this way there is an intimate involvement with the direction of the company. Venture capital also helps in creation of jobs, the knowledge economy and is also used as measure of innovation within the economic sector or the geography (Kleinschmidt, 2007).

Disadvantages-

The first disadvantage is the conflict with the interest of the business. The company becomes more influential and large than the startup. As one needs them more then the company will also needs them. a conflict of interest arises regarding the money source. The deeper the pocket will be the more thick will be the strings attached to funds (Zhang, 2012).

The size of the venture capital size is a good thing when the question arises of how much money one can secure. Those financiers may agree to do the business slowly than the traditional venture capital firms. This can give rise to problems in the instant gratification of the business market where time equals to the money (Maula, Autio & Murray, 2003).

When there is a financial competition with a goliath-sized investor, it may dissuade many other equal attractive sources of funding from getting involved. The corporate venture capital can without any wit scare away other investors mainly who are the competitors. This can damage the basic development of the business or hinder the late on sales of it in the auction.

Corporate venture capital can be set in the stone early in the process of negotiation to secure the funding. When one wants others to believe in their ideas as much as they are doing these condition and terms does not seems to be bad. But when things are really moving and one is in the better position to leverage their some of the new find out then the inability of that person to set up terms in his favor can sound like death knell for the company.

Qualitative aspects of the valuation of early-stage technologies

The data is provided from the pitchbook, which is a Seattle based data and technology provider for the whole venture capital and global private equity. The firms are listed by the total capital which is invested in the seed or in the early stage deals which is completed in the US during 2014. Here it is said mainly about the traditional venture capital firms but it also includes corporate venture capital as well as mutual funds and many other entities.

The venture capital firm which is known for backing cloud companies like the Box and Eloqua is Bessemer venture partners. They have tailed up the valuations of 30 different software and cloud as service companies which have went public. Another interesting metric to be presented here is that if these were traded as index, the share of them would have gone up by around 168% since the beginning of 2012, beating both standard and poor’s 500 and NASDAQ (Metrick & Yasuda, 2011).

	2000	2001	2002	2003	2004
seed stage
FCF	1831	4370	4867	9783	16867
Discount rate (65%)	0.606	0.367	0.223	0.135	0.082
growth rate	0.15	0.15	0.15	0.15	0.15
start up
FCF	1831	4370	4867	9783	16867
Discount rate (50%)	0.667	0.444	0.296	0.198	0.132
growth rate	0.15	0.15	0.15	0.15	0.15
first stage
FCF	1831	4370	4867	9783	16867
Discount rate (40%)	0.714	0.51	0.364	0.26	0.186
growth rate	0.15	0.15	0.15	0.15	0.15
second stage
FCF	1831	4370	4867	9783	16867
Discount rate (25%)	0.8	0.64	0.512	0.41	0.328
growth rate	0.15	0.15	0.15	0.15	0.15
later stage
FCF	1831	4370	4867	9783	16867
Discount rate (30%)	0.769	0.592	0.455	0.35	0.269
growth rate	0.15	0.15	0.15	0.15	0.15
exit stage
FCF	1831	4370	4867	9783	16867
Discount rate (20%)	0.833	0.694	0.579	0.482	0.402
growth rate	0.15	0.15	0.15	0.15	0.15

TERMINAL VALUE	2000	2001	2002	2003	2004
	4015.350877	20138.24885	66671.23288	-652200	-248044.1176
	3541.586074	14863.94558	33335.61644	203812.5	-937055.5556
	3246.453901	12138.88889	22742.99065	88936.36364	468527.7778
	2816.923077	8918.367347	13444.75138	37626.92308	94758.42697
	2957.996769	9886.877828	15957.37705	48915	141739.4958
	2680.819912	8033.088235	11344.98834	29466.86747	66932.53968

Management-the management of genedata consisted of scientists who are having background in mathematics, statistics, computer science, physics and molecular biology or biochemistry. the team has expertise people in these areas which represents a potential mix.

Market- genedata focuses on 4 European markets (Switzerland, Germany and Austria) where the target is given on the commercial as well as on the nonprofit research companies. It differentiate itself from the others by providing with integrated service package, which includes system package, software development, technology transfer data analysis and consulting (Pearce & Barnes, 2006).

Stages of development- there were 6 stages in the development of the company. the stages were as follows:

Seed stage- no proof of the concept, incomplete team, no product, no sales and no earnings.

Start up stage- the concepts are proved here, market plan, production ready.

First stage-finished product, production established

Second stage- profitable company which needs to expand its product line

Later stage- profitable company that needs restructuring to survive

exit stage- established profitable comapny

Lion- the sales of lion in comparison to the sales of genedata is a bit less. This means that genedata has performed much better in sales when compared to lion in the particular year. A increase in sales shows good profitability for the coming years (Poser, 2003).

When coming to the earnings the earnings of lion is showing in negative which means that the ability of the company to earn is much less and the growth of the net revenue is also less there is no good control over the cost and the productivity is also not that strong. when coming to genedata it can be interpreted that ability of the company to earn is much more and the growth of the net revenue is comparatively good. There is good control over the cost and it has a good productivity.

The roadmapping approach to valuing early-stage technology

Compugen- the sales of compugen in comparison to the sales of genedata is a bit less. This means that genedata has performed much better in sales when compared to compugen in the particular year. An increase in sales shows good profitability for the coming years.

When coming to the earnings the earnings of compugen is showing in negative which means that the ability of the company to earn is much less and the growth of the net revenue is also less there is no good control over the cost and the productivity is also not that strong. When coming to genedata it can be interpreted that ability of the company to earn is much more and the growth of the net revenue is comparatively good. There is good control over the cost and it has a good productivity (Tarrade, 2012).

Informax- – the sales of informax in comparison to the sales of genedata is a bit less. This means that genedata has performed much better in sales when compared to informax in the particular year. An increase in sales shows good profitability for the coming years.

When coming to the earnings the earnings of informax is showing in negative which means that the ability of the company to earn is much less and the growth of the net revenue is also less there is no good control over the cost and the productivity is also not that strong. When coming to genedata it can be interpreted that ability of the company to earn is much more and the growth of the net revenue is comparatively good. There is good control over the cost an it has a good productivity.

Tripos- the sales of Tripos in comparison to the sales of genedata is a more. This means that Tripos has performed much better in sales when compared to genedata in the particular year. An increase in sales shows good profitability for the coming years. Genedata should work harder in its sales as Tripos is a good competitor for genedata and it will also hold a good share in the market (Tollington, 2010).

When coming to the earnings the earnings of Tripos is showing in negative which means that the ability of the company to earn is much less and the growth of the net revenue is also less there is no good control over the cost and the productivity is also not that strong. When coming to genedata it can be interpreted that ability of the company to earn is much more and the growth of the net revenue is comparatively good. There is good control over the cost and it has a good productivity.

The net present value is a discounted cash flow approach. As we can see in the above table that for the last for stages it is having a positive NPV and for the first two stages it is having a negative NPV. when adding up in total a positive NPV is achieved that is negative value of (-413143). Therefore the negative cash flows imply that company is losing its money from the projects. it also means that the present values of the cost of goods exceeds the present values of the revenues. so the investors are suggested here not to invest in this case further (Verbeke, 2013).

References

Aernoudt, R., & San José, A. (2003). Executive forum: early stage finance and corporate venture—two worlds apart?. Venture Capital, 5(4), 277-286. doi:10.1080/1369106032000128440

BertoneÌ€che, M., & Knight, R. (2001). Financial performance. Oxford: Butterworth-Heinemann.

Bettignies, J., & Chemla, G. (2003). Corporate venture capital. London: Centre for Economic Policy Research.

Carver, L. (2012). Venture capital valuation. Hoboken, NJ: Wiley.

Coyle, B. (2000). Venture capital & buyouts. Chicago: Glenlake Pub. Co., Ltd.

Gladstone, D., & Gladstone, L. (2002). Venture capital handbook. Upper Saddle River, NJ: Prentice Hall.

Gregoriou, G., Kooli, M., & Kräussl, R. (2007). Venture capital in Europe. Oxford: Butterworth-Heinemann.

Jones, I., Pollitt, M., & Bek, D. (2007). Multinationals in their communities. Basingstoke: Palgrave Macmillan.

Kleinschmidt, M. (2007). Venture capital, corporate governance and firm value. Wiesebaden: Deutscher Universitäts-Verlag.

Maula, M., Autio, E., & Murray, G. (2003). Prerequisites for the creation of social capital and subsequent knowledge acquisition in corporate venture capital. Venture Capital, 5(2), 117-134. doi:10.1080/1369106032000087275

Metrick, A., & Yasuda, A. (2011). Venture capital & the finance of innovation. New York: Wiley.

Pearce, R., & Barnes, S. (2006). Raising venture capital. Chichester, West Sussex, England: J. Wiley & Sons.

Poser, T. (2003). The Impact of Corporate Venture Capital. Wiesbaden: Deutscher Universitätsverlag.

Tarrade, H. (2012). Cross-border venture capital investments. Wiesbaden: Springer Gabler.

Tollington, J. (2010). The role of corporate venture capital in innovation. New York: Nova Science Publisher’s.

Verbeke, A. (2013). International business strategy. Cambridge: Cambridge University Press.

Weber, C., & Weber, B. (2005). Corporate Venture Capital Organizations in Germany. Venture Capital,7(1), 51-73. doi:10.1080/1369106042000316350

Wessner, C. (2009). Venture funding and the NIH SBIR program. Washington, D.C.: National Academies Press.

Zhang, L. (2012). Venture capital and the corporate governance of Chinese listed companies. New York, NY: Springer.