‘Truncation risk’ often overlooked in early-stage valuations

BVWireIssue #115-4
April 25, 2012

One of the final takeaways from Damodaran’s address to the San Francisco Valuation Roundtable is the problem with how to interpret venture capital (VC) and private capital (PC) pricing mechanisms. These investors typically don’t explicitly separate out “truncation risk,” which is the relative likelihood that the ultimate return on investment will be zero (i.e., somewhere between getting part of your money back and a complete loss). “VCs and PCs tend to lump the possibility of success in with the possibility of failure by using a single (high) discount rate,” he said, “so you never really know what sort of odds they are putting on the failure scenario for a particular investment.”

Tackling all the dark aspects of early-stage valuations. Tomorrow, April 26, join Mike Pellegrino (Pellegrino and Associates) for Valuing Early Stage Companies and a discussion of the most challenging aspects of appraising startup companies and new private ventures, from early, volatile revenue streams and inexperienced managers to an overreliance on intellectual property and untested business models.

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