Scenario modeling may help start-up company valuations

Earlier BVWire pointed to a Business Valuation and Advisory Network LinkedIn discussion that pulled over 40 comments responding to an inquiry of how to discount negative cash flows in the early years of an early-stage company.

The Valuation Group on LinkedIn simultaneously generated a timely discussion about valuing a start-up with a new patent.

Noreen Dornenburg suggested valuators look at specific facts and circumstances, such as

  • Is this a niche product or a mass market one?
  • How good is the management team?
  • Is the plan for the team to manage the whole process, or will they sell the patent? And if the latter, to whom?
  • Is there a workable prototype or is the patent for the idea of a product or process only?

Craig Cook favors a “scenario-based expected value or real option approach, running the branches analysis out until the most dilutive capital-raising rounds have been incorporated in the analysis.”

Most of these early-stage discussions end up with a recommendation that analysts approach the issue with scenario modeling in mind. This can be tricky, and BVR has asked David Dufenbach of Grant Thornton to lead a detailed workshop on Monte Carlo simulations. Mark your calendars for January 26, 2012. Here’s the link.