The valuation and financing of high-rise start-up ventures : an option perspective matching real and financial options
Faculty of Applied Economics
Institute of Development Policy and Management
Worcester :Business & Economics Society International, 1999
Business and Economics Society International Conference, July 22-26, 1999, Spain
University of Antwerp
This paper presents a model for the valuation and financing of high-risk start-up ventures with growth-opportunities within an integrated framework based on both financial and real option theories. Traditional valuation techniques as DCF-anaIysis fail in valuing innovative companies because most of the value of highrisk start-up companies is embedded in unexercised real options whose future value is uncertain at this moment. If one considers a company as a portfolio of real options, one can value the company based on an option model. This number will beter reflect the fundamental value of the company and cannot be captured by DCF-analysis. At the same time, this paper shows that near-equity financing fits best the real option characteristics of such companies. Near-equity will provide sequential financing and controls both the "free cash flow" problem and issue costs at the same time.