This book will serve as a practical guide for entrepreneurs and investors/advisors in constructing and understanding valuations of startups in rapidly shifting industries, including the areas of drug development, medical devices, cyber security, and renewable energy. For large companies, valuation is based on forecasts of free cash flow; in technologically-driven industries, product pipelines can represent a large part of market capitalization. The situation is even more critical for small companies committed to a single idea: all of their value is linked to a single project. Any business transaction or internal proposal to begin or terminate an R&D project in which innovative projects are being valued or exchanged requires a realistic valuation of those projects. Moreover, different projects have very different dynamics. Pharmaceuticals have very large lead times and are dependent on patents as well as out-licensing agreements. In contrast, software develops very quickly, and IP is hard to value. This book will be a guide to building appropriate valuations for companies competing in rapidly shifting industries and offering products under new business models where little precedent exists, taking both financial and behavioral issues into consideration.
Author(s): Tiran Rothman
Publisher: Palgrave Macmillan
Year: 2020
Language: English
Pages: 219
City: Cham
Acknowledgments
Contents
List of Figures
List of Tables
Part I: A Short Overview of Valuations
1: Introduction
2: Understanding Financial Valuations: Foundations and Basic Traditional Techniques
2.1 Background
2.2 It’s All About Trust
2.3 What Is a Valuation?
2.4 The Advantages and Disadvantages of Corporate Valuations
2.5 What Does a Corporate Valuation Reflect?
2.6 Different Valuation Methods
2.7 What Are Capitalization Rates? Why Are They Important?
2.7.1 Explaining the Formula Elements
2.8 Valuations in New Technology Industries
2.9 Conclusion
Part II: Overcoming Valuation Hurdles: How to Conduct Valuations Under Unique Circumstances
3: Understanding the Basic Elements of Stockholder Statements and Their Use in Valuations
3.1 Background
3.2 The Balance Sheet
3.2.1 The Balance Sheet Identity
3.2.1.1 Assets
3.2.2 Liabilities
3.2.2.1 Stockholder Equity
3.2.3 Book Value Versus Market Value
3.2.4 Enterprise Value
3.3 The Profit and Loss (PL) Report or Income Statement
3.3.1 Earnings Calculations
3.3.2 The Statement of Cash Flows
3.3.3 Non-operating Assets
3.3.3.1 Investment Operations
3.3.3.2 Financing Operations
3.3.4 Notes to the Financial Statements
3.3.5 Financial Statement Analysis
4: Valuation Methods: The First Chicago Venture Method and the Use of Real Options
4.1 The Use of Multiples with the First Chicago Venture Method
4.2 Finding Similar Companies
4.3 Valuation Through the Use of Real Options: What Is It and When Is It Used?
Part III: Behavioral Factors: How Psychology Affects Bias in Valuations
5: Introduction to Behavioral Finance
5.1 Background
5.2 Investors’ Behavior in the Financial Markets
5.2.1 The Hot Hand Fallacy
5.2.2 The Efficient Market Hypothesis
5.2.3 The Psychology of Tail Events
5.2.4 The Availability Heuristic: Why Does an Event Happen?
5.2.5 Mental Accounting
5.2.6 Stock Market Underreaction and Overreaction
5.2.7 Investors’ Attention and Trade Shares
5.2.8 Anchoring
5.2.9 Hindsight Bias
5.2.10 Endowment Effects
5.3 Do Experts Exhibit Biases?
6: An Overview of Investor Behavior in Financial Markets and Psychological Influences on Valuations
6.1 Background
6.2 Optimism and Expectations in the Financial Aspect
6.3 Attention and Its Effect on Valuations
6.3.1 Psychology Framework: Attention Theory
6.3.2 Selective Attention and Information Processing
6.3.3 Attention Theory Mechanisms
6.3.4 The Role of Attention in Capital Markets
6.3.5 Attention Hypothesis
6.4 The Myopic Aspect of Skewness Investment
References
7: How to Overcome Investor Behavior and Psychological Influences in Valuations: How to Evaluate a Dream?
7.1 Background
7.2 Valuation of Companies
7.3 The r in rNPV
7.4 Valuation of Technology
7.4.1 The Feed Rate Method
Part IV: An Introduction to Valuations in R&D-Intensive Industries
8: The Pharmaceutical Sector
8.1 Understanding the Pharmaceutical Industry
8.1.1 Background
8.1.2 The Drug Development Process
8.1.3 Regulatory Tracks for Drug Approval
8.1.3.1 New Molecular Entities for the Innovation Edge: FDA §505(b)(1)
8.1.3.2 Regulatory Track for Altering an Approved Drug: FDA §505(b)(2)
8.1.3.3 Generic Drug Application: FDA §505(j)
8.1.3.4 Other Types of Drug Applications
8.1.4 Ride-Sharing Platforms and Pharmaceutical Companies
8.1.4.1 How the Ride-Sharing Investment Opportunity Compares with the Life Sciences
8.1.5 Lessons for Valuations of Disruptive Technologies
9: Life Sciences: Disrupting Biologic Drugs Manufacturing
9.1 Biologic Drugs Overview
9.2 Biosimilars’ Competition
9.3 Biobetters
9.3.1 Main Challenge of Biologics: High Costs of Production = High Price, Less Affordability
9.4 Enter Biopharming
9.4.1 Biopharming Offers Several Advantages over Its Microbial/Mammalian Cells Counterpart
10: An Overview of the Cybersecurity and the Renewable Energy Sectors
10.1 Cybersecurity Background
10.2 Trends Impacting the Network Security Market
10.3 Factors Driving the Adoption of Network Security
10.4 Factors Constraining Adoption of Network Security
10.5 Challenges and Insights
10.6 Use Cases
10.7 Future Trends in Network Traffic
10.8 The Renewable Energy Sector Background
Part V: Actual Valuations
11: Company A: Pharmaceutical/New Compounds
11.1 Background
11.2 Clinical Overview
11.2.1 Pre-clinical Studies
11.2.2 Clinical Trials
11.3 Pipeline Analysis
11.3.1 The Company’s Technology Platform
11.3.2 Possible Markets for the Company’s Product Innovation
11.3.3 Key Positive and Inhibiting Factors in the Market
11.3.3.1 The Herpes Simplex Virus and Condition VI: Positive Factors:
11.4 The Competitive Environment in the Sector
11.4.1 Herpes Simplex Virus
11.4.2 Conditions I and VI: Competing Drugs
11.5 Valuation Methodology
11.6 Financial Analysis and Valuation
11.6.1 Recent Relevant Transactions
11.6.2 Success Rates
11.6.3 Technological Platform Valuation Background
11.6.4 Technology Platform Valuation Factors
11.6.5 Equity Value
11.6.6 Sensitivity Analysis
11.6.7 Valuation scenarios as of Dec. 31, 2018
11.6.8 Capitalization Rate
12: Company B: Pharmaceutical/Biologics
12.1 Company Overview
12.1.1 Company B’s Technology and Core Advantages
12.2 Adalimumab: Company B’s Proof of Concept: Market Analysis
12.3 Competitive Landscape
12.4 Company Financial Analysis and Valuation
12.4.1 Valuation Method and Approach
12.5 Company’s B current operations
12.5.1 Company B’s adalimumab operations in Russia
12.5.2 Manufacturing Costs
12.5.3 Capitalization Rate
12.5.4 Success Rates
12.6 Technology Assessment
12.6.1 Technology Platform Valuation Factors
12.6.1.1 Equity Value
12.6.2 Sensitivity Analysis
12.7 Capital Asset Pricing Model (CAPM) for Company B
12.7.1 Top-Down Analysis
12.7.2 Similar Agreements’ Analysis
12.7.3 Valuation Summary
13: Company C: Cybersecurity
13.1 Overview
13.2 Customers
13.3 Company’s Products
13.4 Competitive Analysis
13.4.1 Competitive Analysis: Network Security
13.4.2 Network-Based Data Path
13.4.3 Network-Based DNS Path
13.4.4 Network-Based Home Router
13.4.5 Endpoint-Based Applications
13.4.6 Competitors
13.5 Market Overview
13.5.1 Network Intelligence—Deep Packet Inspection (DPI)
13.5.1.1 Regional Trends
13.5.2 Network Intelligence—Deep Packet Inspection (DPI)
13.5.3 DPI Competitors
13.6 Trends Impacting the DPI Market
13.6.1 Factors Driving Adoption of DPI
13.6.2 Factors Constraining Adoption of DPI
13.6.3 Challenges/Insights
13.7 Use Cases
13.8 Future Trends
13.9 Financial Valuation and Projections
13.9.1 Financial Analysis
13.9.2 Equity Value
14: Company D: Renewable Energy
14.1 Sector Overview
14.2 Company Overview
14.3 Global Power and Renewable Market Overview
14.3.1 Key Regional Market Highlights
14.3.2 Global Solar Market Overview
14.3.3 Global Wind Market Overview
14.4 Company Activities
14.5 Competitive Landscape
14.5.1 Ireland Activities: Renewable Energy Market Overview
14.5.2 Ireland: Key Projects
14.5.2.1 Tully Project
14.5.2.2 Competition
14.5.3 Serbia Activities: Renewable Energy Market Overview
14.5.3.1 The Black Project
14.5.4 Croatia Activities: Renewable Energy Market Overview
14.5.5 Hungary: Renewable Energy Market Overview
14.5.5.1 Key Projects
14.6 Financial Valuation and Projections
14.6.1 Revenues
14.6.2 Balance Sheet
14.6.3 Valuation
14.6.3.1 Forecast: Revenues
14.6.4 Main Valuation Parameters
14.6.5 Pipeline Value
14.6.5.1 Revenue
14.6.6 Equity Value
14.6.7 Sensitivity Analysis
14.6.7.1 Valuation by Multiples
15: Conclusion
Appendix A: Capitalization Rate for Renewable Energy Firms
Appendix B: Capitalization Rate for Software Firms
Index
