The Valuation of Cash-Flowless High-Risk Ventures

Abstract

The valuation of cash-flowless high-risk, especially venture capital, investments is more of an art than a science. In the absence of cash flow forecast and in view of the high uncertainty about the success of the commercialization effort, it is not possible to apply the Discounted-Cash-Flow (DCF) method that is the traditional method for the valuation of conventional projects or ventures. In the absence of a structured and methodical way for valuating such projects, CEOs, CFOs, investment managers as well as venture capital and other investors resort to variety of methods including gut feeling. In this article I present a novel venture-pricing model (VPM) and method for the valuation of cash-flowless risky projects as part of an ongoing effort to set the ground for a quantitative venture capital finance theory that is complementary to the traditional corporate finance. The model may serve both researchers and practitioners (investors, entrepreneurs, C-level executives and the like) for the valuation of high-risk high-gain ventures – such as venture capital investments – and as supporting tool for decision-making and portfolio management.

TOPICS: Private equity, VAR and use of alternative risk measures of trading risk, portfolio construction, security analysis and valuation