FIN 509 MOD 3 CASE - Valuation of New Venture 1 Running...

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Valuation of New Venture 1 Running head: Valuation of New Venture: Investor's and Entrepreneur's Perspectives Touro University International University FIN509 - Entrepreneurial Finance Module 3 – Case Study Valuation of New Venture: Investor's and Entrepreneur's Perspectives Valuation of New Venture 2 It is of extreme importance for a start-up company to have a solid understanding of the value of its company when seeking financing from outside investors. There are many different models for determining the value of a business, such as; Capital Asset Pricing, Discounted Cash Flows, and the Venture Capitalist Method. These more traditional valuation techniques often times fall short in representing an accurate value when addressing a new high-tech venture. A new valuation model has been developed called Real Options that borrows theories from investment finance and strategy to more accurately value a new high-tech business. This essay will look at the Real Options model and the challenges of valuing a high-tech enterprise. Let’s start by addressing the importance of knowing the value a business from both the entrepreneur’s and investor’s perspectives. As an entrepreneur you will inevitably require early and re- occurring rounds of funding for your venture. Eventually you may also want to sell your company to a prospective buyer. For either of these cases it would be imperative for you to have a firm understanding of the value of your company. During the early financing rounds of a start-up, venture capitalists and angel investors are looking to provide Private Equity Financing. That is, they will provide financing in return for some amount of ownership in your business. “The company wants to provide an equitable amount of ownership for the risk and size of the investment and no more. The investor wants to receive an equitable amount of ownership Valuation of New Venture 3
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for the risk it bears in making the investment and no less.” (Pellegrino, M. & Buuck, D. 2007) There fore each party will conduct a valuation analysis to determine the value and risk associated with the business. Unfortunately, it is very difficult to determine the value of most new high-tech enterprises. During the “dot-com” bubble, investors were obviously using flawed valuation techniques, as most of the values were grossly overestimated. This stemmed from the inability to account accurately for the complex variables in the valuation of a high-tech venture, and the irrational behavior of the market. How
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FIN 509 MOD 3 CASE - Valuation of New Venture 1 Running...

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