Valuations of Early-Stage Companies and Disruptive Technologies : How to Value Life Science, Cybersecurity and ICT Start-ups, and Their Technologies

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. 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