Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Third Edition

CHAPTER 23

Valuing Young or Start-Up Firms

Many of the firms that we have valued in this book are publicly traded firms with established operations. But what about young firms that have just come into being? There are many analysts who argue that these firms cannot be valued because they have no history and in some cases no products or services to sell. This chapter presents a dissenting point of view. While conceding that valuing young firms is more difficult to do than valuing established firms, we argue that the fundamentals of valuation do not change. The value of a young start-up firm is the present value of the expected cash flows from its operations, though estimates of these expected cash flows may require us to go outside our normal sources of information.

INFORMATION CONSTRAINTS

When valuing a firm, you draw on information from three sources. The first is the current financial statements for the firm. You use these to determine how profitable a firm's investments are or have been, how much it reinvests back to generate future growth and for all of the inputs that are required in any valuation. The second is the past history of the firm, in terms of both earnings and market prices. A firm's earnings and revenue history over time let you make judgments on how cyclical a firm's business has been and how much growth it has shown, while a firm's price history can help you measure its risk. Finally, you can look at the firm's competitors or peer group to get a measure of ...