Valuing Stock Options: The Black–Scholes– Merton Model Chapter 13 13.1.
Building and Valuing the Business Model Chapter 8.
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Transcript of Building and Valuing the Business Model Chapter 8.
Building and Valuing the Business Model
Chapter 8
Steps in Developing a Business Model
Identify the value chain
Who pays you? And how much?
Are you dealing with radical innovation?
Can you create multiple revenue streams?
Business Models with Radical Innovation
How do you prevent cannibalization of current products?
How do you overcome customer resistance when switching costs are high?
How do you avoid the inertia of a current business model?
Sources of Opportunity for New Business Models
Reposition on the Value Chain Look for unserved or underserved niches and customer dissatisfaction.
Reinvent the Value Chain Tear apart what currently exists and create a whole new value chain. Extrapolating from other industries is often the inspiration for a reinvented value chain in your industry
Redefine value-added If, for example, competitors in your industry seek out contracts from work from customers, you may choose to learn what customers typically want, do the work first, and then sell it to them in a turn-key package. You’re selling convenience. That’s what J.D. Powers & Associates did in the market research industry.
Redefine distribution Think about where customers spend a lot their time and put your product there. If customers typically are at the end of a long chain of intermediaries, consider selling direct.
Consulting GroupBuilds S/Wapplications
BusinessDevelopment
GroupIdentifies Projects& Resources for
developmentgroups
Game Lab -Develops video
games
$
Licensing GroupCreates
licensableConcept &Characters
$
RevenuesConsulting Clients
RevenuesVideo Game Publishers
RevenuesOther media publishers
$$
Sudden Presence Business Model
Centurian School
CenturionSchool
AncillaryServices
Revenue:Fee for daycare
service
K-12 gradeeducation
Revenue:Tuition fee
RegistrationFees
Eveningcomputer
classes foradults
Revenue:Tuition fee
RegistrationFees
food services/cafeteria
Revenue:Fee for food
service
Sales ofbooks,
uniforms,computerequipment
Revenue:Margins from
sale of products
RevenueStream
CorporateSponsorships
Grants
Scholarships
Fund-raisingactivities
Create Multiple Revenue Streams
Expose the technology to people in different industries
Understand and protect the value of the core technology so it can be licensed for a variety of applications.
Go beyond the original invention team to find new applications.
License applications outside the company’s core competency to gain critical mass and become a standard
Most Effective Model
Based on your understanding of the value chain and how it works.
Based on your positioning in the chain
Based on your ability to experiment, learn and evaluate.
Based on your ability to defend what you’re doing.
Drivers of Value
Size of the market and its readiness to adopt Competitive advantage of the firm and its
ability to sustain that advantage Skills, experience, and track record of
management team Upside potential of the venture Downside potential of the venture An appropriate exit time for the investors Current state of the economy and the industry
Financial Models for Assessing Value
Increasing Risk from Things Company Can’t Own
Labor Technologies
Business models
Greatest Challenge:
Understanding the difference between balance sheet and market valuation,
which is intellectual capital
The Highest Valuations Require Options.
Options are greatest when growth is possible, when there’s high volatility and
high risk
Valuation with Real Options
Total Value
Economic ValueEconomic Value Strategic ValueStrategic Value
Diminishing Returns
Innovation
Risk
Diminishing Returns
Innovation
Risk
Calculating Total Value
Step 1: Calculate the Economic Value
Step 1: Calculate the Economic Value
Step 2: Frame the OptionsStep 2: Frame the Options
Step 3: Determine the Option Premium
Step 3: Determine the Option Premium
Step 4: Determine the valueOf the business plan
Step 4: Determine the valueOf the business plan
Step 5: Calculate the option value
Step 5: Calculate the option value
Step 6: Calculate totalStep 6: Calculate total
1. Value of the underlying security2. Strike or exercise price3. The time period of the option4. The volatility5. The risk-free rate
1. Value of the underlying security2. Strike or exercise price3. The time period of the option4. The volatility5. The risk-free rate
Valuing Early-Stage Technology
Stages and Values for New Ventures
Seed CapitalSeed Capital
First Round/Second RoundFirst Round/
Second Round
MezzanineMezzanine
IPOIPO
Stage 1: Seed Capital
Trojan Haptics
Founders = $1 M
+$3 M
Early Investors
3/7 of stock Value
(Cum R&D$ X Step-up ratio) + Financing = Postmoney Valuation
($1M X 4) + $3 M = $7 million
Stage 2: Private Placement, Round 1
Trojan Haptics
$4M in R&DBusiness Plan $7M VC
Post Money Valuation = ($4M x 2.5) + $7 M = $17
Stage 3: Private Placement, Second or Mezzanine round
Trojan Haptics
$11M in R&D
PreMoney
$30 Million
2.8 SU Ratio$17M VC
Post Money Valuation = ($11M x 2.8) + $17 M = $47.8M
Stage 4: Initial Public Offering
Trojan Haptics
$28M in R&D
PreMoney
$70 Million
2.5 SU Ratio$40M IPO
Post Money Valuation = ($28M x 2.5) + $40 M = $110M
Licensing Value
Valuing Via License Agreement
Proven technologies
Unproven or partially proven technologies
Patent rights only – no technology
applications
Proven Technology
Question of balancing technology gains with market forces
Licensor is the sole inventor
For licensee, little risk of non-application since plant design and operating procedures part of licensing package.
Unproven or Partially Proven
LicensorLicensee
Higher risk
Lower royalty
(Capital investment + R&D investment) x ROIC – WACC) + License fees (licensee assumes role of inventor of application)
Valuing the Royalty Stream
Evaluation fees: get rid of tire kickers- refundable
Appropriate discount rate = licensor’s cost of capital
Up-Front Fees
Sign of commitment
Minimum Royalties/
Running Royalties
Discounted Cash Flow Analysis
Essential when part of return is in the future.
Need combination of analytical tools and critical judgment.
DCF says a dollar received tomorrow worth less than one received today.
NPV: present value of future stream of cash flows less any investment
PV/NPV
PV = Pn/(1+M)n
NPV = -I0 + Pn/(1+M)n
Discount Rate
Corporation’s cost of money absent any risk.
Impact of DCF increases as discount rate is higher and time span between present and receipt of rewards increases.
Cost of Money
Debt: short & long-term – comparable risk Weighted Average Cost of Capital (WACC) =
(% debt) x (after-tax cost of debt) + (% equity) x (cost of equity)
Equity: risk-free return + risk premium (beta x market premium)
Rule of Thumb: cost of equity is double prime rate.
Terminal Value
Liquidation Value: multiple of net income, pretax operating earnings (EBIT) or EBITDA.
TV as a perpetuity. Assumes no growth & constant earnings.
Value = Annual payment/Cost of money
Growth in perpetuity
Estimates future growth + degree of profitability. Use only when growth rate is several % less than discount rate.
Build a Revenue Model
Estimate target revenues in a medium-term time horizon from time of commercial launch.
Look for natural limits of size of market or your market share.
Determine the nature of the end game
Software – 2 years
Computers – 3-4 years
Pharmaceuticals – 10 years
Assume that growth will decline
Take-Aways
Add students’ comments here