{"title":"Start-Up Firm Valuation: A Real-Options Approach","authors":"Matthias Bank, K. Wibmer","doi":"10.2139/ssrn.1928710","DOIUrl":"https://doi.org/10.2139/ssrn.1928710","url":null,"abstract":"Start-up firms typically produce negative cash flows in the first years after their foundation. As a consequence, standard discounted cash flow methods are not applicable, often forcing practioneers into using theoretically dissatisfying devices like multiples. In this paper, we develop a comprehensive and theoretically more convincing valuation framework for start-up firms. Our analysis is based on a contingent claims approach in an arbitrage-free setting which - due to an alternative process assumption - explicitly allows for the negative earnings typically produced by start-up businesses in early stages of their development. The model allows for the derivation of optimal conditions for exercising the waiting option to invest in a start-up as well as its optimal capital structure upon establishment. Finally, we show how unexercised additional options to invest (growth options) - even if producing negative cash flows at the time of investment - may significantly contribute to the start-up firm's value. The explicit incorporation of additional investment options may serve as an explanation for observable high market values of start-up firms with low or negative current cash flows.","PeriodicalId":254298,"journal":{"name":"IPOs and Valuation","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133029612","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}