Anyone who has tried to measure the value of start-ups has discovered the difficulty of presenting a correct value of a company using standard techniques like net present value or comparable method. The root of the problem is that static valuation methods tend to undervalue investments made under uncertainty. The Black-Scholes model has been used extensively for financial options, but may be difficult to apply to valuation of start-ups. Instead, it is suggested that the cost and revenue cash flows associated with implementing a project be used to measure the option value of start-ups. This model captures the uncertainty associated with cash flow projections while simplifying some of the assumptions and data required for the Black-Scholes model.
This thesis provides an introduction to the use of real options and how they can benefit venture capitalist pursuing initiatives.
