What is Technology Worth?

Abstract

Investors in high-tech industries face a common issue: how to put a valuation on a technology based venture or project? Although classic investment valuation methods, as discounted cash flow, are well understood, they tend to fail in this environment. Technology investments not only look into an uncertain future—they also have a business plan that is still flexible and subject to change. Both issues often make an investment decision a matter of a mere “judgment call.” In this article we provide a compelling solution to assist investors in high-tech investment decisions: the Real Options Toolkit. This model allows us to capture and evaluate the flexibility of managers to adjust their strategy to alterations in the uncertain high-tech environment. This type of managerial flexibility is modeled as a “real option.” Based on the actual investment case of SemCo.—a technology carve-out venture—we give a clear guideline on when and how to use real options analysis to evaluate technology driven investment decisions. Beyond its appeal for pure investment valuation, the real options framework also provides another insight: the hidden “option value” in a technology investment does not just unfold by itself. Managers need to understand its logic in order to actively leverage and capture the value of their flexibility.

TOPICS: Security analysis and valuation, options