Thursday, 5 June 2014

Valuing Private Companies

It's been a couple of year since I added to this blog, largely because I have been spendning most of my time building Sensor100 and the very successful Sensors in Medicine Conference series.

However, I really shouldn't neglect Captum, and will try to adhere my original resolve of adding a new blog, if not weekly, then at least once a month.

One of the questions I frequently get asked is how to value an unlisted company, where the shares are privately held, and there is no public market for them.  Opinions vary on the answer to this question.  I recall a university technology transfer manager who rather forcefully took the view that there was no meaningful way to value very early stage  university spin outs.  My own view is that it makes sense to form a view of the value of any privately held company, whatever stage of development it is at.  This helpful if you are an owner (am I owning a worthless asset?) and particulary if the company is entering into a transaction (investment of new funds, sale etc).

So how is it done?  Among the plethora of methods a Google search will reveal, there are really only four approaches:
  1. Market value
  2. Cost and/or replication value
  3. Risk adjusted discounted cash flow
  4. Real option valuation
Most valuations will be based on a combination of two or more of these methods.

It doesn't have to be a black art.  At Captum's MasterClasses we explain how these methods work in simple non- mathematical terms appropriate to beginning/intermediate expertise.