How to value a high-tech start-up.

Ask an Economist
Question: 

Hi!

I wanted to value a high-tech start-up of which I have the cash flows of the coming 6 years. I am not a VC just a post-grad student, so I decided to use the discounted cash flow method. To do so, I calculated the discount rate. For a high-tech start- up the discount rate = Rate of equity (which can be determined by the capital asset pricing model). So I calculated my discount rate, used it in the DCF model, and found an approximation of the value of the high-tech firm.

But I didn't take into consideration that the company sells their products globally. This fact has an impact on its beta factor, and consequently on the discount rate, and finally on the value of the firm!

One option is to use the International CAPM model, but my company is going to sell globally, so how do I know the impact of that to the discount rate? Any help would be very appreciated.

Thanks

Answer: 

If your company is based in the U.S., the valuation should be based on the standard CAPM. However, barring exceptional circumstances, one would expect the beta of such a firm to be closer to zero than the beta of an otherwise identical firm selling only in the U.S. market. There are two main reasons for the lower beta. First, foreign economies are less than perfectly correlated with the U.S. economy, meaning that even if foreign economies used the U.S. dollar as their currency, the firm’s revenues are likely to be less correlated with the U.S. market than if the firm sold only to the U.S. market. Second, exchange rate fluctuations are likely to further reduce the correlation of foreign sales with the U.S. market.

At any rate, you may find the attached paper on the valuation of investments abroad useful. Link: http://core.ac.uk/download/pdf/6497929.pdf

Answered by:
Dr. Sergio Lence
Professor and Marlin Cole Chair of International Agricultural Economics
Last updated on June 19, 2018