How to Value a Hard Tech Business
Why real estate can provide inspiration for these hard to value businesses
Valuing hard tech startups is more art than science. In my experience it’s less about financials (in the early days) and more like appraising a quirky, old theater in a bustling city. At first glance, the two may seem worlds apart, but dig a little deeper, and you'll find some striking similarities, especially when it comes to the art of balancing high costs and maintaining equity through the commercialization journey.
Picture a grand, historic theater in downtown. Using a standard Discounted Cash Flow (DCF) method, it might not look like much due to its old facilities and limited modern-day revenue potential. However, switch to the discount to replacement cost method, and suddenly, its value shoots up. Why? Because replicating its charm and history in today's dollars would be a costly affair. This is where our hard tech startups come into play.
Let's take 'FissionTech', a startup knee-deep in developing futuristic nuclear fission technology. Like the old theater, traditional valuation models don't do it justice. It's not just about immediate profits; it's about the immense cost and effort it would take to replicate such groundbreaking tech. Here, the replacement cost method gives a more realistic picture of its worth.
But there's a catch - high innovation often means high investment. To avoid watering down their stake, 'FissionTech' needs to manage dilution along the way. They might look into options like government grants, partnerships, or other early revenue streams - think of it as the theater landing a heritage grant or hosting exclusive events to bankroll its restoration without selling off its bricks.
Like vintage real estate, hard tech startups are hard to value, requiring investors to look beyond the obvious to understand true value. And when it comes to funding, creativity, strategy, and clear risk framing (another post on this topic to come soon!) are critical to achieving the large scale of ambitions these companies usually have.