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These papers (in PDF format) by F. Peter Boer, published in Research-Technology Management, are must reading for those concerned with current issues in R&D finance. |
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2003
OVERVIEW: The decision-tree approach to the valuation of R&D projects is mathematically identical to a probability-adjusted sequence of real options, when systematic (or market) risk is set to zero. Besides adding confidence to the calculation, this observation allows a clean separation of the value contribution of the option to abandon contained in a stagegate approach plus the additional value gained from market risk (as measured by volatility). One consequence is to enable the risk-adjusted valuation of R&D projects on a compact and familiar set of variables: net present value, initial investment, and the estimated cost, duration, and probability of success for each R&D stage. An estimate of the value of the project at the completion of each successive R&D stage is also a useful output of the method.
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2002
OVERVIEW: Financial thinking about R&D has evolved well beyond basic discounted cash flow models. Better tools have been developed to value intellectual capital, including the quantitative assessment of the value added by R&D. The dissection of the elements of risk, and the application of real options theory are new features of the R&D landscape. Financing vehicles have also changed with an enormous surge of venture capital and private equity funds. The analyst's toolbox has been enhanced by electronic spreadsheets, on-line databases, Monte Carlo software, the Internet, and the ubiquitous personal computer.
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2000
OVERVIEW: Cash flow models for valuing technology are increasingly out of touch with market-place valuations. While investor psychology and perceptions about the future may drive the marketplace, the theory of real options can go a long way toward closing the valuation gap. More importantly, it is a quantitative method, and is responsive to changing sets of assumptions. This article focuses on the importance of separating unique and market risk in applying options theory to R&D projects, since the former impacts value negatively while the latter enhances value. It also illustrates how the hidden options in a new venture can contribute enormously to value, especially in fast-growing industries and in markets exhibiting high volatility.
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1998
OVERVIEW: In my personal experiences in teaching and talking about business issues in R&D, no topic evinces keener interest from technical audiences than the financial valuation of technology. Their concern is not only that the application of financial tools to technology issues is problematical, but, when attempted, it often leads to the wrong answer, and usually to the undervaluation of technology.
This article will first review briefly why technology valuation is inescapable, and what financial methods are applied to it, and then address seven hidden traps that can lead to the wrong answer.
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