Valuating innovative business models: quantifying the unquantifiable

ValuatingValuation is a decision-making process aimed at making smart bets on the “least bad” way to “put a number” on a business model, taking into account what is known, what is believed and the remaining ambiguities and uncertainties. Numbers are a necessary evil.

NPVThe net present value (NPV) method is a very powerful but also very dangerous technique for valuing a business model based on its expected riskiness and potential cash flows. It can in particular be effectively used to compare multiple business models under similar cost of capital and terminal value assumptions.

FuturesSensitivity analysis and scenario planning approaches can be used to integrate known risks and potential uncertainties and to reduce the scope of managerial ignorance, provided they are based on challenging business conversations regarding “what you need to believe” rather than black box models and/or blind number-crunching.


The valuation decision-making process:  making smart bets

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  • (Book) Goldfarb, B., & Kirsch, D. A. (2019). Bubbles and Crashes: The Boom and Bust of Technological Innovation. Stanford University Press.
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Carefully using net present value (NPV) to value business models

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  • (Article) Wonglimpiyarat, J. (2018). What is it about strategic implications of using financial models in the process of technology management?. The Journal of High Technology Management Research.
  • (Article) Žižlavský, Ondřej.(2014) “Net present value approach: method for economic assessment of innovation projects.” Procedia-Social and Behavioral Sciences 156: 506-512.

Integrating known risks and potential uncertainties:

  • (Book) Gilovich, T., D. Griffin and D. Kahneman, Heuristics and Biases: The Psychology of Intuitive Judgment, , Cambridge University Press, 2002
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  • (Book) Silver, N. (2012) The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t. Penguin Press
  • (Video) HBR: The Six-Minute Guide to Making Better High-Stakes Decisions, Sarah Cliffe
  • (Video) Shell, Navigating an Uncertain Future
  • (Article) Bishop, P., Hines, A., & Collins, T. (2007). The current state of scenario development: an overview of techniques. Foresight, 9(1), 5-25.
  • (Article) Boudreau, K. J., Guinan, E. C., Lakhani, K. R., & Riedl, C. (2016). Looking across and looking beyond the knowledge frontier: Intellectual distance, novelty, and resource allocation in science. Management Science, 62(10), 2765-2783.
  • (Article) Bylund, P.L., & McCaffrey, M. (2017). A theory of entrepreneurship and institutional uncertainty, Journal of Business Venturing, 32(5), 461-475.
  • (Article) Cornelius, P., Van de Putte, A., & Romani, M. (2005). Three decades of scenario planning in shell. California Management Review, 48(1), 92-109.
  • (Article) Courtney, Hugh. “Decision-driven scenarios for assessing four levels of uncertainty.” Strategy & Leadership 31.1 (2003): 14-22.
  • (Article) Das, T. K., & Teng, B. S. (1999). Cognitive biases and strategic decision processes: An integrative perspective. Journal of Management Studies, 36(6), 757-778
  • (Article) Denning, S. (2006). Effective storytelling: strategic business narrative techniques. Strategy & Leadership, 34(1), 42-48.
  • (Article) Dow, J., & da Costa Werlang, S. R. (1992). Uncertainty aversion, risk aversion, and the optimal choice of portfolio. Econometrica: Journal of the Econometric Society, 197-204.
  • (Article) Goodwin, P., & Wright, G. (2010). The limits of forecasting methods in anticipating rare events. Technological forecasting and social change, 77(3), 355-368.
  • (Article) Kleinknecht, A., & Van Der Panne, G. (2012). Predicting new product sales: The post-launch performance of 215 innovators. International Journal of Innovation Management, 16(02), 1250011.
  • (Article) Hanafizadeh, Payam, Abolfazl Kazazi, and Azam Jalili Bolhasani. “Portfolio design for investment companies through scenario planning.” Management Decision 49.4 (2011): 513-532.
  • (Article) Kenney, H.S., & Pelley, B. (2014). Stories that drive the future: how narratives can improve scenario planning. Strategy & Leadership, 42(5), 28-33.
  • (Article) Jovanović, Petar. “Application of sensitivity analysis in investment project evaluation under uncertainty and risk.” International Journal of Project Management 17.4 (1999): 217-222.
  • (Article) Magni, Carlo Alberto, Stefano Malagoli, and Giovanni Mastroleo. « An alternative approach to firms’ evaluation: expert systems and fuzzy logic” International Journal of Information Technology & Decision Making 5.01 (2006): 195-225.
  • (Article) Mendonça, S., e Cunha, M. P., Ruff, F., & Kaivo-oja, J. (2009). Venturing into the wilderness: Preparing for wild cards in the civil aircraft and asset-management industries. Long Range Planning, 42(1), 23-41.
  • (Article) Popper, R. (2008). How are foresight methods selected?. Foresight, 10(6), 62-89.
  • (Article) Ruff, Frank. “Corporate foresight: integrating the future business environment into innovation and strategy.” International Journal of Technology Management 34.3-4 (2006): 278-295.
  • (Article) Van Groenendaal, Willem JH. “Estimating NPV variability for deterministic models.” European Journal of Operational Research 107.1 (1998): 202-213.
  • (Article) Vecchiato, R. (2019). Scenario Planning, Cognition, and Strategic Investment Decisions in a Turbulent Environment. Long Range Planning. (in press)
  • (Article) Walker, W. E., Harremoës, P., Rotmans, J., Van Der Sluijs, J. P., Van Asselt, M. B., Janssen, P., & Krayer von Krauss, M. P. (2003). Defining uncertainty: a conceptual basis for uncertainty management in model-based decision support. Integrated Assessment, 4(1), 5-17.
  • (Article) Xu, Chonggang, and George Zdzislaw Gertner. “Uncertainty and sensitivity analysis for models with correlated parameters.” Reliability Engineering & System Safety 93.10 (2008): 1563-1573.

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