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

Keywords: ambiguity, IRR (internal rate of return), mathiness, sources of uncertainties, ROI (return on investment), uncertainty, valuation methods

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Carefully using net present value (NPV) to value business models

Keywords: cost of capital, Discounted Cash Flow, Final Value, Net Present Value, opportunity cost, real options, risk premium, WACC

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Integrating known risks and potential uncertainties:

Keywords: black swans, Monte-Carlo simulations, risk management, scenario planning, sensitivity analysis

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  • (Video) Shell, Navigating an Uncertain Future
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  • (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.
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(c) Prof. Benoit Gailly, Louvain School of Management

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