Value is ultimately what parties agree to. Sometimes this seems rational, other times irrational.
The reality is that value often results from the ability or inability to create an effective bidding process and to persuade/anchor a strategic counterparty toward your perspective. Negotiating leverage and personalities are just as important in deal negotiation as market potential and clinical risk, especially with early stage, private companies.
This is a substantially different exercise than the trading of securities on an exchange.
The tools valuation experts use for early-stage, illiquid companies based on mathemagical constructs of portfolio and option theory are blunt and crude and need to be refined to reflect the actual nature of the market dynamics for these companies, assets, and securities as well as for the different adaptive risks these enterprises carry. The closer a company is to Zero on Thiel’s Zero to One scale, the less appropriate “standard” practices are.
I recall Aswath Damodaran lamenting the difficulty of valuing a hot dog stand vs. a large public company on a podcast I heard recently. The large public company is easier to value. Many early-stage companies look more like hot dog stands than large publics like Gilead or Amgen. Yet, we use the same or similar models for both. Hmmm….
For many of our early-stage life science clients, they can’t sell their assets at the valuation at which they were just financed…a standard problem in discovery and development. There are inflection points in clinical development that cause value jumps such that “saleable” value will eventually map to and exceed financing value. But, until then, which is it?
An analogy to consider…Newtonian physics and quantum mechanics: late-stage company valuation and early-stage company valuation. Just a thought.
More to come…
