Valuation of start-ups and intangibles

We were commissioned to evaluate a start-up in the tech sector that was developing a new type of climate-neutral power plant technology. At the time of the assignment, the company was at an advanced stage of prototype development and already had several launch customers who had signalled a strong interest in testing the system. The evaluation was embedded in an upcoming financing round, which was necessary to enable the completion of the prototype and the transition to early commercialisation. 

The initial situation was characterised by a high degree of uncertainty: Operationally and financially, the company was in the critical area of the so-called “Valley of Death” – a phase in which development time and funding requirements had exceeded original expectations. The first investors became increasingly impatient, and the launch customers also increased the communicative pressure with regard to a reliable test date.  

A key problem was that the future performance of the product – and therefore the success of the business model – depended heavily on the actual functionality of the prototype. Although initial functional tests were positive, the long-term performance had not yet been proven. At the same time, there was the challenge of properly recognising the risks and uncertainties inherent in the business model, particularly with regard to regulatory requirements, scalability and the capital intensity of subsequent production. 

We therefore paid particular attention to modelling alternative development paths, even in the event that the prototype does not perform as originally intended – but still has commercial application potential. The aim was to develop a valuation that not only focussed on a best-case scenario, but also took realistic, differentiated perspectives into account and offered investors a clear basis for decision-making. To this end, we actively expanded the management’s originally narrower scope of analysis in order to achieve an optimal investor approach. 

We then developed a holistic valuation model that integrated a wide variety of approaches: from simulation models and VC methods to real option models for technological and commercial milestones. The underlying risk parameters were derived on the basis of extensive benchmarks from capital market analyses, comparable transactions and option pricing models and adapted to the specific company context. 

The decisive factor was the target group-orientated presentation of the analysis, which was deliberately geared towards a clear investment perspective. The presentation emphasised the critical variables, uncertainties and dependencies – and enabled potential investors to make a well-founded risk/reward assessment. The valuation document was prepared in the form of a visually clearly structured presentation that focussed on key economic and strategic aspects. As a result, the company was able to conclude a successful financing round despite the difficult starting position. Our valuation was a central component in gaining the necessary trust of potential investors – through a fact-based, transparent analysis that visualised values and built a credible bridge from today’s uncertainty to potential future growth options (of course taking all risks into account), thereby making a significant contribution to overcoming the “Valley of Death”. 

We were commissioned to value an intangible asset as part of an intra-group transfer from an Austrian subsidiary to the German parent company. The subject of the valuation was the intellectual property (IP) of an AI-based tool for optimising marketing data, which had been developed internally in recent years and was now to be transferred to the German location as part of a reorganisation. 

The valuation of such a specialised intangible asset was associated with several challenges. Firstly, it was necessary to separate the value of the AI-based components of the tool from other, non-technology-driven cash flow components – a distinction that was particularly challenging in combination with traditional marketing services and analytical functions. Secondly, there was the question of the appropriate differentiation between development work that had already been carried out and development work that was still to be carried out in the future: while parts of the functionality were already operational, the tool was also in an evolutionary development process in which future releases were associated with considerable value potential. Another key aspect of the valuation concerned the determination of an economically viable useful life for the existing IP, particularly in light of the extremely dynamic innovation cycles in the field of artificial intelligence. An overly optimistic estimate would have overestimated the substance of the IP, a too short useful life would have led to an underestimation. 

As part of the methodological derivation, it quickly became clear that the usual valuation approaches for intangible assets have reached their limits, at least in their standard form. The relief-from-royalty method showed a wide range of outcomes and could not be plausibly calibrated due to a lack of good comparable cases. Cost-based methods completely ignored the strategic future potential of the application, while market-based methods were not applicable due to a lack of data. Even the MPEEM approach (Multi-Period Excess Earnings Method), which is fundamentally appropriate, proved to be problematic in its pure form, as the calculation of individual contributory asset charges can hardly be applied appropriately in an environment of multiple, closely linked intangible assets. 

Our approach was therefore a further developed methodology that is based on the MPEEM framework but goes significantly further. In the first step, we valued the smallest organisationally and economically viable unit comprising the relevant intangible asset – which in methodological terms came close to a complete start-up valuation. In a second step, all asset charges that could fairly be determined for explicitly identifiable tangible assets and certain intangible assets (no competitive advantages) were deducted. Finally, the remaining residual value was allocated to those intangible assets with an actual strategic competitive advantage using qualitative criteria and a specially calibrated valuation model – with the AI IP at the centre of interest. 

To validate the model, we conducted a cross-check on the individual negotiating potential of the group entities involved. This involved examining the extent to which the Austrian entity would forego compensation and what price willingness can be assumed for the acquiring German entity – always assuming an independent third-party context. This view served as an important plausibility anchor and strengthened the comprehensibility of the valuation. The result was a complex sub-company valuation in which the IP asset could be extracted and fairly valued as an economically separable unit. The methodology deliberately deviated from standard procedures – not out of principle, but because the specific valuation case required this methodologically. This resulted in a well-founded and at the same time practice-orientated valuation, which met the regulatory requirements as well as the economic substance of the valuation object.