Valuation of Private Tech Companies - A Concentration on Disruptive Innovations

Lijing Zhang

Student thesis: Master thesis


The valuation of technology firms has always been a hot topic in the financial world. Among all the technology firms, disruptive innovations are particularly difficult to be valued. The development strategy and limited disclosure create complications for analysts. Traditional valuation approaches no longer provide accurate and explanatory results on tech disruptors.
Aiming at solving the valuation problem for tech disruptors, a new valuation framework is developed in the paper. At the beginning, the definition and impacts of disruptive innovation are presented. In chapter 3, the PEST ROAD analysis framework is developed as part of the valuation framework. The analysis framework focuses on analysing internal and external factors that drive the growth of the industry and the company. Coupled with the suggested valuation methods (i.e. DCF and real options), which are the other part of the valuation framework. The valuation framework forecasts the competition between the disruptor and the incumbents, and it estimates the embedded real options value that hasn’t yet been activated.
In the case study of Airbnb, the valuation framework is demonstrated and applied. The result shows that nearly half of the entire value of Airbnb comes from its option of expanding into travel packages market. The importance of real options value is further urged in the discussion section, where we find out that DCF value is far from its implied valuation. The sensitivity analysis provides us the most sensitive value drivers of Airbnb, and the core status of the size of the user base is argued and generalized to other tech disruptors. From the case study, we further notice the crucial role of real options plays in valuing private tech disruptors. The practicability of the suggested valuation framework is proved, and it is believed to be a valuable framework which facilitates the valuation process and improves the valuation accuracy. At the end, a core value driver of tech disruptors: the size of the user base, is discovered. It is a primary source of value for technology companies, and it could potentially to be used as another entry point of valuation.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages89