Design of a Conceptual Framework for Valuation of Young Growth Companies

Christian Algreen Pedersen & Mads Tandrup Johansen Bentzen

Student thesis: Master thesis

Abstract

This thesis addresses the issue of valuing young growth companies. Young growth companies are notoriously known for possessing a challenging nature to model through traditional corporate financial valuation frameworks which has catalyzed the following research question: How should a conceptual framework for valuing young growth companies be designed? Though valuation of young growth companies is a complex task the relevancy is nonetheless not to be understated. Young growth companies are constantly on the seek of external capital which demands valuation of these companies with high frequency. This thesis seeks to uncover how one ought to approach the returning exercise of valuing such companies. Firstly, the typical characteristics of young growth companies is determined. By conducting an analysis of the typical life cycle of companies we unravel how a company’s development is connected to the need of raising external funds. Young growth companies are often associated with high risk which forces both companies and investors to source alternative ways of financing the future growth. We find that this circumstance entails greater complexity to the valuation process. By designing a conceptual framework specifically for young growth companies, we provide a guidance as to how an analyst should incorporate alternative ways of funding into the valuation and present theoretically sound valuation models which captures the uncertain nature of these companies. We find that over the course of a company’s life cycle different valuation models yields different applicabilities. Through our theoretical analysis we conclude that real options possess a great ability to capture the managerial flexibility and uncertain environment that young growth companies operate in. Furthermore, we seek to address the practical implications of both the presented valuation models as well as our conceptual framework. This is done through a practical analysis where we partly conduct a meta-analysis of existing empirical studies in the research sphere and partly carry out interviews with practitioners. In this regard we find, that as the company matures more practitioners tend to the use of DCF and multiples but disregard real options on a broad note.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages130