Why Traditional Valuation Methods Struggle:

1) DCF Limitations: Startups lack the historical data required for reliable forecasts, making it challenging to predict long-term performance using DCF.

2) Multiples Approach: Finding comparables for innovative startups is difficult as they may not align closely with established companies in growth, risk profile, or market potential.

Innovative Approaches to Consider:

3) Real Options Valuation: This method considers the startup’s ability to adapt and evolve, recognizing the value of future choices—expand, pivot, or abandon projects based on market feedback.

4) Venture Capital Method: Often used in practice, this method looks at the potential future value at exit or further funding rounds, focusing on achieving milestones that increase company value.

Key Insights:

a) Startups should be evaluated not just on current financials but on their strategic decisions and potential market impact.

b) Incorporating real options into valuation acknowledges the flexibility and sequential decision-making inherent in startups.

c) Understanding the specific risks and the potential high rewards can lead to a more balanced view of a startup’s worth.