their metric of preference and apply it regardless of where on the Technology Valuation Lifecycle the technology resides. Buyers must be willing to change metrics depending upon the business case and also to assure they are comparing apples to apples (especially in comparing the value of a new project to previous experiences)
Sellers need to align the valuation metric with their business model and product marketing. For example, if a software company finds its target market segment to be the Early Majority an Application Service Provider (ASP) business model would further reduce TCO. Pricing must not only be justified by the value of the product, but support a sustainable business model.
System Integrators face a unique challenge of bundling products originally built and promoted towards different valuation metrics and a need to contextualize the whole value concept for their customer.
Venture Capitalists stage companies. environment, if the
have traditionally used ROI to define Despite the temptation to shift to technology is highly differentiated ROI
the value proposition of early TCO in a cost-constrained is a better measure to gauge
potential value. have fulfilled a reduces indirect
By the whole costs, a
time an early stage company is crossing the chasm, they will product concept through development and partnerships that more reasonable time to apply TCO.
Business Cycle Considerations
The most basic calibration to valuation models that is made according to the business cycle is the discount rate. However, using a discount rate to account for risk of return to future cash flows is only as good as the assessment of risk and the inputs of cost and benefit they are based upon. Different inputs used in different environmental conditions:
Hard vs. Soft Costs: today’s bottom line economy puts a greater emphasis on hard cost savings vs. soft cost savings. It is important to understand that this change is because, in part, valuations of publicly traded companies are less frequently based upon EBITDA and more frequently based upon Net Income, which accounts for hard costs. When the economy is booming, public company valuations shift to the top line to reward gaining a greater share of a growing pie. Top line valuation also allows unprofitable companies who emerged to capitalize upon new opportunities to be valued at all.
New vs. Old: when the business cycle is at its bottom, increasing existing revenue streams rather than creating new revenue streams is less risky and given better credence for inclusion in valuation models.
Tangible vs. Intangible: technology benefits measured by the model will shift from a focus on tangible values in a down economy to marginal inclusion of intangible values (e.g. human capital, intellectual capital).
Since business cases are aligned with business models, it is natural to translate business cases into shareholder value. The Information Economy bubble put a premium on equity value and purchasers of technology demanded business cases relate to equity value. While co-founding and taking public RateXchange, the leading B2B exchange for the telecom industry, we had a
highly differentiated solution with a compelling primarily from reduction of Sales, General
Our bandwidth trading Administrative costs.
proposition needed to translate to the strategic level. Listening to our customers, we developed well-received whitepaper that not only defined hard and soft cost savings, but also implied how reduction in S, G & A could impact shareholder value as measured by EBITDA.