Title: Valuing technology investments: use real options thinking but forget real options valuation

Authors: Paul R. Steffens, Evan J. Douglas

Addresses: Brisbane Graduate School of Business, Queensland University of Technology, G.P.O. Box 2434, Brisbane Qld 4001, Australia. ' Brisbane Graduate School of Business, Queensland University of Technology, G.P.O. Box 2434, Brisbane Qld 4001, Australia

Abstract: When facing risky technology investments or ventures |real option thinking| – the managerial flexibility to capitalise on opportunities when they arise and/or to minimise the impact of threats – is precisely what is needed. Notwithstanding this, we argue Real Options Valuation (ROV) is inferior to traditional decision tree analysis for this context. Our reasoning is twofold. Firstly, ROV techniques provide a sophisticated treatment of market risks, but do not deal with firm-specific risks. However, the elevated risk facing technology ventures is predominantly firm-specific risk. Secondly, ROV has a severe practical limitation for new technology ventures. The starting point for ROV is to value the ||underlying asset|| – the venture/project in the absence of the |real options| – using discounted cash flow techniques. But the risk profile/discount rate can not be established for this nonsensical hypothetical entity – because the |real options| are an integral part of technology venture.

Keywords: technology investments; real options; valuation; decision tree analysis; DTA; new technology ventures; risk; technoentrepreneurship.

DOI: 10.1504/IJTE.2007.013270

International Journal of Technoentrepreneurship, 2007 Vol.1 No.1, pp.58 - 77

Published online: 19 Apr 2007 *

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