In search of the true value of start -up firms: Creative destruction and real options approach

In this dissertation I propose a Creative Destruction-Real Options Approach (CD-ROA) to valuing start-ups when only technological uncertainty is present. I claim that is the case when a company takes part of a Creative Destruction process as described by Schumpeter (1942). This approach is able to explain the high prices investors pay for growth stocks and proves that it is not a case of overpricing but recognition of the large growth potential of firms which are part of highly innovative industries. I also perform a case study on the valuation of Gilead Sciences, Inc., at the time of its IPO using the CD-ROA. By taking into account two facts not being considered by traditional method---i.e. the Net Present Value---this approach gives a much better estimate of the firm's value. Those facts are, on one hand, that this firm is under a Creative Destruction process, which gives it an expectation of becoming the next monopolist, and, on the other hand, a real growth option which gives it flexibility to make additional investments only in the case of success. The CD-ROA also accounts properly for the probability of preemption by any of the other competitors, in addition to other determinants of the value of the firm such as the characteristics of the industry which determine the distribution of the size of the jumps in value, as well as the scrap value in the case of preemption.