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A Valuation Formula for Firms in the Early Stage of Their Lifecycle

We develop a valuation formula for analyzing high growth firms using the stages of an industry lifecycle. Our model is best suited for start-up firms with low (or negative) earnings and low sales. Our formula uses start-up firm data and captures the firm’s growth potential by incorporating data about two key stages along the lifecycle. One stage corresponds to the largest firm in the industry and the other to the firm situated at the inflection point of the S-shaped curve describing the lifecycle. We test the formula by examining the biotechnology industry in the late 1990s. An empirical analysis of the biotechnology industry reveals an important correlation between market values growth rates and assets growth rates, which is predicted by our formula. We find that on average, our formula underestimates the actual market value of biotechnology start-up firms by about 15%.