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SVB Analytics Research Finds Flaws in Industry Approach Used to Assign Value to Venture Capital-Backed Tech Companies
Company news | January 13, 2010
SAN FRANCISCO — January 13, 2010 — Researchers from SVB Analytics, a leading provider of corporate valuation services, found reason to question the widespread use of the Black Scholes Merton stock option pricing model as an allocation methodology when it is applied to very early-stage technology and life science companies. The Black Scholes model is a mathematical formula used to assign a value to a company's stock options. It is also widely used as a method to allocate value to each tranche of the securities of a company with a complex capital structure, as is typical for venture backed companies.
"Over the years a number of valuation practitioners and auditors have acknowledged weakness in the Black Scholes model as applied, finding it may not be appropriate for all companies, in all cases. We decided to take a harder look at the data, as it relates to venture capital-backed technology and life science companies," said James Walling, chief operations officer, SVB Analytics. "The data shows that the reality for early stage companies differs materially from the model that the industry relies upon to allocate the value of companies, particularly to the common shares. Expecting that many valuation practitioners and auditors may have applied the Black Scholes model as the default allocation model for years, we are concerned that the common equity of many early stage firms has been mis-valued over time."
SVB Analytics' research, based on company exit data from Dow Jones/ Venture Source, looked at exits (IPOs, mergers or acquisitions, or going out of business) among venture capital-backed software, medical device/ equipment and biopharmaceutical companies between 2001 and 2008. The data shows that the Black Scholes model does not account for the large volume of exits that result in less than the amount of the capital invested. The model also fails to recognize the potential for "home runs," particularly in industries such as software. The actual exit prices for early stage companies are significantly different than those implied by the underlying assumptions of the Black Scholes model.
A full copy of the research report, written by James Walling and Cindy Moore of SVB Analytics, can be found in the January 2010 issue of Business Valuation Update, a publication by Business Valuation Resources, LLC.
About SVB Analytics
SVB Analytics is a leading provider of valuation services and corporate equity administration software for private technology and life science companies. SVB Analytics offers fair market valuations for compliance with IRC 409A and FAS 123R. eProsper, which is majority owned by SVB Analytics, offers capitalization tracking and FAS 123R options accounting software. SVB Analytics is a member of global financial services firm SVB Financial Group (Nasdaq: SIVB), with Silicon Valley Bank, SVB Capital, SVB Global and SVB Private Client Services, which serve the unique needs of technology, life sciences and private equity firms. More information on the company can be found at www.svb.com/svbanalytics.
SVB Analytics is a non-bank affiliate of Silicon Valley Bank. eProsper is a majority-owned subsidiary of SVB Analytics and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics and eProsper are not insured by the FDIC or any other Federal Government Agency and are not guaranteed by Silicon Valley Bank or its affiliates. SVB Financial Group and its subsidiaries do not provide tax or legal advice and clients should consult their own accountants and attorneys for such advice.
"Over the years a number of valuation practitioners and auditors have acknowledged weakness in the Black Scholes model as applied, finding it may not be appropriate for all companies, in all cases. We decided to take a harder look at the data, as it relates to venture capital-backed technology and life science companies," said James Walling, chief operations officer, SVB Analytics. "The data shows that the reality for early stage companies differs materially from the model that the industry relies upon to allocate the value of companies, particularly to the common shares. Expecting that many valuation practitioners and auditors may have applied the Black Scholes model as the default allocation model for years, we are concerned that the common equity of many early stage firms has been mis-valued over time."
SVB Analytics' research, based on company exit data from Dow Jones/ Venture Source, looked at exits (IPOs, mergers or acquisitions, or going out of business) among venture capital-backed software, medical device/ equipment and biopharmaceutical companies between 2001 and 2008. The data shows that the Black Scholes model does not account for the large volume of exits that result in less than the amount of the capital invested. The model also fails to recognize the potential for "home runs," particularly in industries such as software. The actual exit prices for early stage companies are significantly different than those implied by the underlying assumptions of the Black Scholes model.
A full copy of the research report, written by James Walling and Cindy Moore of SVB Analytics, can be found in the January 2010 issue of Business Valuation Update, a publication by Business Valuation Resources, LLC.
About SVB Analytics
SVB Analytics is a leading provider of valuation services and corporate equity administration software for private technology and life science companies. SVB Analytics offers fair market valuations for compliance with IRC 409A and FAS 123R. eProsper, which is majority owned by SVB Analytics, offers capitalization tracking and FAS 123R options accounting software. SVB Analytics is a member of global financial services firm SVB Financial Group (Nasdaq: SIVB), with Silicon Valley Bank, SVB Capital, SVB Global and SVB Private Client Services, which serve the unique needs of technology, life sciences and private equity firms. More information on the company can be found at www.svb.com/svbanalytics.
SVB Analytics is a non-bank affiliate of Silicon Valley Bank. eProsper is a majority-owned subsidiary of SVB Analytics and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics and eProsper are not insured by the FDIC or any other Federal Government Agency and are not guaranteed by Silicon Valley Bank or its affiliates. SVB Financial Group and its subsidiaries do not provide tax or legal advice and clients should consult their own accountants and attorneys for such advice.