Valuing intellectual capital of innovative start‐ups

DOIhttps://doi.org/10.1108/14691931111123386
Pages179-201
Publication Date19 April 2011
Date19 April 2011
AuthorAleksandra Grajkowska
SubjectAccounting & finance,HR & organizational behaviour,Information & knowledge management
Valuing intellectual capital of
innovative start-ups
Aleksandra Grajkowska
Aleksandria Ventures Limited, Nicosia, Cyprus
Abstract
Purpose – The main purpose of this study is to contribute to the theory of intellectual capital (IC)
with the new IC valuation method based on the economic value added (EVA
w
) concept as well as to
present the Innovation Funnel, which is a useful management method and tool from which companies
would benefit.
Design/methodology/approach – The paper first explains the links and differences between IC
and intellectual assets (IAs) and aims at improving the reader’s understanding of the share of the two
classes of shareholders, monetary capital investors and intellectual capital investors, of the innovative
start-ups. The paper provides practical guidance for use in IC valuation and financial management of
innovation rather than a theoretical framework, and is based on the literature on innovation, IC,
corporate finance as well as the practical experience of a few early stage venture capitals with whom
the author cooperates.
Findings The findings show a way of calculating fair share of an innovative company’s
shareholdings. The method reflects the risk adjusted future value of cash invested by monetary capital
investors and a real market value of IC contributed by the founders. The paper also presents a method
of financial management of innovation projects.
Research limitations/implications The presented methods focus on creating shareholder value
and on financial aspects of IC rather than on IC indicators and their graphical representation, hence,
members of the IC community who seek more practical concepts may be more interested in the paper.
Originality/value – The paper proposes a practical perspective on the method for IC valuation,
innovation projects’ financial management, as well as fair division of a start-up shares between
intellectual and monetary capital investors that would be useful for venture capital officers, innovative
companies founders and R&D centers’ managers.
Keywords Innovation, Intellectual capital, Assetsmanagement, Asset valuation,Risk management,
Business formation
Paper type Conceptual paper
1. Valuation of intellectual capital – the “mirror” concept
In literature on intellectual capital (IC) it is very common that the terms: “intellectual
capital” and “intellectual assets” (IAs) are used interchangeably, which is both
confusing and incorrect (Andriessen, 2004). It is therefore very important to precisely
define the aforementioned terms to improve communication and mutual understanding
between the IC community and the world of corporate finance and accounting.
To be consistent with financial accounting terminology the two terms: assets and
capital should not be misused even when related to IC. IAs, as any other company’s
assets, have to generate cash flows today or in the future (Berle and Means, 1991;
Manton, 2006). On the other hand, IC is the human potential that could be converted
into IAs (Bounfour and Edvinsson, 2005). As such, the value of assets reflects (mirrors)
the value of capital (see Figure 1). Therefore, the value of company’s IC is equal to the
value of all its IAs. That explains why investors are willing to invest into promising,
knowledge-based companies and pay the price per share that exceeds its current book
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
Valuing IC of
innovative
start-ups
179
Journal of Intellectual Capital
Vol. 12 No. 2, 2011
pp. 179-201
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931111123386
value, thus acknowledging the potential value of the company’s intellectual capital
(Damodaran, 1996) and creating “intellectual aggio”.
The value of the company’s entire IC is mirrored by the economic profit created on
all assets, especially IAs. The economic profit generated by each particular asset
should be calculated separately as its estimated (intrinsic) or realized (market) value
less cumulative value of cash invested into given asset from beginning to present day,
capitalized with risk adjusted cost of capital rate (RaCoC). The level of RaCoC is
determined by specific risks relevant for each asset, including IAs (see Table I).
The purpose of the valuation process is to define a fair market value of a company,
which is not a trivial task in the case of innovative knowledge-based companies (KBC)
(Daum, 2003). Fair market value is the price at which the asset (company) would
change owner when neither the seller nor the buyer is under pressure to sell/buy, and
both parties have equal knowledge about the asset (company) (Slee, 2004). Therefore, a
critical element of KBC valuation is, through the process of business due diligence, to
gather proper information about all its assets, especially the IA (Spedding and Rose,
2008). If IC seems to be the main value driver, it is recommended to perform intellectual
capital due diligence aimed at in-depth identification and analysis of each intellectual
asset’s element (see Figure 2), intellectual property (IP) in particular.
Figure 1.
The value of intellectual
capital equals intellectual
assets’ intrinsic value
JIC
12,2
180

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