Techno-Economic Analysis for Innovation Valuation www.sark7.com Integrated financial modeling & simulation for OVERVIEW high-risk / high-reward innovation valuationThis integrated techno-economic analysis process offers a framework for undertaking complex valuation to guide strategicdecision making and to refine strategy. The method integrates Net Present Value (NPV), Monte Carlo simulation, and RealOptions Analysis (ROA) to extrapolate the value of an innovation, particularly when new and uncertain markets are involved.Keywords: techno-economic analysis, valuation, innovation, strategy, management of uncertainty, optimization, IP, R&D, NPV, ROA Identifying business 1 SCOPE objectives, model artifacts, data & structure Organizational identification of business needs, requirements, opportunities, challenges, risk 1 tolerance, and key historical data. A highly segmented NPV model provides a skeleton. A Project Finance approach is utilized for value analysis, focusing on: 1) cash flows, 2) stakeholder segmentation, and 3) explicit risk identification and allocation (i.e. partners, customers, financiers). 2 Providing insight into risks / opportunities 6 2 MODEL via integrating probability & scenario 5 3 analysis Revenue streams NPV Model Monte Carlo Decision Tree Opportunity Simulation Analysis Analysis OPEX Costs 4 CAPEX expenditures Financing 7 Static Net Present Value (NPV) analysis presents a highly linear and selective view of a prospect, often overlooking key opportunities and risks. The techno-economic model framework extends traditional Net Present Value (NPV) analysis via integrated Monte Carlo (probability) and Real Options Analysis (scenarios) to facilitate robust analysis of risks and opportunities. 3 RANGES Continuously and iteratively refined, the model is an organizational artifact, bringing together diverse experts and stakeholders into a unified, structured conversation. Economy andStatic variables are extended to ‘ranges’ (i.e. transparency are key: the model must be as simple as possible with a clear audit path concerningmin, max, average; historical probability key assumptions.distributions) based upon historical data andexperts. Key variables are enhancedaccording to an understanding of their Integrated simulation gives directprobabilistic behavior, bringing insight tovariable factors affecting capital/operating 5 SIMULATE insight into volatility & sensitivitycosts, revenue, economic factors, etc. Stakeholder Combined, Monte Carlo D/E mix componentization simulation and Decision Tree Business structure Financing terms results show expected ranges & sensitivities via 4 SCENARIOES Effect of timing on COSTS INVESTMENT STRUCTURE REVENUES risk-adjusted NPV outcomes. NPV Market The highly-segmented model price CAPEX Market size provides both roll-up and simulation analysis deep-dive insights into OPEX COST NPV REVENUE Market integrated strategic factors: competition Commodity OPTIMIZATION SIMULATION OPTIMIZATION Financial (granular): simulationGross and uncertain factors (both risks & price analysis Price elasticity Alternate uncertainties, priceopportunities) are added to the NPV model Scale analysis / optimization scenarios variability, revenues, CAPEX/OPvia a branching Decision Tree. Such factors comparison (license, sell) EX, market price FINANCIALcould include: chance and cost of legal Proof-of- Tax ENGINEERING Jurisdictional elasticity, currency & interest concept orsuit, chance of subsidy/grant, market straight to structure arbitrage rates, etc...size, R&D success/failure, chance of market? Derivative Grants & Currency Interest rate Scenario-based (gross):competitor entering, alternate strategies for hedging subsidies forecasting forecasting investment, timing, scaling, POcommercialization C cost/savings, risk(timing, scale, offering, licensing, partnering, strategies, commercialization/r sell). Decision Tree analysis allows for evenueadvanced like-to-like introspection regarding strategies, financing, market, kmacro-level risks and opportunities. ey risks, etc… Refine comparative scenarios by Review and validate: refine model via 6 OPTIMIZE x optimizing structure, planning, timing… 7 ITERATE x refined information and understandingsIntegrated simulation allows for formal volatility, sensitivity, and x The universal NPV basis allows for like-to-like comparisons across aoptimization analysis at both a gross and granular level (final NPV diverse strategic portfolio. Comparative strategies can be refined:and component-level). Gaining insight into systemic structured financing, hybrid models (i.e. licensing, riskdynamics, particular areas can be targeted for efficiency / sharing), scaling, timing, tax, etc. Implicit stakeholder perceptions &exploitation. Structured scenarios can then be tailored to optimize assumptions are made explicit & verified throughout development andprofits and to reduce costs. refinement of the model.