s	 	 conomic
What if you could
What if you could      the      FUTURE       of your         business?
If you could
theVALUE  of ...
... the   ACQUSITION             you are               planning ...
theVALUE  of ...
... entering        a newMARKET...
theVALUE  of ...
... yourHEDGING  PROGRAM ...
theVALUE  of ...
... building        a newPRODUCTION    SITE ...
theVALUE  of ...
... alternativeproduct PORTFOLIOS ...
... alternativeR&D PORTFOLIOS ...
... alternativereal estatePORTFOLIOS ...
theVALUE  of ...
... LEVERAGING        your firm ...
theVALUE  of ...
... an entirely                                       new                                  BUSINESSwww.businessmodelgenera...
For this you need just       3    THINGS
1
A    PLANNINGthat doesn’t start with ...
theNUMBERS
but with theBUSINESS LOGIC           behind them
With such a   DRIVER-BASED     PLANNING ...
Income                                  Statement                                 Cash Flow... every financial figure...  ...
Income                              Statement                             Cash Flow... results from the           logic of...
And every single part          of the model...
l     the del      ike mos   a les
he of   r t ng o lim ode lies su  pp
... delivers a consistent   set of financial statements.
You can  think    of  this    conc ept...
PORT...... as having a standardized
... with which       you can link
... with which        you can linkany  BUSINESS to the   LOGIC        FINANCIALS
With such a   DRIVER-BASED     PLANNING ...
... you can see       the       CONSEQUENCES        of your            DECISIONS
before you take action   in the     REAL   WORLD               http://en.wikipedia.org/wiki/File:04KJER0243.jpg
2
A    PLANNINGthat doesn’t rely on ...
SINGLE-  POINT ESTIMATES
SINGLE-     POINT       ESTIMATESrather than on the FULL RANGE   of possible outcomes
Becausein the          REAL     WORLD...
... the future is  NOROADSTRAIGHT                    ...
... instead it’s full of  UNCERTAINTY             and                   RISK
Therefore, the        INPUTS     of your planning model ...
... must not only contain        the things you know          with certainty ...
la st ikearsl e  y es f ig ur
... but also those things        you dont know exactly ...
the ent likelopm    e arket pridev m           ces   of
r the for o nddema ur products   yo in the f uture
Even for those things you dont know exactly,  you can always define      a range of possible                   values.
So, the OUTPUT   of the planning model ...
... shouldn’t look like         THAT
... and NOT ONLY like       TH AT
... and NOT ONLY like       TH AT    i.e. ju               expec st                value ted                      s
Instead, you should see    MUCH MORE ...
Instead, you should see Probability bands showing the possible       MUCH MORE ... range of future development
Instead,Probabilityshould see the          you density charts showing     MUCH MORE ...        relative likelihood of poss...
Instead, you should functions showing         Cumulated probability see     MUCH MORE ...         how likely a certain out...
All these statistical views,     along with others,        are not only available                for certain              ...
... but for every single item      within the model.
... but for every singel item      within the model.
... but for every single item      within the model.
... but for every single item      within the model.
With such an EXPLICIT   RISK ANALYSIS you can see how likely it is ...
... to achieve a desired result, ...                         ance                    % ch less                 40         ...
... to have enough headroom    given your funding sources ...                                 ntial                       ...
... or whatever else      you are interested in
Because the    ACTUAL INFORMATIONis in the MARGIN ...
... and not in the average              www.flawofaverages.com
... and not in the average                           Like with the                           statistican who              ...
3
A    VALUATIONthat doesn’t play with ...
... the DISCOUNT         RATE ...
... to account for                     RISK ...
... rather than harnesses the              INFORMATION         RISK      about               we already have
From our risk analysis,       we not only know ...
oba     pr of  blethe nce aria g. thev .   e        me Ne t I nco
or  the      low    e C as h FFre
... but every single scenario         produced by the      Monte Carlo simulation.
Assuming we put every      substantial risk  carefully into our model ...
s is hingthi eryt  ev        bly         oba .t     pr  hat appen ca n h
s is hing   thi eryt      ev          bly               oba .   t        pr     hat appen      na  OK,cot nexhtl          ...
Having captured all risk within the cash flows,  there is no need to ...
NPV ... use a    % +%  risk premiumto calculate net present value.
NPV ... use a    % +%  risk premiumto calculate net present value.
we   canIn ste ad,         us  e as im ply      ra te.     k-f ree ris%
% Discounting every scenario   with the risk-free rateleads to a distribution of NPV.
?             hats the       B ut w %             val   ue      airhaeveryioscenario     f ftDiscounting t t n        o   ...
With an  OPTION-BASED  VALUATION , we can turn this distribution    into a single VALUE
So, mean?what does this
Nothing less than:
We canEVALUATE ...
We canEVALUATE
s	 	 conomic
What if You Could See the Future of Your Business?
What if You Could See the Future of Your Business?
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What if You Could See the Future of Your Business?

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Wouldn't it be cool if you could test your next great business venture in a virtual sandbox before you spend a lot of money to prove the concept in the real world? Here are the three things you need for this.

Published in: Business, Economy & Finance
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Statistics
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  • Great Presentation, but I think the assumption that we can provide useful uncertainty distributions about ALL the value influencing influential variables is claiming a bridge too far. The method seeks to maximise the consideration of the "known unknowns"; But the "unknown unknowns" may add up to a bigger share of real world variability. It takes a lot of .management courage to honestly estimate real world risk, because if we do, it will usually kill almost all startup investments. SO i think the limiting variable is project cost optimism ( Most projects overrun the estimate) and project return estimates ( most business have annual results outside the planning variability envelope. And there are more negative than positive deviations.
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  • Torsten, very nice presentation indeed. Needless to say that discounting risk-adjusted cash-flows at risk-neutral probabilities is easier said than done. I usually use a base-case DCF scenario and then run it for sensitivity analysis using the Crystal Ball software. It’s less sophisticated but still enables me to get a pretty good assessment of the randomness associated to each key value-driver. Thanks for sharing your stuff. Eduardo
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  • Slide 94 - could you explain this?
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What if You Could See the Future of Your Business?

  1. 1. s conomic
  2. 2. What if you could
  3. 3. What if you could the FUTURE of your business?
  4. 4. If you could
  5. 5. theVALUE of ...
  6. 6. ... the ACQUSITION you are planning ...
  7. 7. theVALUE of ...
  8. 8. ... entering a newMARKET...
  9. 9. theVALUE of ...
  10. 10. ... yourHEDGING PROGRAM ...
  11. 11. theVALUE of ...
  12. 12. ... building a newPRODUCTION SITE ...
  13. 13. theVALUE of ...
  14. 14. ... alternativeproduct PORTFOLIOS ...
  15. 15. ... alternativeR&D PORTFOLIOS ...
  16. 16. ... alternativereal estatePORTFOLIOS ...
  17. 17. theVALUE of ...
  18. 18. ... LEVERAGING your firm ...
  19. 19. theVALUE of ...
  20. 20. ... an entirely new BUSINESSwww.businessmodelgeneration.com MODEL
  21. 21. For this you need just 3 THINGS
  22. 22. 1
  23. 23. A PLANNINGthat doesn’t start with ...
  24. 24. theNUMBERS
  25. 25. but with theBUSINESS LOGIC behind them
  26. 26. With such a DRIVER-BASED PLANNING ...
  27. 27. Income Statement Cash Flow... every financial figure... Balance Sheet
  28. 28. Income Statement Cash Flow... results from the logic of your Balance Sheet business model.
  29. 29. And every single part of the model...
  30. 30. l the del ike mos a les
  31. 31. he of r t ng o lim ode lies su pp
  32. 32. ... delivers a consistent set of financial statements.
  33. 33. You can think of this conc ept...
  34. 34. PORT...... as having a standardized
  35. 35. ... with which you can link
  36. 36. ... with which you can linkany BUSINESS to the LOGIC FINANCIALS
  37. 37. With such a DRIVER-BASED PLANNING ...
  38. 38. ... you can see the CONSEQUENCES of your DECISIONS
  39. 39. before you take action in the REAL WORLD http://en.wikipedia.org/wiki/File:04KJER0243.jpg
  40. 40. 2
  41. 41. A PLANNINGthat doesn’t rely on ...
  42. 42. SINGLE- POINT ESTIMATES
  43. 43. SINGLE- POINT ESTIMATESrather than on the FULL RANGE of possible outcomes
  44. 44. Becausein the REAL WORLD...
  45. 45. ... the future is NOROADSTRAIGHT ...
  46. 46. ... instead it’s full of UNCERTAINTY and RISK
  47. 47. Therefore, the INPUTS of your planning model ...
  48. 48. ... must not only contain the things you know with certainty ...
  49. 49. la st ikearsl e y es f ig ur
  50. 50. ... but also those things you dont know exactly ...
  51. 51. the ent likelopm e arket pridev m ces of
  52. 52. r the for o nddema ur products yo in the f uture
  53. 53. Even for those things you dont know exactly, you can always define a range of possible values.
  54. 54. So, the OUTPUT of the planning model ...
  55. 55. ... shouldn’t look like THAT
  56. 56. ... and NOT ONLY like TH AT
  57. 57. ... and NOT ONLY like TH AT i.e. ju expec st value ted s
  58. 58. Instead, you should see MUCH MORE ...
  59. 59. Instead, you should see Probability bands showing the possible MUCH MORE ... range of future development
  60. 60. Instead,Probabilityshould see the you density charts showing MUCH MORE ... relative likelihood of possible values
  61. 61. Instead, you should functions showing Cumulated probability see MUCH MORE ... how likely a certain outcome is
  62. 62. All these statistical views, along with others, are not only available for certain "key values"...
  63. 63. ... but for every single item within the model.
  64. 64. ... but for every singel item within the model.
  65. 65. ... but for every single item within the model.
  66. 66. ... but for every single item within the model.
  67. 67. With such an EXPLICIT RISK ANALYSIS you can see how likely it is ...
  68. 68. ... to achieve a desired result, ... ance % ch less 40 to earn 5m tha n €2
  69. 69. ... to have enough headroom given your funding sources ... ntial bsta o su o g risk t upt bankr ear y he r next t e aft
  70. 70. ... or whatever else you are interested in
  71. 71. Because the ACTUAL INFORMATIONis in the MARGIN ...
  72. 72. ... and not in the average www.flawofaverages.com
  73. 73. ... and not in the average Like with the statistican who drowned crossing a river that was 3 ft. deep—on average. www.flawofaverages.com
  74. 74. 3
  75. 75. A VALUATIONthat doesn’t play with ...
  76. 76. ... the DISCOUNT RATE ...
  77. 77. ... to account for RISK ...
  78. 78. ... rather than harnesses the INFORMATION RISK about we already have
  79. 79. From our risk analysis, we not only know ...
  80. 80. oba pr of blethe nce aria g. thev . e me Ne t I nco
  81. 81. or the low e C as h FFre
  82. 82. ... but every single scenario produced by the Monte Carlo simulation.
  83. 83. Assuming we put every substantial risk carefully into our model ...
  84. 84. s is hingthi eryt ev bly oba .t pr hat appen ca n h
  85. 85. s is hing thi eryt ev bly oba . t pr hat appen na OK,cot nexhtl ac y these few samples, but runnin g somethousand simulationyou get pr s etty close ...
  86. 86. Having captured all risk within the cash flows, there is no need to ...
  87. 87. NPV ... use a % +% risk premiumto calculate net present value.
  88. 88. NPV ... use a % +% risk premiumto calculate net present value.
  89. 89. we canIn ste ad, us e as im ply ra te. k-f ree ris%
  90. 90. % Discounting every scenario with the risk-free rateleads to a distribution of NPV.
  91. 91. ? hats the B ut w % val ue airhaeveryioscenario f ftDiscounting t t n o st ribu with thedirisk-free rategives us a distribution of NPV.
  92. 92. With an OPTION-BASED VALUATION , we can turn this distribution into a single VALUE
  93. 93. So, mean?what does this
  94. 94. Nothing less than:
  95. 95. We canEVALUATE ...
  96. 96. We canEVALUATE
  97. 97. s conomic

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