What is your biotech company worth? Valuing deep tech before investment negotiations

A biotechnology company can spend years developing a valuable technology before it generates meaningful revenue. Its laboratory equipment may represent only a small part of its worth. Much of the value sits in its intellectual property, specialist knowledge, development evidence and ability to meet a commercial need.

This makes valuation difficult, but also essential. When founders enter investment negotiations without a reasoned view of company value, they have little basis for assessing the ownership they are giving away or the conditions attached to the funding.

At Maravion, our approach brings together an assessment of the existing business, the commercial potential of its technology and the uncertainties that could affect future performance. The aim is a defensible valuation range, supported by assumptions that founders and investors can examine and discuss.

1              Why valuation matters before the term sheet

The amount a company needs to raise and the value of that company are different questions. A business might need R10 million to complete development and enter the market. That funding requirement does not, by itself, establish how much equity an investor should receive.

Consider a simplified investment in which all funding goes into the company as new equity, with no other changes to its share capital:

Agreed pre-money equity value	New investment	Post-money equity value	Investor ownership
R20 million	R10 million	R30 million	33.3%
R40 million	R10 million	R50 million	20.0%

The same investment produces substantially different ownership outcomes. Understanding the evidence behind the valuation helps founders explain their position and assess an offer.

The headline valuation is only part of that assessment. Founders also need to understand the effect of share rights, liquidation preferences, employee option pools, future dilution, board representation and funding released against milestones. Venture financing documents address ownership, investor rights and governance through several linked agreements, as illustrated by the National Venture Capital Association’s model documents.[4]

A higher valuation can therefore come with conditions that make an offer less attractive. Equally, an ambitious valuation that the company cannot support through subsequent progress can complicate its next funding round. The objective is to secure enough capital on terms that support the business and fairly reflect its stage of development.

2              Why deep-tech biotech needs a broader assessment

Historical revenue and accounting profit can tell an incomplete story when a business is still developing its technology. A patented enzyme platform, diagnostic system or therapeutic candidate may have substantial commercial potential before it becomes profitable. However, years of research expenditure do not automatically translate into economic value.

The central question is whether the technology can generate future cash flows, taking into account the investment, time and risk required to reach customers.

Those risks differ across biotechnology. A therapeutic candidate may face clinical development and approval risk. An industrial biotechnology business may be more exposed to production yield, scale-up reliability, customer qualification and manufacturing cost. Applying the same assumptions to both would obscure the factors that determine their value.

Woo and colleagues’ work on biopharmaceutical valuation illustrates why development stage and drug type matter when estimating development periods and probabilities of success.[1] Those specific inputs should not be transferred automatically to diagnostics, research reagents or industrial biotechnology.

3              The Maravion methodology

Our methodology starts with the business and its evidence, then uses complementary valuation methods to assess what that evidence could mean financially.

Understand the existing business and its funding needs

We review historical financial statements, current management accounts, management forecasts, the business model and the market in which the company operates. Discussions with management help clarify the commercial assumptions and the resources needed to deliver the plan.

This includes assessing whether the business can continue operating while it develops and commercialises its technology. A promising market opportunity does not remove the need to fund salaries, development work, working capital and manufacturing capacity before revenues arrive.

Management forecasts provide a starting point. We challenge and, where appropriate, adjust them through analysis and discussion. The scope of verification and reliance on management information must be clear: reviewing a forecast is different from auditing the underlying information.

Assess assets and intellectual property

Net asset valuation examines the fair value of assets less liabilities. It provides a view of the resources already in the business, although it may capture little of the commercial potential of internally developed technology. Replacement cost can provide another perspective, but recreating past expenditure does not necessarily recreate a commercially useful asset.

IP valuation therefore requires a separate assessment of the economic benefit attributable to the rights and know-how involved. Relevant questions include ownership, remaining protection, enforceability, competing technologies and whether the business has the rights it needs to commercialise its product.

Where appropriate, a relief-from-royalty method estimates the royalties a business avoids paying because it owns the IP. The projected royalty savings are discounted to present value. Royalty assumptions should reflect comparable transactions and the rights being licensed, including exclusivity, territory, maturity and the royalty base.[5,6]

Published industry royalty rates and historical profit-sharing rules can inform an initial discussion. A broad pharmaceutical or chemical industry range, or a rule allocating 25% of profit to a licensor, does not establish the appropriate royalty for an individual technology.

We also avoid counting the same value twice. If a whole-business valuation already includes the earnings enabled by its IP, adding a separate IP valuation can overstate the total.

Model future cash flows

Discounted cash flow analysis connects the commercial plan to company value. It estimates future free cash flows and discounts them to their present value using a rate appropriate to the cash flows and their risk.

The model needs more than a large addressable market. It must explain the customers the business can realistically reach, the pace of adoption, achievable prices and margins, development expenditure, capital investment and working capital requirements. Patent expiry and competition may also limit the period over which returns can be sustained.

The distinction between enterprise value and equity value matters here. A valuation of the operating business must be reconciled with debt, cash and other relevant claims before it can support a negotiation over shares.

Discount rates also require consistency. Discount cash flows in nominal terms at a nominal rate; discount cash flows in real terms at a real rate. Damodaran’s valuation guidance explains this relationship.[7] Inflation should not simply be added again to a nominal government bond yield. Nor should a discount rate selected for one assignment become a standard rate for every early-stage biotechnology business.

Test the assumptions and quantify uncertainty

A single forecast can conceal how much depends on uncertain inputs. We therefore examine a base case alongside lower and higher outcomes for critical assumptions, such as launch timing, sales volumes, selling prices, production yields and development costs.

Structured expert input can help define plausible ranges. A formal Delphi process involves repeated rounds of expert input and feedback; an ordinary management discussion should not be described as a Delphi study.

Monte Carlo simulation extends the analysis by repeatedly sampling combinations of uncertain inputs. It produces a distribution of possible valuations rather than one fixed outcome. This can help identify the assumptions that matter most and show the probability of negative value under the model.

The choice of distributions matters. In one application of this methodology, lower and higher assumptions were positioned at the 10th and 90th percentiles of normal distributions. These are not absolute worst and best outcomes: values beyond both remain possible. For other assignments, bounded or asymmetric distributions may better represent quantities such as market share, cost or delay. Relationships between inputs also matter, because higher sales can require more capacity and working capital.

Simulation describes uncertainty within the chosen model. It does not automatically make a valuation risk-adjusted. Development failure, financing needs and the discount rate still require explicit treatment, with care to avoid counting the same risk twice.

Cross-check the result and consider future decisions

Comparable companies, licensing agreements and investment transactions provide useful checks where sufficiently similar evidence is available. Earnings multiples have limited usefulness for a company without earnings; other comparisons may be more relevant, provided differences in development stage, rights and commercial maturity are recognised.

The investor method works backwards from a potential future exit value using an investor’s required return. Its usefulness depends on credible exit assumptions and allowance for further funding and dilution.

Future decisions can also create value. Management may be able to stop an unsuccessful programme, license a technology, defer expansion or pursue additional products after initial validation. Kellogg and Charnes illustrate how real-options methods can value a biotechnology company as a portfolio of development projects.[2] Willigers and Hansen show how valuation methods can produce different results because they treat risk and managerial flexibility differently.[3]

These approaches complement the core assessment. They should not be used to add speculative platform value without identifying the development costs and decisions needed to realise it.

4              Use valuation to plan the next investment

A useful valuation helps management identify what could increase company value. Reliable pilot-scale performance, repeat orders, improved margins or a regulatory milestone may each strengthen the investment case. The model helps determine which achievements are likely to matter most.

This creates a practical link between valuation and fundraising: how much capital is needed to reach the next meaningful milestone, what uncertainty that milestone could resolve and what further funding may follow.

For founders, the value of this work extends beyond a number in a report. It provides a clearer basis for discussing ownership, comparing investment offers and explaining how capital will advance the business.

Maravion brings financial modelling, technology assessment and commercial judgement together to support those discussions. A credible valuation makes both the opportunity and the assumptions behind it visible, giving founders and investors a stronger basis for reaching an agreement.

What is your biotech company worth? Valuing deep tech before investment negotiations

5              References

We identified research references 1–3 through Consensus.

1.    Woo, J., Kim, E., Sung, T.-E., Lee, J., Shin, K. and Lee, J.-H. (2019). Developing an Improved Risk-Adjusted Net Present Value Technology Valuation Model for the Biopharmaceutical Industry. Journal of Open Innovation: Technology, Market, and Complexity, 5(3), 45. DOI: 10.3390/joitmc5030045. 19 citations.

2.    Kellogg, D. and Charnes, J. (2000). Real-Options Valuation for a Biotechnology Company. Financial Analysts Journal, 56, 76–84. DOI: 10.2469/faj.v56.n3.2362. 209 citations.

3.    Willigers, B. and Hansen, T. L. (2008). Project Valuation in the Pharmaceutical Industry: A Comparison of Least-Squares Monte Carlo Real Option Valuation and Conventional Approaches. R & D Management, 38, 520–537. DOI: 10.1111/j.1467-9310.2008.00530.x. 31 citations.

4.    National Venture Capital Association. Model Legal Documents. Illustrative US venture financing documents, rather than South African legal guidance.

5.    World Intellectual Property Organization. Valuing Intellectual Property Assets.

6.    World Intellectual Property Organization. Intellectual Property Valuation Basics for Technology Transfer Professionals: The Income Approach.

7.    Damodaran, A. NYU Stern School of Business. Discounted Cash Flow Valuation Inputs: Inflation and Valuation.