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Valuing intellectual capital of innovative start-ups

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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®) 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: Asset valuation; Assets management; Business formation; Innovation; Intellectual capital; Risk management

Document Type: Research Article

DOI: http://dx.doi.org/10.1108/14691931111123386

Publication date: April 19, 2011

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