Innovation EconomicsStrategy
Innovation economics: pricing the option value of frontier tech
Frontier technology bets behave like real options. Treating them like discounted cash flows under-prices them and starves the portfolio of upside.
DCF is the wrong tool for frontier bets
Discounted cash flow assumes we know the cash flows. Frontier technology rarely produces predictable cash flows in year one. It produces capability that may or may not be exercised.
Real-options thinking gives you a vocabulary for that uncertainty. Even a back-of-envelope option-value estimate is more honest than a strategic-value plug.