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If you’re a financial analyst or anyone involved in valuing early-stage startup businesses, you’ve probably come across a few innovative companies for which there is little historical data to reference.

Indie video games are prime example of innovative products that are difficult to accumulate operational data on. This makes valuation extremely difficult.

Recently, the Louisiana Technology Park has charged me with the formidable task of developing a methodology of valuating the indie games made here. After numerous hours of research and trial-and-error, I was able to create a valuation strategy. Here are my four big takeways from the project:

Tip #1: Understand That Valuation is More Art Than Science

Valuating innovative companies is certainly subjective. In fact, venture valuation is often considered one of the most ambiguous and misunderstood concepts in finance.

This unpredictable nature is amplified in tech and digital media start-ups, which evolve around innovation, differentiation and products or services that are often unique to others in the market. So if you’re uncomfortable with uncertainty, valuating innovative companies may feel difficult to you.

Tip #2: You Need the Right Tools for the Job

Traditional financial databases, such as Bloomberg and CapIQ, are of less help when it comes to valuating innovative products. For indie games, this is an especially big problem. Assuming the studio has even released previous games, historical financial statements will likely be volatile from game to game.

To work around this obstacle, it is necessary to reference niche tools. For gaming websites, I used tools like Steam Spy and VGChartz. These sources provide metrics concerning: playtime, amount of owners, publisher and genre, to name a few. This data can be used to find key performance indicators and ultimately to aid in forecasting sales.

Tip #3: Craft a Valuation Story that Keeps the Audience First

Be mindful of your audience. Depending on the circumstances, a particular type of valuation may be more or less appropriate.

For example, a buyout situation would call for a valuation of the entire business. However, using the indie gaming example, you would be much more likely to encounter a scenario where valuation would be desired for internal use--such as negotiating with publishers over a new release. Finding the value of a single product line, or game in this case, is a different process from valuing an entire business.

Tip #4: Watch Out for Data Pitfalls

Using inaccurate or outdated data ultimately results in an invalid valuation. “Garbage in is garbage out.”

Referring back my indie-gaming valuation project, I was able to identify a data-mining tool called Steam Spy. But as I was using the tool, I noted that there were discrepancies in their figures. For example, the site notes a margin of error for “numbers of owners per game.” Pitfalls like these can drastically skew your conclusions if you aren’t careful.

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Innovative product valuation is an abstract process, but not an impossible one. If you begin to layout a framework of best practices, then you may be able to produce results that help with internal decision-making and negotiating.

Stephen Loy