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When our chip comes in ... how do venture capitalists make informed decisions when appraising investments in high-tech firms whose inventions are still in the early stages of development?

Reid, Gavin C. and Smith, Julia A. (2004) When our chip comes in ... how do venture capitalists make informed decisions when appraising investments in high-tech firms whose inventions are still in the early stages of development? Financial Management, May. pp. 30-32. ISSN 1471-9185

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Abstract

Venture capitalists are becoming distinctly jittery about current proposals to force the consolidation of accounts of all firms within their portfolios. The new procedures will take effect in January, yet many experts believe that consolidation doesn't make much sense. The issue of how to evaluate and account for the risks inherent in early-stage high-tech firms is therefore of topical importance. The government and the UK accounting bodies are interested in promoting high-tech investments. From a financial reporting point of view, venture capitalists are interested in how firms value the intangible assets tied up in their intellectual property, as protected by patents, licences, trademarks etc. FRSlO recommends 3 ways to value an intangible: 1. the amount it could be sold for, 2. the difference between cost and fair value if it has been purchased, or 3. by reference to any active market where frequent trading of such an asset occurs.