## Innovation Options Calculator

The Innovation Options calculator is a simple tool to run an ROI analyses on your pre-growth initiatives. This post will explain how to use and read the tool; to learn more about the concepts and mathematics behind Innovation Options can do so here.

#### Input

We start with the four inputs we’ll need: the term, iterations, fundraising goal and best-case scenario.

#### Term

The term is the duration of the option. It is the period during which you’ll be conducting the market testing to determine the idea’s growth potential.

#### Iterations

This corresponds to how frequently you expect to test your idea’s assumptions against reality. You should test as often as possible; this generally corresponds to your intended release cycle, but can be any form of validated learning.

#### Fundraising Goal

This is the amount you intend to raise in a growth fundraising round. It represents the financing you’d need to accelerate production and support market growth (think of it as a Series A or other big-budget request.)

#### Best-Case Valuation

This is the upper bound valuation of that growth round. It generally corresponds to the pre-money valuation of rounds in sectors similar to the idea, but can also be estimated based on historical valuations of similar projects within the firm.

#### Output

There are two specific outputs from the model: the initial value and the derived sigma.

#### Initial Value

The initial value is what the option is worth at inception. It is the “time-zero” node on the valuation tree, and represents what it is worth to determine whether or not a particularly initiative has actual growth potential.

#### Derived Sigma

The derived sigma is a measure of the relative riskiness of a project given the inputs. The sigma is derived (rather than estimated) since there is no public market for pre-growth initiatives. The higher the number, the greater the relative risk.

#### Pre-Money Valuation Tree

The pre-money valuation tree is the fully expanded lattice once of the trinomial calculations are complete. It roughly corresponds to the pre-money valuation of the initiative at any given combination of upward, downward, or flat iterations. The time-zero (leftmost) node also serves as the initial value of the option.