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.