Traditional valuation techniques use a company's historical performance, standardized industry and company metrics, and forecasts of future market opportunity and the impact of strategy execution to estimate free cash flow and discounted present value.2 This approach is designed for companies and industries with a relatively stable capital structure. As such, the approach is less helpful if a company is operating in a high-growth, high-uncertainty, and rapidly changing environment. Furthermore, if a company has not yet generated earnings, the approach becomes highly unreliable and many of the measures cannot be calculated. Needless to say, these traditional techniques don't work when analyzing most new ventures on the Internet.

To address the problems with traditional measures, some analysts and executives developed revenue- based metrics (for example, price-to-sales and revenues-per-share). These measures, however, did not factor in costs or "cash burn" and, therefore, were not useful for measuring overall financial performance. In fact, many of the most "valuable" companies in terms of price-to-revenue and revenue-per-share were among the firms listed as most likely to run out of cash in Barron's controversial study of "dot-com" balance sheets published in March 2000immediately before the NASDAQ stock market plunge.3

The Business Value Framework, discussed in "Analyzing Business Value," enables a broad-based approach to measuring performance that unites the business fundamentals that drive shareholder valueConcept and Capabilitieswith traditional financial measures. These measures are then used as input to a scenario-based approach to valuation that helps account for uncertainty and lack of comparability in the environment, technology, and business models.4