Scalability Premium

The ability of a business to grow revenue significantly without a proportional increase in costs or resources. Highly scalable businesses—often those built on software, platforms, or strong intangible assets—can expand margin as they grow, making them attractive to investors.

The additional amount a buyer pays above the pro-rata market value of a company's shares to acquire a controlling interest. The control premium reflects the value of being able to direct the company's strategy, operations, capital allocation, and management.

The incremental return that investors require for holding equities over risk-free government bonds, reflecting the additional risk associated with equity ownership. The ERP is a critical input to cost of equity estimation under both CAPM and build-up methods.

An additional return demanded by investors for holding the equity of smaller companies, reflecting the empirically observed tendency for small-capitalisation stocks to earn higher returns than predicted by the Capital Asset Pricing Model alone. Size premiums are commonly sourced from the Duff & Phelps (now Kroll) Cost of Capital Navigator and are added to the cost of equity in the build-up method or as a modification to CAPM.

An additional return added to the cost of equity to reflect idiosyncratic risks unique to the subject company that are not captured by beta, the equity risk premium, or the size premium. Common factors justifying a specific company risk premium include customer concentration, key person dependence, regulatory exposure, limited product diversification, geographic concentration, and early-stage business risk.

An economic model built around digital platforms that create value by facilitating exchanges between two or more user groups. Platform businesses derive the majority of their enterprise value from intangible assets including network effects, proprietary algorithms, user data, and brand trust.

A sustainable competitive advantage that protects a business from rivals and preserves its market position over time. Moats are typically built from intangible assets: brand strength, network effects, switching costs, proprietary technology, or regulatory advantages.

The practice of valuing assets at their current market price rather than their historical cost. Mark-to-market accounting provides a more timely view of portfolio value but can introduce volatility, particularly for intangible-heavy investments where market prices may fluctuate significantly in response to sentiment and information flow.

AI and Competitive Moats: Valuing Proprietary AI Systems

Not all AI creates competitive advantage. This article examines the four types of AI moats — data, model, integration, and network — and provides a valuation framework for assessing the defensibility and durability of proprietary AI systems.

What is a moat and why do investors care?

A moat is a sustainable competitive advantage — brand strength, network effects, switching costs, proprietary technology, or scale — that protects against competition and justifies premium valuation.

How do you value proprietary technology and algorithms as intangible assets?

Technology value is assessed via patent strength, market adoption, competitive differentiation, and the cost to replicate. Strong tech moats justify premium valuations.

How do network effects create intangible asset value?

Network effects create intangible value by making a product or platform more valuable as more users join, generating self-reinforcing competitive moats in customer relationships, data assets, and brand equity.