When I first developed the Tier Method my ambitions were not as comprehensive as the method’s current form, but the foundation came from the same thesis. My conviction has always been that for the commercial space industry to fully mature; we need participants who are not space enthusiasts but value creators. These are the investors who evaluate risk against reward and plan their portfolios according to their tolerance.
The challenge is that in commercial space, traditional financial methods break down because they fall short of capturing the systemic and developmental risks embedded in the entire ecosystem. A new framework was needed, not to replace but to complement standard risk assessments such as WACC, IRR, the Dividend Discount or Gordon Growth Model, the Bond Yield Plus Risk Premium Approach, and CAPM.
At the beginning I was not aiming to create a mathematical formula. My idea was simply to frame potential risk levels at different stages of technological development. I borrowed the concept from the military’s use of tiers to allocate funding and resources. For example, Tier 3 includes large operational units like the 82nd and 101st Airborne. Tier 2 includes the Rangers and Special Forces. Tier 1 includes highly specialized units like CAG and ISA.
I applied this structure to technology. Tier 3 is the abstract and theoretical stage. Tier 2 is the development and prototyping stage. Tier 1 is the transition into scalable application. From there it moves to Tier 0, where fully matured technologies can be evaluated with normal financial risk models alone. Investors should continue to use standard models wherever possible, but the tiers provide a way to understand where a technology is in its lifecycle.
As I researched further I noticed that each tier could align with a different range of required rates of return. If those ranges could be defined, investors could measure risk more concretely and calculate a realistic premium. This transforms the Tier Method from a conceptual guide into a practical tool for emerging markets.
Traditional finance assumes that markets already price in all necessary information for existing companies with track records. But emerging technologies lack this history. The question then becomes: how do we calculate a risk premium without precedent? The answer lies in identifying the core factors of development, mapping their interrelations, and assigning probabilities to their outcomes. From this, we can create a composite score that acts as an addendum to the traditional required rate of return.
The Tier Method introduces the following expression:
RRRTier=RRRStandard+(T+E+R+M4×CPS)RRR_{Tier} = RRR_{Standard} + \left( \frac{T + E + R + M}{4} \times CPS \right)RRRTier=RRRStandard+(4T+E+R+M×CPS)
Where:
- RRRStandardRRR_{Standard}RRRStandard is the required rate of return calculated using traditional models such as CAPM or WACC
- T,E,R,MT, E, R, MT,E,R,M represent the scores for Technology, Environment, Regulation, and Market, each on a scale of 1 to 10
- CPSCPSCPS is the Composite Premium Score, a weighting factor that distributes the premium adjustment (for example 25 percent at the starting point)
I placed the four factors in this order because they reflect a hierarchy of risk. The first is technology. Does it hold up to the laws of physics, and if so, what is the acceptable rate of failure during testing? Markets tolerate a baseline level of failure, but it is important to know whether the technology exceeds that threshold. The second is environment. A result proven in the lab does not guarantee performance in the conditions where it will be deployed. The third is regulation. While markets determine the winners, regulators decide who is allowed to compete. It is necessary to understand whether the policy environment is indifferent, hostile, or supportive. The fourth is the market itself. Adoption ultimately follows value, and the technology that delivers the greatest utility and efficiency will prevail.
With these four factors, grounded in real world data, we can build a premium risk model that integrates with traditional assessments. The Tier Method extends risk pricing into the frontier of emerging technologies and helps investors capture the full picture when standard models alone are insufficient.
I am currently building a database that will list existing companies, the sectors they belong to, and the technologies they are developing. Each company will be assigned a tier level, a premium added rate of return level, and a breakdown of the four composite scores. This database will allow investors to compare companies across the commercial space and deep technology industries, track their progression over time, and identify which opportunities align best with their portfolio strategies.
If you are interested in following the progress of this project, gaining early access to the database, or exploring how the Tier Method can enhance your investment decisions, I invite you to connect and stay engaged. Together we can help bring clarity and structure to one of the most challenging frontiers in finance and technology.
In a future article I will demonstrate how the Tier Method works in practice by applying it to two companies. This will show how the scoring system, tier placement, and premium adjustment change the required rate of return in real investment scenarios.
Sean Key is the CEO of Better Futures, Inc., and a contributor to this blog