Startup valuation by venture capitalists: an empirical study

Abstract

International audienceHow to value a new venture is critical in entrepreneurial financing. This article develops an integrated theoretical framework to examine whether venture capitalists' valuation of a new venture can be explained by factors identified in the strategy theories as important to firm performance. Empirical results from the analyses of 184 rounds of early-stage venture capital investments in 102 new ventures support the central proposition that venture capitalists do take into consideration those factors that are important to firm performance in their valuation of new ventures. More specifically, this article finds that attractiveness of the industry, the quality of the founder and top management team, as well as external relationships of a new venture significantly and positively affect its valuation by venture capitalists when it seeks venture capital financing in its early stages of development. These empirical findings help to establish an initial linkage between the well-developed theories in strategic management and underresearched venture capital valuation practice. It brings more theoretical rigor to the venture capital investment literature by introducing a systematic approach to identify and measure factors important to new venture valuation. It explores a possibility to develop a supplementary method to value an early-stage new venture when extant valuation methods fail to yield consistent results because these methods require accounting information that a new venture typically cannot provide

Valuing start-ups – selected approaches and their modification based on external factors

“…The estimates β 0 to β k of the regression coefficients β 0 to β k can be obtained in a matrix based on the formula by Heij et al (2004): Miloud et al (2012 developed the model in terms of a sample of start-ups in just one country (France). Thus, it is impossible to demonstrate the effects of environment suitability on the valuation of investments.…”

“…The next approach to evaluating start-up projects we used in our consideration is the model by Miloud et al (2012). The authors assume that the value of start-ups can be expressed as the linear combination of the project's characteristics:…”

“…The question of start-up valuation is also examined in the empirical work by Miloud et al (2012). The authors point out that the existence of too many assumptions in a valuation by conventional methods often leads to a very wide scatter of results.…”

“…valuation methods that rely on cash flows, comparable transactions, and analysis of assets (Kumar 2015). The difficulty of using these approaches in the valuation of start-ups lies mainly in the fact that start-ups can provide only very little information about their history (Miloud et al 2012). This may be due to a lack of accounting data (short history, i.e.…”

“…Brealey et al 2007). When valuing start-ups, for which only few clues (information) are available, there is a relatively high risk of a considerable scatter of results (Miloud et al 2012). The problem of a scarcity of relevant information for the valuation of startups, such as the lack of historical data, uncertainty about the factors influencing their future, unclear future cash flows, etc., is mentioned by many authors (e.g.…”