Valuation of private companies by Estonian private equity and venture capitalists

Sander, Priit; Kõomägi, Margus

doi:10.1108/17465260710720219

Cited by 16 publications

(13 citation statements)

References 31 publications

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“…A non-parametric test is used because the Kolmogorov-Smirnov test indicates that the variables do not follow a normal distribution. Among all these aspects, the ability of human capital has been the most repeated one throughout the study, what is in accordance with the results obtained by authors like Sander and Koomagi (2007) or Payne et al (2009) in other countries. Most Spanish VCs opt for minimising risk by investing in companies that are in late stages of development (70.6% of our sample).…”

Section: Analysis Of Resultssupporting

confidence: 90%

Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

Maya

Hernandez

2012

IJESB

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The goal of this paper is to analyse the investment valuation decisions by Spanish venture capitalists (VCs) according to their experience and the investee's stage of development (early stage vs. late stage investments) with particular reference to the variables used in applying the discounted cash flow (DCF) method. Based on a questionnaire sent to 51 Spanish VCs, we find that, when selecting an investment project, the expected return on investment (ROI) is the most important factor considered by Spanish VCs. The stage of development has a decisive influence on the selection of the valuation method used, as DCF is the most commonly used method for early-stage investment projects. Our paper also provides first evidence on the way VCs operationalise the key variables in the DCF method, such as the discount rate, the risk premium and the terminal value. The results of this study have important implications. By gaining insight into the investment decision criteria of Spanish VCs, Spanish entrepreneurs will be able to develop better and more targeted materials to maximise their success rate in attracting capital. VC firms can use the information from this study to better understand their decision processes, both individually and relative to competitors.Reference to this paper should be made as follows: Reverte Maya, C. and Sánchez Hernández, M.M. (2012) 'Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation', Int.

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Section: Analysis Of Resultssupporting

confidence: 90%

Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

Maya

Hernandez

2012

IJESB

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“…The findings of this study have a special value since valuation methods based on DCF are both recommended by previous studies [7] and widely used by investors in startups [8] [9] [10]. In its basic form, DCF includes a number of difficult tasks to be solved such as to estimate the expected future cash flows and the terminal value, and to choose the appropriate risk-adjusted rate that quantifies the risk inherent to the investment.…”

Section: Discussionmentioning

confidence: 99%

“…Because of the importance of cash flows for the development of startups, valuation methods based on the discounted cash flow (DCF) are recommended by prior studies [7]. DCF is also the most commonly used valuation method employed by investors [8] [9] [10]. Especially, DCF is the preferred method when there is little information available to compare with.…”

Section: Introductionmentioning

confidence: 99%

Discounted Cash Flow (DCF) as a Measure of Startup Financial Success

Laitinen¹

2019

TEL

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The purpose of the study is to investigate the characteristics of the discounted cash flow (DCF) as a measure of startup financial success. In general, DCF is found the most popular method in startup valuation followed by the internal rate of return (IRR) and the payback period methods. However, the consequences of using this method in startup valuation are rarely analyzed in financial research. In this study, a simplified mathematical model is developed to describe the time-series development of the cash flow. This model is based on the growth of expenditures and their ability to generate revenues from the founding of the startup. The model employs IRR as the measure of true profitability and the average lagin revenue generation as a proxy of the payback period. Numerical experiments are used to show the sensitivity of DCF to the parameters of the model. The results indicate that the use of DCF favors startups that grow slowly and have a short payback period but that also exhibit a high IRR. The longer the time series of the startup used in the analysis, the more significant role IRR tends to play in DCF. Empirical evidence extracted from a sample of Finnish startups supports the numerical findings.

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“…In most of the cases Estonian private and venture capitalists relied on a combination of DCF and multiples, whereas multiples were used as benchmarks for DCF valuations. However, research by Sander and Kõomägi (2007) is based on five case studies and does not allow generalization of practitioners' valuation practices in Estonia.…”

Section: Literature Reviewmentioning

confidence: 99%

Value in the eye of the beholder: a survey of valuation practices of Estonian financial professionals

Kantšukov

Sander

2016

Investment Management and Financial Innovations

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This is the first empirical study related to the linkage between distributed profit taxation and company valuation. In this paper we present the results of a survey of Estonian valuation practitioners. The main purpose of this study is to clarify the valuation practices of Estonian analysts with emphasis on fundamental analysis-based valuation methods. We elucidate whether and how practitioners treat certain aspects of corporate income taxation when valuing Estonian companies, and how they adjust conventional models taking into account the peculiarities of the Estonian distributed profit taxation system. As distributed profit taxation allows Estonian companies to postpone their income tax liability, it should lead to a positive impact on the value of Estonian companies compared to non-Estonian ones. The survey also included hypothetical valuation cases seeking to determine the difference in analysts’ views on equity value in a simplified framework. Results show that free cash flow to the firm and EV/EBITDA multiples are the most popular valuation models among analysts, with the majority of analysts using these models together. Analysts adjust models primarily when calculating the cost of capital and forecasting corporate income tax liability. However, many respondents did not make any adjustments when valuing Estonian companies, but proceeded from the same grounds when valuing Estonian and non-Estonian businesses. The equity valuation of hypothetical companies revealed highly diverse estimates and an unawareness of the positive aspects of distributed profit taxation vis-à-vis traditional profit taxation on a company’s value

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Valuation of private companies by Estonian private equity and venture capitalists

Cited by 16 publications

References 31 publications

Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

Discounted Cash Flow (DCF) as a Measure of Startup Financial Success

Value in the eye of the beholder: a survey of valuation practices of Estonian financial professionals

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