Startup Valuation by Venture Capitalists
How to valuate a new venture is critical in entrepreneurial financing; however, “little work is available on the valuation of venture capital investments .” (Wright & Robbie, 1998:558) As one of the first large sample management studies on new venture valuation, this dissertation aims to fill this gap in the research literature. Leveraging established theories in strategic management, this dissertation 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 340 rounds of early stage venture capital investments in 210 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 dissertation 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. This empirical finding helps to establish an initial linkage between the well developed theories in strategic management and under-researched 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 valuate 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 can not provide.
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