Firm valuation in venture capital financing rounds: the role of investor bargaining power

Abstract

This study explores the impact of the bargaining power of venture capital (VC) firms on the valuation of their portfolio companies. VC firm types with greater bargaining power vis-a-vis the entrepreneur are expected to negotiate lower valuations compared with VC firm types with less bargaining power. Consistent with this hypothesis, university and government VC firms, which have comparatively greater bargaining power, negotiate lower valuations compared with independent VC firms. The valuations of captive VC firms equal those of independent VC firms. Our findings suggest that valuations in the VC contract reflect the relative bargaining power of the VC investor