Valuing entrepreneurial investments: the venture capitalists' approach.

Abstract

Valuing high-growth, high-uncertainty firms, characterised by a unique business concept, significant growth opportunities, and/or no real positive cash flows to show the profit potential of the venture, is a major challenge faced by most venture capitalists (Gompers (1995)). Unlike for an investment in publicly traded securities for which there exists a well-defined pricing mechanism, it is difficult to find an objective valuation for the investment holdings of a venture capital fund. The valuation of individual unquoted investments is, thus, a very complicated process. subject to the discretion and judgment from the part of the venture capitalist. Recently, growing criticism and increasing interest are observed regarding the valuation of the private equity and venture capital portfolios of high-tech, high risk, high growth venture investments (EVCA (2001), Millner (2002), Blaydon & Horvath (2002)). Consequently, the underlying goal of the empirical analyses included in this paper corresponds exactly with revealing the valuation methodology operated by venture capitalists when determining or reconsidering the valuation for each venture investment held in portfolio.Cash flow; Firms; Investment; Investment portfolio; Investments; Opportunities; Portfolio; Pricing; Processes; Risk; Studies; Valuation; Valuation method; Venture capital;