Biases in Management Forecasts of Venture-Backed Start-Ups: Evidence from Internal Due Diligence Documents of VC Investors

42 Pages Posted: 26 Nov 2010 Last revised: 12 Jul 2012

Date Written: July 11, 2012

Abstract

This study provides evidence of significant biases in multi-year management forecasts by analyzing a proprietary dataset on venture-backed start-ups in Germany. We find that revenues and expenses are highly overestimated in each of the investigated one- to five-year-ahead planning periods. Furthermore, entrepreneurs underestimate one-year-ahead profit forecasts but clearly overestimate their profit forecasts for all longer-term forecast horizons. Additional analyses reveal that teams with prior management experience issue even more overestimated forecasts and misrepresent their forward-looking information. In contrast, greater asset verifiability and corporate lead investors are associated with lower levels of forecast errors. All key results hold if bias is either measured by traditionally comparing forecasts to ex-post realizations or by using a cross-sectional projection approach based on historical accounting data developed by prior research.

Keywords: Management forecasts, Forecasting biases, Venture-backed start-ups, Projection methods

JEL Classification: G24, G32, M13, M41

Suggested Citation

Mokwa, Christopher Frederik and Sievers, Soenke, Biases in Management Forecasts of Venture-Backed Start-Ups: Evidence from Internal Due Diligence Documents of VC Investors (July 11, 2012). Available at SSRN: https://ssrn.com/abstract=1714399 or http://dx.doi.org/10.2139/ssrn.1714399

Christopher Frederik Mokwa

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Soenke Sievers (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

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