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How Fundamental are Fundamental Values? Valuation Methods and Their Impact on the Performance of German Venture Capitalists

40 Pages Posted: 18 Jul 2002  

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Ernst G. Maug

University of Mannheim Business School; European Corporate Governance Institute (ECGI)

Johannes Kemper

Humboldt University of Berlin

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2002

Abstract

This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.

Keywords: DCF, Performance, Valuation, Venture Capital, IPO

JEL Classification: G15, G24, G31

Suggested Citation

Dittmann, Ingolf and Maug, Ernst G. and Kemper, Johannes, How Fundamental are Fundamental Values? Valuation Methods and Their Impact on the Performance of German Venture Capitalists (November 15, 2002). Available at SSRN: https://ssrn.com/abstract=307562 or http://dx.doi.org/10.2139/ssrn.307562

Ingolf Dittmann (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 4081283 (Phone)
+31 10 4089165 (Fax)

HOME PAGE: http://people.few.eur.nl/dittmann/

Tinbergen Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Ernst G. Maug

University of Mannheim Business School ( email )

L9, 1-2
Mannheim, 68131
Germany
+49 621 181-1952 (Phone)

HOME PAGE: http://cf.bwl.uni-mannheim.de/de/people/maug/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Johannes Kemper

Humboldt University of Berlin ( email )

Unter den Linden 6
D-10178 Berlin, 10099
Germany

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