Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions

31 Pages Posted: 9 Mar 2021

See all articles by Johannes A. Barg

Johannes A. Barg

University of Hamburg

Wolfgang Drobetz

University of Hamburg

Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management; Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies

Date Written: March 5, 2021

Abstract

The valuation of start-up firms is challenging, yet highly relevant for entrepreneurs and financiers alike. We reverse-engineer fair-value multiples by comparing the firm value at the time of financing with the firm value at the time of exit. Our framework produces reliable valuation multiples from observed venture capital transactions per industry and financing round. Despite their simplicity, sanity checks confirm that our multiples are highly performant in describing common valuation characteristics. Valuation multiples are higher when more experienced investors are involved, and when the exit occurs through an IPO rather than an M&A. In contrast, later stage financing rounds and larger investment consortia are associated with lower valuation multiples.

Keywords: Private equity, venture capital, entrepreneurship, investment multiples, start-up valuation

JEL Classification: G11, G24, G32, G34, L26, M13

Suggested Citation

Barg, Johannes A. and Drobetz, Wolfgang and Momtaz, Paul P., Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions (March 5, 2021). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3798637

Johannes A. Barg (Contact Author)

University of Hamburg

Moorweidenstraße 18
Hamburg, 20148
Germany

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, 80333
Germany

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
Malet Place London WC
London, London
United Kingdom

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