The Role of Venture Capitalists in the Identification and Measurement of Intangible Assets

Posted: 28 Feb 2007

See all articles by Leonardo L. Ribeiro

Leonardo L. Ribeiro

Center For Private Equity and Venture Capital Research at Fundacao Getulio Vargas (GVcepe)

Luís Fernando Tironi

Institute of Applied Economic Research (IPEA)

Date Written: October 2006

Abstract

The increase in the importance of intangibles in business competitiveness has made investment selection more challenging to investors that, under high information asymmetry, tend to charge higher premiums to provide capital or simply deny it. Private Equity and Venture Capital (PE/VC) organizations developed contemporarily with the increase in the relevance of intangible assets in the economy. They form a specialized breed of financial intermediaries that are better prepared to deal with information asymmetry. This paper is the result of ten interviews with PE/VC organizations in Brazil. Its objective is to describe the selection process, criteria and indicators used by these organizations to identify and measure intangible assets, as well as the methods used to valuate prospective investments. Results show that PE/VC organizations rely on sophisticated methods to assess investment proposals, with specific criteria and indicators to assess the main classes of intangible assets. However, no value is given to these assets individually. The information gathered is used to understand the sources of cash flows and risks, which are then combined by discounted cash flow methods to estimate firm's value. Due to PE/VC organizations extensive experience with innovative Small and Medium-sized Enterprises (SMEs), we believe that shedding light on how PE/VC organizations deal with intangible assets brings important insights to the intangible assets debate.

Keywords: private equity, venture capital, intangible assets, information assymetry, investment decision

JEL Classification: G24, G31, D82, G12, M41, M44

Suggested Citation

Ribeiro, Leonardo de Lima and Tironi, Luís Fernando, The Role of Venture Capitalists in the Identification and Measurement of Intangible Assets (October 2006). Available at SSRN: https://ssrn.com/abstract=965594 or http://dx.doi.org/10.2139/ssrn.965594

Leonardo de Lima Ribeiro (Contact Author)

Center For Private Equity and Venture Capital Research at Fundacao Getulio Vargas (GVcepe) ( email )

Rua Itapeva, 432
8th floor
Sao Paulo, Sao Paulo 01313-902
Brazil
+55 (11) 3281-3459 (Phone)

HOME PAGE: http://www.cepe.fgvsp.br

Luís Fernando Tironi

Institute of Applied Economic Research (IPEA) ( email )

Av. Pres. Antonio Carlos , 51 - 17 andar
Rio de Janeiro, RJ, 20020-010
Brazil

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