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

Johannes A. Barg, Wolfgang Drobetz and Paul P. Momtaz

Finance Research Letters, 2021, vol. 43, issue C

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 (search for similar items in EconPapers)
JEL-codes: G11 G24 G32 G34 L26 M13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000891

DOI: 10.1016/j.frl.2021.102008

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