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The valuation of entrepreneurial start-ups for the purpose of equity allocation to business angel investors is an enduring point of discord between the contracting parties. Lack of information and lack of trust, plus the asymmetry of both information and trust between the parties, typically cause the investor to apply a higher risk premium and argu...
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... Remarkably, some researchers argue that the occurrence of legitimacy results in higher capital costsor entrepreneurs because angel investors adjust their valuation to the higher risk premium (Douglas et al., 2014;Rutherford et al., 2009). If these costs, whether entrepreneurs make accurate statements or not, is factored in by investors, entrepreneurs may feel like they are expected to lie, or at least exaggerate their legitimacy to some extent. ...
Early-stage entrepreneurs exert significant efforts to secure deals with angel investors, but many are canceled during the due diligence process. Drawing upon interpersonal persuasion theory and information asymmetries in the pitch context, we investigate deal cancellations as instances of biased communication and strategic misrepresentation. We analyze a novel dataset comprising N = 1,334 pitches from the British Dragons’ Den and the German Die Höhle der Löwen format. Our examination delves into differences related to gender and team size of the involved parties, format, and level of financial risk. We find a bias against female investors, higher cancellation rates for more costly deals, and a country effect.
... They contend that these two cultural aspects are intimately linked to the information asymmetries and uncertainty that underlie venture capital investments. As previously noted, significant levels of uncertainty and information asymmetry are intrinsic elements that impact venture capital (VC) early-stage start-up values [53,48]. As earlystage start-up valuation in the venture capital (VC) setting is characterized by a great deal of uncertainty [see, for example, 53,48,42]it is anticipated that uncertainty avoidance will have an impact on early-stage start-up valuation. ...
... As previously noted, significant levels of uncertainty and information asymmetry are intrinsic elements that impact venture capital (VC) early-stage start-up values [53,48]. As earlystage start-up valuation in the venture capital (VC) setting is characterized by a great deal of uncertainty [see, for example, 53,48,42]it is anticipated that uncertainty avoidance will have an impact on early-stage start-up valuation. More precisely, VC investors are likely to demand a greater risk premium in nations where there is a preference for avoiding uncertainty as compensation for the risk taken, which ultimately results in lower start-up valuations [54,51]. ...
The start-up industry in Indonesia is receiving a lot of interest from businessmen, investors, and researchers. Reliable valuation techniques are essential for investors and business owners alike in Indonesia’s dynamic startup ecosystem. This study maps the structure of startup valuation research in the Indonesian setting using bibliometric analysis. It also examines how research subjects have changed over time and evaluates the significance of key studies. This study carefully examines the usual traits of new businesses in Indonesia, concentrating on both financial and non-financial factors. To illustrate the entire strategy adopted, start-up valuations frequently mix quantitative techniques like discounted cash flow (DCF) with qualitative assessments. There are still several calculating components that are not standardized when doing assessments at start-up. Therefore, valuation is more art than science. This bibliometric analysis delivers unique insights into research by syncing and visualizing knowledge networks, helping entrepreneurs, investors, and policy makers to comprehend the existing environment and future direction of startup assessment approaches in Indonesia. It uses co-word analysis to examine this topic’s knowledge structure. As a result, the research finds 163 journal articles related to start-up valuation. In addition, four clusters are found to describe the current state of start-up valuation: start-up, investment, venture capital and discounted cash flow. Keywords: start-ups, Indonesia, valuation, bibliomeric analysis
... At this stage, the issue for the two parties is to negotiate the best deal, especially concerning the start-up valuation (Köhn, 2018). This stage is often characterized by difficult negotiations as the investor and the entrepreneur try to "feel their way" to an agreement (Casamatta & Haritchabalet, 2014;Douglas et al., 2014). The two parties should also pay attention to how and when the investor can be available for the entrepreneur, even if that issue is not usually set out in the formal agreement (Paul et al., 2007). ...
New technology-based firms (NTBFs) currently represent a strong growth lever for the economy, but they face numerous obstacles. Achieving financing goals is a key element in securing sufficient resources for growth. To do so, entrepreneurs need to build high-quality relationships with investors. Through the proposition of an integrative model thanks to the upper echelon theory (UET), our research studies how personal characteristics of entrepreneurs and investors influence their fit. In an original qualitative approach, we interviewed nine pairs of entrepreneurs and investors. To complement findings in entrepreneur/investor relationship field, we demonstrate that similarity is not everything and that complementary personality traits, aligned values and past experience which give confidence are crucial antecedents of their fit. We also complement past research by showing that those personal characteristics are more important in the first stages of pre-financing process, from the encounter stage, even if they need to be taken into account throughout the process via the construction of the interpersonal relationship between the two actors.
... Entrepreneurs vary in terms of financial and technical expertise and experience and often may be pitching to investors for the first time. By contrast, investors have extensive experience negotiating equity valuations and typically apply a higher risk premium and argue for a larger share of equity than the founder deems reasonable (Douglas et al., 2014). Compounding this effect is the nature of the game show, since time pressure has also been shown to skew negotiating power towards investors (Ahlers et al., 2016). ...
Most negotiations over startup valuation take place behind closed doors. As a result, we lack knowledge about how valuation is negotiated between entrepreneurs and investors. We constructed a dataset by hand to exploit the unique nature of a popular business pitch television show, ABC's Shark Tank, to examine this issue. Our descriptive findings suggest that entrepreneurs who initially offer less of their company to investors are more likely to receive investment offers. We also discovered that startup valuation negotiations tend to take place over the relative equity percentage each party receives rather than investment amount. Finally, although investors are more likely to experience negotiation gains, entrepreneurs who successfully pit sharks against each other receive deal terms closer to their initial ask. These results add to the emerging literature on dynamic process of startup valuation.
... ii) as part of the platform onboarding and registration process, the platform (on behalf of the prospective investors interested in EF) negotiates the share exchange ratio (i.e., X% for $Y) and other terms with the SME entrepreneur. Such information (when decided) will be made available to all parties before they commit to any form of investment/fund raising (Douglas et al., 2014). Hence, given its predictability and to reduce the complexity of our models, we assumed that the equity/share exchange ratio under the EF scheme is equal to 1. 10 Considering the above assumptions, we next formulate the problem setting in details and study the equilibrium strategies of GNPD players under two settings. ...
This paper studies the green new product development (GNPD) problem of a risk-averse capital constrained supply chain (SC). The SC is managed by an SME entrepreneur, seeking financial support from a multi-sided FinTech platform (MSP) to develop a portfolio of green and non-green products. The MSP offers the SC a combination of equity financing (EF) and debt financing (DF) facilities and must decide on the interest rate of its DF facility. Using a benchmark model, we first characterize the SC’s production and the MSP’s financing decisions under a deregulated scenario. Focusing on an alternative case with government intervention (i.e., hybrid environmental-green entrepreneurship policy), we next develop a three-level game theoretical model and sequentially characterize the decision-making behavior of government, MSP, and SC. The model outcomes are analyzed by considering the policy approach (i.e., economic influence vs. social welfare) and the platform’s risk attitude. The results reveal that, when coupled with an appropriate government intervention policy, a regulated scenario leads to a better outcome, particularly when the MSP is risk-neutral and strikes a right balance between the EF and DF. The win–win situation may not be realized when the MSP is risk-averse and the host government is merely focused on its economic influence. To successfully promote sustainable supply chain finance (SSCF) through digital platforms, policy makers are urged to leverage their legislative power and prioritize green entrepreneurship and social welfare over their financial maximization agenda.
... Because the VCs would have less information about the likelihood of entrepreneurs shirking, this would create less trust between the parties. This lack of trust would induce the VC to apply a higher risk premium and argue for a larger share of the firm's equity than the entrepreneur deems reasonable (Douglas, Carlsson-Wall, & Hjelström, 2014). Given these facts around the causes of moral hazards in entrepreneurial financing, there is a serious need for tools that can overcome hidden information problems and accurately target capital to entrepreneurs that can use it well (Field, Pande, Papp, & Rigol, 2013). ...
This article aims to use a bargaining power model to reduce moral hazard—in the form of entrepreneurial effort shirking—and derive an optimum sharing ratio of a Profit and Loss Sharing (PLS) contract that involves a Venture Capitalist and an Entrepreneur. The model reveals the following interesting findings. First, under complete information—where the Venture Capitalist has a bargaining power ‐ Venture Capitalist offers the entrepreneur a profit sharing ratio that is less than her capital contribution ratio. Second, in an incomplete information setting, the entrepreneur demands a profit sharing ratio higher than her capital contribution ratio when the sum of the marginal cost (from exercising a higher effort) and private benefits (from exercising a low effort) is greater than the marginal return (from exercising a high effort). In addition, the model is used to derive a span of negotiation about the profit sharing ratio. Finally, an agent based simulation (Netlogo) platform is considered to implement the model, which allows a faster numerical calculations of the profit share and helps decide on the validity of the funding contract.
... Accordingly, formal institutions are ascribed the task of reducing transaction costs stemming from incomplete information (Li and Zahra 2012). Since start-ups usually have limited history and negative earnings, a start-up valuation is characterized by omnipresent uncertainty and information asymmetry (e.g., Amit et al. 1998;Douglas et al. 2014;Sievers et al. 2013). This in turn makes it extremely challenging for VC investors to assign a valuation to an entrepreneurial enterprise (Li and Zahra 2012). ...
... In particular, Li and Zahra (2012) show that uncertainty avoidance and collectivism affect VC activity, arguing that these two cultural dimensions are closely related to the uncertainty and information asymmetries underlying VC investments. As mentioned above, high uncertainty and information asymmetry are inherent factors affecting early-stage start-up valuations in the VC context (e.g., Douglas et al. 2014;Miloud et al. 2012). Consequently, we draw on these two cultural dimensions of Hofstede (2001) to study the relevance of uncertainty avoidance and collectivism for early-stage start-up valuations in the VC context. ...
... Uncertainty avoidance considers the level to which uncertainty is tolerated within a society and thus indicates the readiness of its people and organizations to accept risk taking (Hofstede 2001). Since early-stage start-up valuation in the VC context is marked by significant uncertainty (e.g., Douglas et al. 2014;Miloud et al. 2012;Sievers et al. 2013), uncertainty avoidance is expected to influence the valuation of early-stage start-ups. More specifically, VC investors in countries characterized by a preference for avoiding uncertainty are likely to demand a higher risk premium as compensation for the risk taken; which in turn leads to lower start-up valuations (Fidrmuc and Jacob 2010;Li and Zahra 2012). ...
Countries increasingly compete to host innovative start-ups to secure and promote economic growth. However, because start-ups seem to be valued differently across countries, both researchers and policymakers must understand the factors determining the variability of early-stage start-up valuations. This study therefore draws on institutional theory and conducts a fuzzy-set qualitative comparative analysis to analyze a sample of 1251 start-up valuations drawn from 13 countries between 2009 and 2016. Our findings show that a common law system together with high levels of innovativeness in a country explain high early-stage start-up valuations. The second configuration leading to high start-up valuations is characterized by favorable cultural circumstances in terms of low levels of uncertainty avoidance and high levels of collectivism, which in combination possibly compensate for a civil law system. Two configurations explaining low start-up valuations are a combination of a lack of innovativeness nationally, and unfavorable informal institutions (i.e., high uncertainty avoidance or low collectivism), regardless of the origins of a nation’s legal system. The last configuration explaining low start-up valuations is a combination of unfavorable informal institutions in terms of high uncertainty avoidance and low collectivism, alongside a civil law system. © 2018, Springer Science+Business Media, LLC, part of Springer Nature.
... The rationale why valuations need to be negotiated between investors and start-ups is the reduction of information asymmetries. Negotiations do not evolve around one final price tag, but around the validity of the start-ups business plan and its underlying assumptions (Douglas, Carlsson-Wall, & Hjelström, 2014;Tyebjee & Bruno, 1986). Therefore, the valuation needs to be transparent and especially β, i.e. the underlying risk, is discussed (Festel et al., 2013). ...
... Operational terms are mainly focused on control rights (Douglas et al., 2014), covenants (Tyebjee & Bruno, 1984) or management incentives and board seats for CVC personnel (Christofidis & Debande, 2001). Kirilenko (2001) demonstrates that disproportionally high control rights for a VC are traded-off against better financing terms for the start-up, especially a more balanced risk-sharing. ...
... Having merely an idea leads to less negotiation power than having a functioning prototype or even a market-proven product. 42 Other forms of investors include business angels, family and friends or crowdfunding Tyebjee and Bruno (1986) (Douglas et al., 2014). Especially with regards to IVCs, technical knowledge is an advantage for start-ups. ...
Corporate Venture Capital (CVC) is an established vehicle for collaboration among a corporation and start-ups. Through equity investments paired with access to resources, capabilities and expert networks, corporations aim at supporting start-up development. Although the efficacy of CVCs is broadly discussed in literature, CVCs are often treated as uniform vehicles. Little is known about the impact of a CVC’s strategic direction and organizational design on the performance of start-ups. Moreover, Corporate Accelerator (CA) is a rather new form of corporate start-up engagement. Due to its newness limited research is available and literature urges – among others – to compare CA with more established form of corporate start-up support, especially CVC. Following these identified research gaps the dissertation consists of two empirical sections. In the first section, the effect of a CVCs organization and strategic direction on start-up performance is evaluated. Using a hand-collected unique data-set of 210 start-ups under the management of 21 German CVCs, the study finds that organization of a CVC impacts the financial and strategic performance in multiple ways. Distinct hypotheses on portfolio size, concentration and fit, previous experience and CVC leadership are developed and tested empirically. The results show that CVC strategy and organization matter for start-up performance, however, disparate effects are observable for financial and strategic performance. Large portfolios enhance the performance of start-ups under CVC management, whereas both portfolio concentration and industry fit have a negative relationship with start-up performance. Moreover, more established CVCs support financial, yet impede strategic start-up performance. Lastly, it is detected that Previous industry experience of CVC personnel leads to financial start-up performance, whereas previous founder experience of CVC personnel strengthens strategic start-up performance. The second section aims at empirically reflecting the differences between CVC and CA, the start-ups under management and performance implications. The work is based on a novel multi-level and hand-collected dataset on financial and strategic performance covering 21 German CVCs with 210 start-ups and 15 German CAs with 132 start-ups. The results show that CVC and CA differ. CVCs tend to support older and further developed start-ups that operate more frequently in strategic proximity to the corporate parent, whereas CAs collaborate with younger and less mature start-ups across varying industries. In addition, CVCs stimulate start-up performance more than CAs do, even when matching CVC- and CA-managed start-ups based on their size and stage of development All in all, the work adds to literature in multiple ways as understanding of CVCs is deepened through a grounding in economic theories, uncovering of white spots determination of performance implications of a CVC’s strategic direction and organizational design and differentiation from a similar corporate venturing form, Corporate Accelerator. The work empirically supports that a differentiation of financial and strategic performance is required in corporate venturing research and sheds light on how CVCs should be organized to foster start-up performance. Moreover, it offers an enhanced understanding of CVC through an empirical comparison with the new phenomenon of CAs. Lastly, empirical evidence on CVC and CA is given based on a German dataset, in contrast to the majority of studies, being based on US data.
... However, in light of the paper's underlying setting the narrowed focus was a necessity, as for instance it permitted the exclusion of articles focusing on young public firms that are irrelevant in the scrutinized VC context. Third, from a financial perspective, business plans including a startup's projected cash flows usually provide the basis for a startup's financial valuation in the VC context (e.g., Douglas, Carlsson-Wall, & Hjelström, 2014;MacMillan et al., 1985;Manigart et al., 1997) and it is therefore surprising that none of the selected articles directly examined the reliability and impact of the business plans provided by entrepreneurs on startup valuations. Admittedly, this review cannot claim to provide a complete picture of the matter, and relevant factors might not have been identified in the course of the review. ...
... Accordingly, formal institutions are ascribed the task of reducing transaction costs stemming from incomplete information (Li & Zahra, 2012). Since startups usually have limited history and negative earnings, a startup valuation is characterized by omnipresent uncertainty and information asymmetry (e.g., Amit, Brander, & Zott, 1998;Douglas et al., 2014;Sievers et al., 2013). This in turn makes it extremely challenging for VC investors to assign a valuation to an entrepreneurial enterprise (Li & Zahra, 2012). ...
... In particular, Li and Zahra (2012) show that uncertainty avoidance and collectivism affect VC activity, arguing that these two cultural dimensions are closely related to the uncertainty and information asymmetries underlying VC investments. As mentioned above, high uncertainty and information asymmetry are inherent factors impacting early-stage startup valuations in the VC context (e.g., Douglas et al., 2014;Miloud et al., 2012). Consequently, we draw on these two cultural dimensions of Hofstede (2001) to study the relevance of uncertainty avoidance and collectivism for early-stage startup valuations in the VC context. ...
The purpose of this dissertation is to examine the underlying determinants of startup valuation and startup acquisition in the venture capital (VC) context, with particular focus on the role of corporate venture capital (CVC). The first studyChapter 2titled The determinants of startup valuation in the venture capital context: A systematic review and avenues for future research is a systematic review of the literature on empirically examined determinants of startup valuations in the VC context. It compiles and organizes the determinants examined in 58 selected papers in an integrative framework. This framework shows that startup valuations in the VC context are shaped by factors related to three levels, namely startup, venture capitalists, and the external environment. Moreover, the review process makes it possible for the study to highlight academic voids and to outline promising paths for future research. In the second studyChapter 3Exploring the differences in early-stage startup valuation across countries: An institutional perspective, fuzzy-set qualitative comparative analysis (fsQCA) across a sample of 13 countries is applied to explore the driving factors of the institutional setting in combination with a countrys innovativeness determining high and low early-stage startup valuations across countries. Overall, the study identifies five configurations; two configurations explain the outcome of high early-stage startup valuations, and three configurations explain the outcome of low early-stage startup valuations across countries. By applying fsQCA, the study also highlights the benefits of a configurational approach to exploring the institutional determinants in combination with a countrys innovativeness underlying early-stage startup valuations in the VC context. The third studyChapter 4titled A world of difference? The impact of corporate venture capitalists investment motivation on startup valuation combines explorative research (computer-aided text analysis and cluster analysis) and theory-testing (hierarchical linear modeling) methods to disentangle the different types of the motivation underpinning corporate venture capitalists (CVCs) investments, and their impact on startup valuations. In its explorative part, the study identifies four types of CVCs investment motivation: financial, strategic, unfocused, and analytic. In its theory-testing part, the results show that CVCs with a strategic investment motivation assign significantly lower startup valuations, while CVCs with an unfocused investment motivation assign significantly higher valuations than their peers having an analytic motivation. Hence, the studys findings stress the heterogeneity of CVCs, thereby moving beyond the dominant black and white approach of the current academic discourse that labels CVCs as either strategic or financial. The fourth studyChapter 5titled From investment to acquisition: The impact of exploration and exploitation on CVC acquisition forms a bridge to the previous study by investigating the interplay of CVC investments and startup acquisitions drawing on the framework of exploration and exploitation. The study exploits a unique and diligently constructed dataset to shed light on the phenomenon of CVC acquisitions (i.e., a corporate mother acquiring a startup funded through its CVC unit) using computer-aided text analysis and logistic regression. The findings show that corporate mothers with a greater degree of explorative (exploitative) orientation are more (less) likely to engage in a CVC acquisition; and that this effect is negatively (positively) moderated by the extent of product market relatedness between startup and the potential acquirer. Taken as a whole, this dissertation is interested in the hitherto empirically studied determinants influencing startup valuations in the VC context; how the institutional setting affects early-stage startup valuations; the differing investment motivations of CVCs and their impact on the startup valuations assigned; and the underlying drivers of CVC acquisitions. To address these aspects, the dissertation draws on multiple streams of academic literature and various analytical methods. In doing so, this dissertation provides new and important insights that enhance the understanding of the entrepreneurial process by painting a more complete picture of the factors affecting the valuation and acquisition of startups in the VC context. Notwithstanding the dissertations contributions, it also discusses its limitations in outlining promising paths for future research. In sum, this dissertation can clearly serve as a door opener for future research seeking to further illuminate these under-researched, but crucial events in the entrepreneurial process.
... A significant number of works analyse to what extent the entrepreneur's soft-skill qualities affect BAs' judgements, such as the entrepreneur's personality (Becker-Blease and Sohl, 2015;Murnieks et al., 2015), his/her entrepreneurial passion (Mitteness et al., 2012a;Hsu et al., 2014), his/her presentational skills (Clark, 2008) and the trust established between the entrepreneur and the angel investors (Fairchild, 2011;Nofsinger and Wang, 2011;Wallnöfer and Hacklin, 2013;Douglas et al., 2014;Maxwell and Lévesque, 2014). ...
... A total of three papers develop theoretical models explaining the interaction between entrepreneurs, BAs and VCs in the funding process (Fairchild, 2011;Conti et al., 2013;Hellman and Thiele, 2015). Finally, only a few papers explore the negotiation phase, focusing on how BAs' contracts affect their involvement in invested firms and investments through syndicates (Kelly and Hay, 2003), in comparison with VCs' contractual provisions (Ibrahim, 2008), and on the challenges faced by entrepreneurs in closing deals with BAs (Amatucci and Swartz, 2011;Douglas et al., 2014). Figure 2 summarizes the main BAs' selection criteria identified in the literature. ...
Since the seminal works of Wetzel, research on business angels (BAs) has emerged as a new and promising research field. This review analyses the current knowledge on BAs, identifying the main contents and outcomes. We also provide a bibliometric analysis to illustrate the evolution of the research field, the level of dispersion of the scientific community, the main outlets for publication and the different methodological approaches adopted. Through the analysis of backward and forward citations, we depict the current knowledge base on which BA research is grounded and whether it has any impact on other research fields.
