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last updated on February 5, 2019 The study on valuation practices of venture capitalists was first launched in 2014 by Rödl & Partner in cooperation with the Technische Hochschule Nürnberg (Nuremberg Tech University). The recent update and extension also includes questions relating to drafting contracts in venture capital investments. The study focused on examining the procedure by venture capitalists and corporate venture capitalists for collecting data used in start-up valuation – e.g. at the occasion of funding rounds depending of the life cycle phase. The study shows the differences between corporate VCs and VCs.
In most cases, the surveyed VC and CVC managers have very rich experience and manage mainly small and medium-sized funds. All respondents are from Germany or are at least located there and, as they indicated, they conclude approx. 230 deals with a total volume of approx. EUR 850 million per year. The focal points of the investments are the early stage, including start-up and seed phase, as well as the expansion stage. As for the sectors of industry, the focus is on Industry 4.0 and Software as a Service. The average holding period for these investments is 5.99 years (median = 6 years; min. = 2 years, max. = 10 years).
The data for determining the value and the price of start-up ventures were collected and analysed mostly by the VC funds themselves, except for the data collected as part of a tax and legal due diligence. This includes the financial and the commercial due diligence and / or the market and competitive analysis, and the analysis of the business plan.
A large part of the valuation process applied by the respondents focuses on the qualitative analysis of the management, the product / technology, and the market, as well as on other requirements. Here, important are criteria such as the completeness and the composition of the management team, the USP, and growth potential or scalability.
As regards the various quantitative valuation methods, certain preferences in methods applied in the individual phases became apparent. While the respondents mainly relied in the early stage on their own experience, valuations made in comparable funding rounds, and the Venture Capital Method (VCM), it was rather classic approaches such as the DCF model and Trading and Transaction Multiples as recommended by IDW (Institute of Public Auditors in Germany) and DVFA (Federation of Investment Professionals in Germany) that prevailed in the later stage investments.
Among the market value based methods, the methods that are most frequently used by the respondents include the comparison of the valuation levels from comparable funding rounds, revenue multiples based on comparable companies from the industry with comparable value drivers such as growth, market position, and phase in the life cycle. Multiples are often adjusted due to differences relating to general risk factors and the size. When valuations are based on the DCF method, the Multi Factor Model, or with regard to the input parameters for multiplier method, the respondents usually make adjustments to the business plan of the portfolio company (the start-up venture) and calculate worst, best and normal case scenarios. This leads to a significantly lower discount rate than often indicated in the literature or other studies. The discount rate is determined mainly as a lump sum. Capital pricing models such as the CAPM and multi-factor models are virtually not used for this purpose. Also the value-reducing components such as illiquidity, lack of diversification, insolvency risks and size are tackled only at some later point down the road or dealt with only marginally.
The final pricing is immensely influenced by the scalability potential, the actual negotiation process, market trends and the relationship to company founders. Also liquidity preferences play quite a significant role in pricing considerations.
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Cyril Prengel
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