Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

Exploring the differences in early-stage start-up valuation across countries: an institutional perspective

  • 494 Accesses

Abstract

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.

This is a preview of subscription content, log in to check access.

Fig. 1

References

  1. Acs, Z. J., Braunerhjelm, P., Audretsch, D. B., & Carlsson, B. (2009). The knowledge spillover theory of entrepreneurship. Small Business Economics, 32(1), 15–30.

  2. Aggarwal, R., & Goodell, J. W. (2014). Cross-national differences in access to finance: Influence of culture and institutional environments. Research in International Business and Finance, 31, 193–211.

  3. Aggarwal, R., Gopal, R., Gupta, A., & Singh, H. (2012). Putting money where the mouths are: The relation between venture financing and electronic word-of-mouth. Information Systems Research, 23(3), 976–992.

  4. Ahlstrom, D., & Bruton, G. D. (2006). Venture capital in emerging economies: Networks and institutional change. Entrepreneurship Theory and Practice, 30(2), 299–320.

  5. Amit, R., Brander, J., & Zott, C. (1998). Why do venture capital firms exist? Theory and Canadian evidence. Journal of Business Venturing, 13(6), 441–466.

  6. Antonczyk, R. C., & Salzmann, A. J. (2012). Venture capital and risk perception. Zeitschrift für Betriebswirtschaft, 82(4), 389–416.

  7. Antonczyk, R. C., & Salzmann, A. J. (2014). Corporate governance, risk aversion and firm value. Applied Financial Economics, 24(8), 543–556.

  8. Armour, J., & Cumming, D. (2006). The legislative road to Silicon Valley. Oxford Economic Papers, 58(4), 596–635.

  9. Batjargal, B., & Liu, M. (2004). Entrepreneurs’ access to private equity in China: The role of social capital. Organization Science, 15(2), 159–172.

  10. Baumol, W. J. (1996). Entrepreneurship: productive, unproductive, and destructive. Journal of Business Venturing, 11(1), 3–22.

  11. Berger, E. S. C., & Kuckertz, A. (2016). Female entrepreneurship in startup ecosystems worldwide. Journal of Business Research, 69(11), 5163–5168.

  12. Broughman, B. J., & Fried, J. M. (2012). Do VCs use inside rounds to dilute founders? Some evidence from Silicon Valley. Journal of Corporate Finance, 18(5), 1104–1120.

  13. Bruton, G. D., Fried, V. H., & Manigart, S. (2005). Institutional influences on the worldwide expansion of venture capital. Entrepreneurship Theory and Practice, 29(6), 737–760.

  14. Bruton, G. D., Ahlstrom, D., & Li, H.-L. (2010). Institutional theory and entrepreneurship: Where are we now and where do we need to move in the future? Entrepreneurship Theory and Practice, 34(3), 421–440.

  15. Cable, D. M., & Shane, S. (1997). A prisoner’s dilemma approach to entrepreneur-venture capitalist relationships. The Academy of Management Review, 22(1), 142–176.

  16. Cai, D. A., Wilson, S. R., & Drake, L. E. (2000). Culture in the context of intercultural negotiation. Human Communication Research, 26(4), 591–617.

  17. Cuervo, A. (2005). Individual and environmental determinants of entrepreneurship. International Entrepreneurship and Management Journal, 1(3), 293–311.

  18. Cumming, D. (2007). Government policy towards entrepreneurial finance: Innovation investment funds. Journal of Business Venturing, 22(2), 193–235.

  19. Cumming, D., & Dai, N. (2011). Fund size, limited attention and valuation of venture capital backed firms. Journal of Empirical Finance, 18(1), 2–15.

  20. Cumming, D., & MacIntosh, J. G. (2000). Venture-capital exits in Canada and the United States. https://www.researchgate.net/publication/228976418_Venture-capital_exits_in_Canada_and_the_United_States. Accessed 9 October 2017.

  21. Cumming, D., & Walz, U. (2010). Private equity returns and disclosure around the world. Journal of International Business Studies, 41(4), 727–754.

  22. Cumming, D., Fleming, G., & Schwienbacher, A. (2009a). Corporate relocation in venture capital finance. Entrepreneurship Theory and Practice, 33(5), 1121–1155.

  23. Cumming, D., Sapienza, H., Siegel, D. S., & Wright, M. (2009b). International entrepreneurship: Managerial and policy implications. Strategic Entrepreneurship Journal, 3(4), 283–296.

  24. Cumming, D., Johan, S., & Zhang, M. (2014). The economic impact of entrepreneurship: Comparing international datasets. Corporate Governance: An International Review, 22(2), 162–178.

  25. Dimov, D., & Murray, G. (2008). Determinants of the incidence and scale of seed capital investments by venture capital firms. Small Business Economics, 30(2), 127–152.

  26. Ding, Z., Sun, S. L., & Au, K. (2014). Angel investors’ selection criteria: A comparative institutional perspective. Asia Pacific Journal of Management, 31(3), 705–731.

  27. Douglas, E. J., Carlsson-Wall, M., & Hjelström, T. (2014). Negotiating equity share and management control of the entrepreneurial new venture. Venture Capital, 16(4), 287–307.

  28. Du, Q., & Vertinsky, I. (2011). International patterns of ownership structure choices of start-ups: Does the quality of law matter? Small Business Economics, 37(2), 235–254.

  29. Dushnitsky, G. (2014). Entrepreneurial optimism and venture capital valuations. http://siepr.stanford.edu/system/files/OptCrossCountries.pdf. Accessed 9 October 2017.

  30. Engelen, P.-J., & van Essen, M. (2010). Underpricing of IPOs: Firm-, issue- and country-specific characteristics. Journal of Banking & Finance, 34(8), 1958–1969.

  31. Fidrmuc, J. P., & Jacob, M. (2010). Culture, agency costs, and dividends. Journal of Comparative Economics, 38(3), 321–339.

  32. Gompers, P., & Lerner, J. (1998). What drives venture capital fundraising? Brookings Papers on Economic Activity: Microecnomics, 149–204.

  33. Gompers, P., & Lerner, J. (2000). Money chasing deals? The impact of fund inflows on private equity valuation. Journal of Financial Economics, 55(2), 281–325.

  34. Gu, W., Qian, X., & Lu, J. (2018). Venture capital and entrepreneurship: A conceptual model and research suggestions. International Entrepreneurship and Management Journal, 14(1), 35–50.

  35. Hajek, S. (2016). Dedrone: Das lukrative Geschäft mit der Drohnenabwehr. WirtschaftsWoche. http://gruender.wiwo.de/dedrone-das-lukrative-geschaeft-mit-der-drohnenabwehr/. Accessed 14 August 2017.

  36. Hand, J. R. M. (2005). Value relevance of financial statements in the venture capital market. Accounting Review, 80(2), 613–648.

  37. Haxhi, I., & Aguilera, R. V. (2017). An institutional configurational approach to cross-national diversity in corporate governance. Journal of Management Studies, 54(3), 261–303.

  38. Hirukawa, M., & Ueda, M. (2011). Venture capital and innovation: Which is first? Pacific Economic Review, 16(4), 421–465.

  39. Hofstede, G. H. (2001). Culture’s consequences: Comparing values, behaviors, institutions and organizations across nations. London: SAGE Publications.

  40. Hsee, C. K., & Weber, E. U. (1999). Cross-national differences in risk preference and lay predictions. Journal of Behavioral Decision Making, 12(2), 165–179.

  41. Hsu, D. H. (2004). What do entrepreneurs pay for venture capital affiliation? Journal of Finance, 59(4), 1805–1844.

  42. Hsu, S.-Y., Woodside, A. G., & Marshall, R. (2013). Critical tests of multiple theories of cultures’ consequences: Comparing the usefulness of models by Hofstede, Inglehart and baker, Schwartz, Steenkamp, as well as GDP and distance for explaining overseas tourism behavior. Journal of Travel Research, 52(6), 679–704.

  43. Inderst, R., & Müller, H. M. (2004). The effect of capital market characteristics on the value of start-up firms. Journal of Financial Economics, 72(2), 319–356.

  44. Jaffe, A. B., Trajtenberg, M., & Henderson, R. (1993). Geographic localization of knowledge spillovers as evidenced by patent citations. Quarterly Journal of Economics, 108(3), 577–598.

  45. Jeng, L. A., & Wells, P. C. (2000). The determinants of venture capital funding: Evidence across countries. Journal of Corporate Finance, 6(3), 241–289.

  46. Kaplan, S. N., & Strömberg, P. (2002). Characteristics, contracts, and actions: Evidence from venture capitalist analyses. SSRN. https://ssrn.com/abstract=295109. Accessed 9 October 2017.

  47. Kaplan, S. N., Strömberg, P., & Sensoy, B. A. (2002). How well do venture capital databases reflect actual investments? SSRN. Retrieved October 8, 2016, from http://ssrn.com/abstract=939073

  48. Karsai, J., Wright, M., Dudzinski, Z., & Morovic, J. (1998). Screening and valuing venture capital investments: Evidence from Hungary, Poland and Slovakia. Entrepreneurship and Regional Development, 10(3), 203–224.

  49. Köhn, A. (2018). The determinants of startup valuation in the venture capital context: A systematic review and avenues for future research. Management Review Quarterly, 68(1), 3–36.

  50. Kortum, S., & Lerner, J. (2000). Assessing the contribution of venture capital to innovation. RAND Journal of Economics, 31(4), 674–692.

  51. Kraus, S., Ribeiro-Soriano, D., & Schüssler, M. (2018). Fuzzy-set qualitative comparative analysis (fsQCA) in entrepreneurship and innovation research—The rise of a method. International Entrepreneurship and Management Journal, 14(1), 15–33.

  52. Kuckertz, A., Berger, E. S. C., & Allmendinger, M. P. (2015). What drives entrepreneurship? A configurational analysis of the determinants of entrepreneurship in innovation-driven economies. Business Administration Review, 75(4), 273–288.

  53. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155.

  54. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2002). Investor protection and corporate valuation. Journal of Finance, 57(3), 1147–1170.

  55. La Porta, R., Lopez-de-Silvanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61(1), 1–32.

  56. Lerner, J., & Schoar, A. (2005). Does legal enforcement affect financial transactions? The contractual channel in private equity. The Quarterly Journal of Economics, 120(1), 223–246.

  57. Lerner, J., & Tåg, J. (2013). Institutions and venture capital. Industrial and Corporate Change, 22(1), 153–182.

  58. Lerner, J., & Watson, B. (2008). The public venture capital challenge: The Australian case. Venture Capital, 10(1), 1–20.

  59. Lewellyn, K. B., & Bao, S. R. (2014). A cross-national investigation of IPO activity: The role of formal institutions and national culture. International Business Review, 23(6), 1167–1178.

  60. Li, Y., & Zahra, S. A. (2012). Formal institutions, culture, and venture capital activity: A cross-country analysis. Journal of Business Venturing, 27(1), 95–111.

  61. Li, Y., Vertinsky, I. B., & Li, J. (2014). National distances, international experience, and venture capital investment performance. Journal of Business Venturing, 29(4), 471–489.

  62. Mäkelä, M. M., & Maula, M. V. J. (2008). Attracting cross-border venture capital: The role of a local investor. Entrepreneurship and Regional Development, 20(3), 237–257.

  63. Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P., Sapienza, H., & Beekman, A. (2002). Determinants of required return in venture capital investments: A five-country study. Journal of Business Venturing, 17(4), 291–312.

  64. Mason, C., & Brown, R. (2014). Entrepreneurial ecosystems and growth oriented entrepreneurship. Final report to OECD, Paris, 30(1), http://www.oecd.org/cfe/leed/Entrepreneurial-ecosystems.pdf.

  65. Miloud, T., Aspelund, A., & Cabrol, M. (2012). Startup valuation by venture capitalists: An empirical study. Venture Capital, 14(2–3), 151–174.

  66. Muñoz, P., & Dimov, D. (2015). The call of the whole in understanding the development of sustainable ventures. Journal of Business Venturing, 30(4), 632–654.

  67. Nahata, R., Hazarika, S., & Tandon, K. (2014). Success in global venture capital investing: Do institutional and cultural differences matter? Journal of Financial and Quantitative Analysis, 49(4), 1039–1070.

  68. North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

  69. Petkova, A. P., Rindova, V. P., & Gupta, A. K. (2013). No news is bad news: Sensegiving activities, media attention, and venture capital funding of new technology organizations. Organization Science, 24(3), 865–888.

  70. Ragin, C. C. (1987). The comparative method: Moving beyond qualitative and quantitative strategies. Berkeley: University of California Press.

  71. Ragin, C. C. (2000). Fuzzy-set social science. Chicago: University of Chicago Press.

  72. Ragin, C. C. (2006). Set relations in social research: Evaluating their consistency and coverage. Political Analysis, 14(3), 291–310.

  73. Ragin, C. C. (2008). Redesigning social inquiry: Fuzzy sets and beyond. Chicago: University of Chicago Press.

  74. Ross, O., & Woolsey, B. (2017). Berlin seeks to woo talent from U.S. startups. Handelsblatt. https://global.handelsblatt.com/companies-markets/berlin-seeks-to-woo-talent-from-u-s-startups-702189. Accessed 14 August 2017.

  75. Sahlman, W. A. (1990). The structure and governance of venture-capital organizations. Journal of Financial Economics, 27(2), 473–521.

  76. Schertler, A., & Tykvová, T. (2011). Venture capital and internationalization. International Business Review, 20(4), 423–439.

  77. Schneider, C. Q., & Wagemann, C. (2012). Set-theoretic methods for the social sciences: A guide to qualitative comparative analysis. Cambridge: Cambridge University Press.

  78. Shepherd, D. A., & Zacharakis, A. (2001). The venture capitalist-entrepreneur relationship: Control, trust and confidence in co-operative behaviour. Venture Capital, 3(2), 129–149.

  79. Sievers, S., Mokwa, C. F., & Keienburg, G. (2013). The relevance of financial versus non-financial information for the valuation of venture capital-backed firms. The European Accounting Review, 22(3), 467–511.

  80. Simón-Moya, V., Revuelto-Taboada, L., & Guerrero, R. F. (2014). Institutional and economic drivers of entrepreneurship: An international perspective. Journal of Business Research, 67(5), 715–721.

  81. Technologist. (2017). Brain drain: How europe is fighting back. Technologist. Retrieved August 14, 2017, from http://www.technologist.eu/brain-drain/

  82. Tiessen, J. H. (1997). Individualism, collectivism, and entrepreneurship: A framework for international comparative research. Journal of Business Venturing, 12(5), 367–384.

  83. Weller, C. (2017). A Canadian venture capital firm is funding entrepreneurs to relocate and become citizens. Business Insider. http://www.businessinsider.de/canadian-vc-firm-pays-relocation-residency-2017-6?r=US&IR=T. Accessed 14 August 2017.

  84. White, S., Gao, J., & Zhang, W. (2005). Financing new ventures in China: System antecedents and institutionalization. Research Policy, 34(6), 894–913.

  85. Wright, M., Lockett, A., Pruthi, S., Manigart, S., Sapienza, H., Desbrières, P., & Hommel, U. (2004). Venture capital investors, capital markets, valuation and information: US, Europe and Asia. Journal of International Entrepreneurship, 2(4), 305–326.

  86. Wright, M., Pruthi, S., & Lockett, A. (2005). International venture capital research: From cross-country comparisons to crossing borders. International Journal of Management Reviews, 7(3), 135–165.

  87. Yan, Y., & Guan, J. (forthcoming). Entrepreneurial ecosystem, entrepreneurial rate and innovation: The moderating role of internet attention. International Entrepreneurship and Management Journal. https://doi.org/10.1007/s11365-018-0493-8.

  88. Yang, Y., Narayanan, V. K., & Zahra, S. A. (2009). Developing the selection and valuation capabilities through learning: The case of corporate venture capital. Journal of Business Venturing, 24(3), 261–273.

  89. Zheng, Y., Liu, J., & George, G. (2010). The dynamic impact of innovative capability and inter-firm network on firm valuation: A longitudinal study of biotechnology start-ups. Journal of Business Venturing, 25(6), 593–609.

Download references

Acknowledgements

The authors gratefully acknowledge the helpful feedback provided by Andreas Kuckertz and thank the participants of the 20th G-Forum in Leipzig, Germany and the participants of the Academy of Management Meetings in Atlanta, USA for their comments. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Author information

Correspondence to Elisabeth S.C. Berger.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Berger, E.S., Köhn, A. Exploring the differences in early-stage start-up valuation across countries: an institutional perspective. Int Entrep Manag J (2018). https://doi.org/10.1007/s11365-018-0534-3

Download citation

Keywords

  • Venture capital (VC)
  • Valuation
  • Start-ups
  • Culture
  • Innovativeness
  • Fuzzy-set qualitative comparative analysis (fsQCA)