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The determinants of startup valuation in the venture capital context: a systematic review and avenues for future research

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Abstract

Startup valuation in the venture capital (VC) context is often said to be more art than science. In view of this, it is particularly important to be aware of and understand the different underlying determinants that affect the valuation of startups. This paper conducts a systematic review of the existing empirical literature to illustrate the determinants of startup valuations in the VC context. Beyond that, the paper seeks to provide an organizing structure to the current literature as well as to detect academic voids and directions for future research. To achieve these goals, it develops an integrative framework for the factors determining startup valuations in the VC environment, which should be of use to both practitioners and researchers. That framework illustrates how startup valuations in the VC context are shaped by a three-sided interplay of factors related to startups, venture capitalists, and the external environment.

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Notes

  1. The latter group of search strings was derived based on Zheng et al. (2010) considering a startup’s valuation as the estimate of its market value.

  2. For discontinued journals the latest available score was applied. It must be acknowledged that the applied cut-off criteria is not free of criticism. However, to the best of the author’s knowledge there are no systematic literature reviews suggesting a reasonable quality cut-off for the Scopus relevant SJR. Therefore, it wasconsidered appropriate to cut off the journals within the lowest quartile based on the SJR metric. Additionally, to benchmark the cut-off criteria, they were compared with journals that are assigned a JCR Impact Factor as this allowed the author to rely on the threshold suggested by Bouncken et al. (2015) (JCR impact factor \({<}\)0.7). The comparison indicated that the derived Scopus specific threshold is reasonable.

  3. One article only provided summary statistics on valuation and stated that owing to the lack of a complete set of variables, valuation was not considered in the subsequent analysis.

  4. It should be mentioned that in the initial search (first step), the terms “pre-money” and “post-money” were covered by the search word “valuation*” because in the VC jargon one speaks of pre-money valuation and post-money valuation. Furthermore, the additional search (fourth step) targeted undetected papers within the identified journals, including whenever possible a full-text search. Consequently, to guarantee a goal-oriented and efficient full-text search through the additional search, it was specifically searched for the search strings “pre-money” and “post-money” because they are inherently linked to startup valuations in the VC context.

  5. A few of the selected papers used pooled samples of private and public valuations. However, it is not expected that the results would be much different on a disaggregated level. For instance, Aggarwal and Hsu (2009) stated that their results were widely consistent on the disaggregated level.

  6. The author is grateful to an anonymous reviewer for pointing this out.

  7. In this regard, it should be noted that the risk-neutral probability also forms the basis of the seminal work of Merton (1974) on estimating bankruptcy risk.

  8. It should be noted that the work of Ang and Sorensen (2012) was not part of the selected papers.

  9. The author is grateful to an anonymous reviewer for highlighting this point.

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Acknowledgements

I thank Andreas Kuckertz and Patrick Röhm, of the University of Hohenheim, for their useful and valuable comments on previous versions of this paper. In addition, I am grateful to the two anonymous reviewers for their constructive and insightful feedback. Finally, I express my gratitude to Renzo Cordina, Antonio Davila, David H. Hsu, Arthur Korteweg, Morten Sorensen, Noam Wasserman, and Yi Yang for the highly valuable and helpful email correspondence.

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  1. Institute of Marketing and Management, University of Hohenheim, Entrepreneurship (570 C), Wollgrasweg 49, 70599, Stuttgart, Germany

    Andreas Köhn

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Köhn, A. The determinants of startup valuation in the venture capital context: a systematic review and avenues for future research. Manag Rev Q 68, 3–36 (2018). https://doi.org/10.1007/s11301-017-0131-5

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