Title: Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

Authors: Carmelo Reverte Maya; María del Mar Sánchez Hernández

Addresses: Department of Accounting and Finance, Technical University of Cartagena, C/ Real, nº 3 (antiguo CIM), E-30201 Cartagena, Spain. ' Department of Accounting and Finance, Technical University of Cartagena, C/ Real, nº 3 (antiguo CIM), E-30201 Cartagena, Spain

Abstract: The goal of this paper is to analyse the investment valuation decisions by Spanish venture capitalists (VCs) according to their experience and the investee's stage of development (early stage vs. late stage investments) with particular reference to the variables used in applying the discounted cash flow (DCF) method. Based on a questionnaire sent to 51 Spanish VCs, we find that, when selecting an investment project, the expected return on investment (ROI) is the most important factor considered by Spanish VCs. The stage of development has a decisive influence on the selection of the valuation method used, as DCF is the most commonly used method for early-stage investment projects. Our paper also provides first evidence on the way VCs operationalise the key variables in the DCF method, such as the discount rate, the risk premium and the terminal value. The results of this study have important implications. By gaining insight into the investment decision criteria of Spanish VCs, Spanish entrepreneurs will be able to develop better and more targeted materials to maximise their success rate in attracting capital. VC firms can use the information from this study to better understand their decision processes, both individually and relative to competitors.

Keywords: venture capital; discounted cash flows; investment valuations; venture capitalists; capitalist experience; development stages; Spain; investees; investors; early stage investments; late stage investments; investment projects; ROI; return on investment; valuation methods; key variables; discount rates; risk premiums; terminal values; investment decisions; decision criteria; success rates; decision processes; competitors; small and medium-sized enterprises; SMEs; entrepreneurs; entrepreneurship.

DOI: 10.1504/IJESB.2012.050166

International Journal of Entrepreneurship and Small Business, 2012 Vol.17 No.4, pp.495 - 510

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 31 Oct 2012 *

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