The impact of funding on market valuation in technology start-up firms: Implication for open innovation

Abstract

Do outside funds and increased access to capital have an effect on the market valuation of technology startup firms? Should entrepreneurs prioritize outside funding to increase the values of their firms? This research seeks to answer these important questions. Given the current lack of empirical-based assessment on this topic, a causal impact analysis was conducted to draw conclusions regarding the effect of different investment types and funding amounts on market valuation. Using the Crunchbase data platform, we conducted a study of 7481 early-stage technology startups in the United Arab Emirates (UAE) from 2000 to August 2022. To ensure an accurate and reliable evaluation of the impact of funding on market valuation in technology startups, we employed the Ordinary Least Squares (OLS) and various causal inference methods such as Shapley values analysis, Average Treatment Effect (ATE), and Conditional Average Treatment Effect (CATE). The findings suggest that there is a U-shaped relationship between the amount of capital raised and post-money valuation, indicating that while capital funding has an overall positive effect on market valuation, raising too much capital has a negative impact. Furthermore, we found evidence that private equity, Series B, and Series C rounds generate significant market valuation for early-stage technology companies. These results extend the current literature by highlighting the positive impact of capital funding and financing on market valuation. Policymakers can use these empirical results to make informed decisions about promoting higher investments into early-stage technology firms through venture capital financing from both the government and private sectors.