Valuation of a startup: Moving towards strategic approaches

Abstract

AbstractThe valuation of a new venture is often considered to be a combative point of negotiation between venture capitalists and entrepreneurs. To bridge this gap, the present study aims to comprehend the link between startup valuation and established strategic management theories. The purpose of this study is to prioritize the theories from the strategic management literature in the valuation of a startup to assess firm performance using evidence from India, an emerging market. This study addresses research questions such as whether strategic theories (internal‐based theory, industry‐based theory, and network‐based theory) enable the valuation of a new venture and how venture capitalists prioritize and vary the importance of these theories to assess the economic value of a new venture. The strategic management theories are prioritized using the fuzzy analytic hierarchy process, a multicriteria decision‐making technique for the valuation of a venture. The present study develops an integrative multicriteria fuzzy decision‐making approach to measure the relative importance of the strategic input variables. The results of the study validate the inclusion of strategic variables and provide a systematic approach to follow and measure the important factors when valuing a new venture. Such outcomes of the study help to theoretically and practically build a valuation foundation for both venture capitalists and entrepreneurs. This study brings increased rigor to the venture capital valuation literature by introducing a supplementary method to identify and measure the importance of these theories in new venture valuation.