Early-stage Technology Ventures Research Articles

Practical Applications of Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate

In <b>Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate</b>, from the Winter 2021 issue of <b><i>The Journal of Alternative Investments</i></b>, authors <i>Christoph P. Wessendorf, Jared Schneider, Kai Shen</i>, and <i>Orestis Terzidis</i> of <i>Karlsruhe Institute of Technology (KIT)</i> seek to develop an approach venture capitalists can use to derive the discount rate of technology ventures at their early stage. Traditional venture valuation methods rely on quantifiable financial history and data that often are unavailable in early-stage ventures. To compensate for the missing data, venture capitalists often use subjective, or nonfinancial, determinants to assess a venture’s value. The authors explore which nonfinancial valuation determinants have a meaningful impact on eventual value, weigh their relative importance, and use these factors to calculate a venture-specific valuation score. Next, the authors assess mathematical models that can be used with this score to calculate a suitable discount rate. They compare the empirical results of early-stage technology ventures with the values attained using these models to find high fidelity between the exponential discount rate structure and the real observed target return data. Ultimately, the authors propose that an exponential discount rate structure can be used in tandem with nonfinancial determinants to develop sound, venture-specific valuation. <b>TOPICS:</b>Real assets/alternative investments/private equity, security analysis and valuation, performance measurement

Practical Applications of Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate

In Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate, from the Winter 2021 issue of The Journal of Alternative Investments, authors Christoph P. Wessendorf, Jared Schneider, Kai Shen, and Orestis Terzidis of Karlsruhe Institute of Technology (KIT) seek to develop an approach venture capitalists can use to derive the discount rate of technology ventures at their early stage. Traditional venture valuation methods rely on quantifiable financial history and data that often are unavailable in early-stage ventures. To compensate for the missing data, venture capitalists often use subjective, or nonfinancial, determinants to assess a venture’s value. The authors explore which nonfinancial valuation determinants have a meaningful impact on eventual value, weigh their relative importance, and use these factors to calculate a venture-specific valuation score. Next, the authors assess mathematical models that can be used with this score to calculate a suitable discount rate. They compare the empirical results of early-stage technology ventures with the values attained using these models to find high fidelity between the exponential discount rate structure and the real observed target return data. Ultimately, the authors propose that an exponential discount rate structure can be used in tandem with nonfinancial determinants to develop sound, venture-specific valuation. TOPICS:Real assets/alternative investments/private equity, security analysis and valuation, performance measurement

Practical Applications of Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate

In <b>Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate</b>, from the Winter 2021 issue of <b><i>The Journal of Alternative Investments</i></b>, authors <i>Christoph P. Wessendorf, Jared Schneider, Kai Shen</i>, and <i>Orestis Terzidis</i> of <i>Karlsruhe Institute of Technology (KIT)</i> seek to develop an approach venture capitalists can use to derive the discount rate of technology ventures at their early stage. Traditional venture valuation methods rely on quantifiable financial history and data that often are unavailable in early-stage ventures. To compensate for the missing data, venture capitalists often use subjective, or nonfinancial, determinants to assess a venture’s value. The authors explore which nonfinancial valuation determinants have a meaningful impact on eventual value, weigh their relative importance, and use these factors to calculate a venture-specific valuation score. Next, the authors assess mathematical models that can be used with this score to calculate a suitable discount rate. They compare the empirical results of early-stage technology ventures with the values attained using these models to find high fidelity between the exponential discount rate structure and the real observed target return data. Ultimately, the authors propose that an exponential discount rate structure can be used in tandem with nonfinancial determinants to develop sound, venture-specific valuation. <b>TOPICS:</b>Real assets/alternative investments/private equity, security analysis and valuation, performance measurement

Valuation of Early-Stage Technology Ventures: An Approach to Derive the Discount Rate

Valuation of firms in general and early-stage technology ventures is sometimes referred to as an art rather than a science. Yet, an objective and practical valuation is critical for venture capitalists to make sound investment decisions. The authors develop an approach to derive the discount rate for a present value approach to valuation, broadly used by practitioners, that accounts for a missing data history and subjectivity in the early stage. This approach is based on thorough previous research analyzing the impact of subjective valuation determinants on a venture’s value and thereby expands the results’ academic and practical context. This impact is transformed into a valuation score and matched to a suitable discount rate structure. An initial validation within the valuation of three early-stage technology ventures provides promising results, with modeled discount rates showing a deviation of less than 2% from the real target return applied. The resulting discount rates can then be used for valuation. TOPICS:Real assets/alternative investments/private equity, security analysis and valuation, performance measurement Key Findings ▪ The missing financial track record of early-stage technology ventures requires an accurate reflection of relevant non-financial determinants. The authors develop a quantitative valuation approach for early-stage technology ventures based on conventional valuation methods that accounts for these non-financial determinants. ▪ With this approach, a suitable discount rate is derived based on the observable non-financial determinants. The resulting discount rates can then be used for valuation within a present value valuation framework, such as the venture capital method. ▪ An initial validation within the valuation of three early-stage technology ventures provided promising results with modeled discount rates showing a deviation of less than 2% from the real target return applied.

Against All Odds: Early-Stage Technology Ventures’ Resource Mobilization in Penurious Environments

This study seeks to elucidate resource mobilization mechanisms in early-stage technology ventures in penurious environments of extreme resource scarcity. We conducted an inductive, multiple case study analysis on a sample of eight health technology ventures in Uganda. Our study reveals three archetypes, each characterized by a different configuration of resource seeking and bricolage. Ventures with high focus on either resource seeking or bricolage accomplished higher outcomes than those engaging in resource seeking and bricolage alike. Besides, our evidence suggests that early-stage technology ventures’ resource mobilization is affected by external stimuli—benefitting from outside recognition or an influx of resources. Specifically, these ventures are prompted, first, to increasingly seek resources and reduce bricolage and, second, to systematize resource seeking. Our results have implications for resource mobilization theory—adding to research on performance implications of resource seeking and bricolage—as well as the study of entrepreneurial processes in the early stages.

On Antifragility in Technology Ventures

This paper discusses technology ventures through the lenses of antifragility, asymmetry, and optionality, with emphasis on early-stage technology ventures. Given the volatile and uncertain nature of technology ventures, the ability to adapt and respond quickly is essential to increase the probability for survival in a highly competitive space. Further, we explore the potential impact of optionality and positive asymmetry into the design of the venture from the company and investor sides in the quest for antifragility.

Perspective on Industry Viability: The Case of Venture Capital in Australia

The paper aims to evaluate the viability of the Australian venture capital industry using a system approach and life-path assessment of multiple data sources, academic literature and public documents. Like any other system, the venture capital industry has a unique life path and viability issues. The Australian venture capitalists have adopted a number of established financing practices from international experiences, especially from the US, while dealing with internal market forces, institutional arrangements and policy regimes. We evaluate the factors which can help the system to survive and sustain vis-a-vis the ones which can disrupt and diminish its lifespan. Two interconnected aspects of industry viability are considered. The first aspect relates to continuity of core industry activities, such as fund raising and investing in promising early stage technology ventures. The second aspect is about the industry’s ability to deal with the growing stakeholders’ demand for environmental, social and governance aspects in investment decisions. We evaluate industry practices, institutional arrangements and the role of stakeholders to assess viability issues, objectives and strategies.

Exploring the Role of Trust in the Deal–Making Process for Early–Stage Technology Ventures

The deal–making process requires entrepreneurial actors to create and maintain wide networks of weak ties while simultaneously developing stronger collaborative ties that will enable opportunities to be realized. We currently lack an adequate account of how these activities are integrated by deal–makers under conditions of risk and uncertainty. In an empirical study of deal making in early–stage technology ventures, we find that deal–makers rely on different forms of trust in the early and later phases. Based on this study, we develop a process model and propositions on the role of trust in integrating strong and weak ties in deal making.

Innovative Products vs. Specialized Complementary Resources: The Determinants of Alliance Funding

We examine the effects alliance partners’ complementary asset possession have on the level of payments promised by funding firms (firms which provide money to develop prospective products) to the early stage technology ventures (young firms which uncover the new technology to be developed into a commercializable product). On the one hand, the value of the innovative idea under development by the early stage technology venture provides a meaningful bargaining position in contract negotiations. Thus, a more valuable innovative idea should generate larger promised remuneration for early stage technology firms upon signing an alliance agreement. However, established firms holding specialized complimentary assets can leverage those assets in such a way as to minimize the amount of money the early stage technology venture firm is likely to negotiate as part of the alliance contract. We examine the effects these two countervailing forces have on money promised to the early stage technology venture by the funding...