1Koen De Waele
1De Vlerick Management School
University of Ghent
2University of Nottingham
3University de Bourgogne
4University of South Carolina
Methods to value potential investments and influences on target rates of return sought have important implications for the ability of venture capital firms to earn successful returns. This paper presents the results of a study covering five venture capital markets. The paper addresses questions relating to whether approaches to valuation issues vary according to whether countries have Anglo-Saxon regimes which may be more likely to use approaches derived from corporate finance theory.
A questionnaire, adapted and translated for each of the countries covered by the study, was mailed to the CEOs of the members of the Venture Capital Associations in each country. The UK survey was undertaken in late 1994, the French and Belgium/Holland survey in early 1996 and the US in late 1996. Completed questionnaires received were: UK 66 (58% response rate); France 32 (30 %); Belgium/Holland 38 (30 %): US 70 (24 %). On the basis of demographic factors, the completed replies were representative of the population of venture capitalists. The responses were analyzed using univariate and multivariate techniques.
Venture capitalists in the different countries emphasize significantly different benchmarks in assessing expected rates of return. In the UK, US, Holland and Belgium there was more emphasis on the requirement to meet a specific return based on the particular characteristics of an investee. In France, there was significantly more emphasis on meeting a rate of return target according to the risk band of the investment. The most important valuation methods employed differ significantly between countries, with the UK and US emphasizing variations of price earnings multiples, Holland and Belgium DCF methods and France comparator prices obtained from attempts to solicit bids for the company. The average benchmark IRR used to evaluate expected returns also varied significantly between countries.
The results emphasize the heterogeneity of venture capital markets with there being a need for entrepreneurs, venture capitalists and funds providers to be aware of the dominant approaches used in a particular country when valuing and structuring deals. Further research questions concern the need to explore the basis for the differences which have emerged.