Valuation of Venture Capital Backed Firms - Guess or Professional Judgment of Agency Risks and Observable Firm Characteristics?

Sep 4, 2026

Uploaded by Hazel

Valuing young and innovative companies poses a major challenge for investors and entrepreneurs in venture capital financing. The study examines how venture capitalists determine enterprise values for portfolio firms and identifies anticipated agency risk as a key value driver. Even after accounting for agency risks, accounting information and observable firm characteristics continue to meaningfully influence valuation. The paper proposes a valuation framework suggesting venture capital-backed firms can be valued as precisely as publicly traded firms, indicating valuation need not be mere guesswork.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages52

Reading Time2 h 11 min

AccessFree to download

Introduction

Risk and opportunity expectations in venture capital valuation

Agency risks and observable firm characteristics

Accounting information and externally observable measures

Valuation of venture capital backed firms-guess or professional judgment of agency risks and observable firm characteristics? Thomas Hartmann-Wendels, Georg Keienburg and Soenke Sievers First Draft: March, 2008 This Draft: December, 2008 Abstract Valuing young and innovative companies is a challenging task. Still, determining their economic value is one of the most important issues for investors and entrepreneurs engaged in venture capital financing. We analyze how venture capitalists determine enterprise values of their portfolio firms. We find that the anticipated magnitude of agency risk is a major value driver for young and innovative firms. However, even taking into account agency risks, accounting information and observable firm characteristics remain important value drivers. As a result we provide a valuation framework in which venture capital backed firms may be valued as precise as publicly traded firms. This shows that valuation of venture capital backed firms is not a guess. JEL classification: G24, G32 Keywords: valuation, venture capital, agency risk, investment opportunity, accounting information We are grateful to Walter Auel, Kerstin Kiehl, Klaus Mark, Katrin Ullrich and Volker Zimmermann for making this research possible. Additionally, we would like to thank all members of KfW department K1c for their support. The authors gratefully acknowledge funding from the German Research Foundation and the Institute of Banking and Banking Law, University of Cologne. Thomas Hartmann-Wendels, Department of Banking, Albertus Magnus Platz, University of Cologne, 50923 Cologne, Germany, e-mail: ~~hartmann~~-~~wendels@wiso~~.~~uni~~-~~koeln~~.~~de;~~ Georg Keienburg, Department of Banking & Graduate School of Risk Management, Meister-Ekkehart-Str. 11, University of Cologne, 50923 Cologne, Germany, [e-mail:](e-mail: keienburg@wiso.uni-koeln.de)[ ](e-mail: keienburg@wiso.uni-koeln.de)~~[keienburg@wiso](e-mail: keienburg@wiso.uni-koeln.de)~~[.](e-mail: keienburg@wiso.uni-koeln.de)~~[uni](e-mail: keienburg@wiso.uni-koeln.de)~~[-](e-mail: keienburg@wiso.uni-koeln.de)~~[koeln](e-mail: keienburg@wiso.uni-koeln.de)~~[.](e-mail: keienburg@wiso.uni-koeln.de)~~[de](e-mail: keienburg@wiso.uni-koeln.de)~~ Soenke Sievers, Department of Corporate Finance, Albertus Magnus Platz, University of Cologne, 50923 Cologne, Germany, e-mail: ~~[sievers@wiso](sievers@wiso.uni-koeln.de)~~[.](sievers@wiso.uni-koeln.de)~~[uni](sievers@wiso.uni-koeln.de)~~[-](sievers@wiso.uni-koeln.de)~~[koeln](sievers@wiso.uni-koeln.de)~~[.](sievers@wiso.uni-koeln.de)~~[de](sievers@wiso.uni-koeln.de)~~, tel: + 49 221 470 7882 1. Introduction Anecdotal evidence suggests that the valuation of young and innovative firms is often a guess, May and Simmons (2001) . This assumption may not be unreasonable as these firms exhibit only short term historical information, high levels of uncertainty and no benchmark valuations due to the innovativeness of the underlying project. Apart from business risk, by definition entrepreneurial success is closely tied to the entrepreneur as a person, which may lead to severe information asymmetries between the founder and the potential investor. To cope with uncertainty a primary approach in venture capital is financial contracting. To overcome agency risks, venture capital investors arrange milestone based capital infusion, Gompers (1995), make use of complex covenants, Kaplan and Strömberg (2003) and form syndicates, Casamatta and Haritchabalet (2007) . Unfortunately, failure rates of 30%, Cumming and MacIntosh (2003), and negative internal rates of return for many venture capital investors suggest, that the expected development of young and innovative firms is far from foreseeable. Inevitably, financial contracting within venture capital is never complete. Therefore, despite all risk mitigating efforts venture capital investors face tremendous risks. Within the corporate finance literature, the standard instrument

FAQs

What is the paper’s central question about venture capital firm valuation?

The paper investigates whether valuing venture capital-backed firms relies on guessing or on professional judgment grounded in agency risks and observable firm characteristics.

Which factor is found to be a major value driver for young and innovative firms?

Anticipated magnitude of agency risk is identified as a major value driver for young and innovative firms.

Besides agency risks, what other elements significantly drive valuation?

Accounting information and observable firm characteristics remain important value drivers even after incorporating agency risks.

Sep 4, 2026

Uploaded by Hazel