An Empirical Study of Startup Valuation

Mathias Rohde Olsen

Student thesis: Master thesis


This paper examines the challenge of valuing startups. The complexity of factors impacting the future success of a startup makes startup valuation a complicated and difficult task. Nevertheless, valuation is an important part of entrepreneurial finance, which prompts the question of how to do it. In this paper, the question of how to value a startup is examined through an analysis of existing valuation frameworks, a comparative study of five valuation frameworks, and an empirical analysis in a venture capital context. Firstly, implications for various valuation frameworks are identified. Corporate financial valuation frameworks encounter difficulties because of high input requirements as well as inability to meet underlying model assumptions. Startup specific valuation frameworks solve some of the challenges of corporate financial valuation frameworks, but instead introduce a great deal of subjectivity while relying on average industry valuations or multiples. In the light of these implications, the paper argues that valuation frameworks should be considered accordingly to the available input and the corporate life cycle. Additionally, a comparative study of five valuation methods rejects methodological independence in the context of startup valuation. Valuation frameworks produce large variability in both the level and concentration of valuations. Quantitative frameworks produce higher and more dispersed valuations compared to qualitative frameworks. Based on these findings, the paper proposes relying on multiple frameworks when valuing startups. Lastly, analysis of 122 US investments reveals determinants of startup valuation in a venture capital context. Using univariate difference in means tests, multiple regression models, and Shapley value regression the paper finds several notable results. General startup characteristics as well as human capital attributes, such as relevant industry experience, previous founding experience, and academic capital, significantly and positively affect startup valuation. In reliance with these findings, the paper argues that entrepreneurs should signal certain qualities when seeking venture capital funding. Viewed in its entirety, this paper underscores the difficulty of valuing startups and reinforce the notion that valuing a startup is part art and part science. Keywords: entrepreneurial finance, startup valuation, valuation framework, venture capital, entrepreneurs, early stage investors, startup characteristics, human capital

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2019
Number of pages84