Best Practice for the Investment Decision Making Process in the Danish Venture Market

Yasmin Holm Larsen & Kathrine Holm

Student thesis: Master thesis

Abstract

The purpose of this thesis is to develop a best practice decision making process for investments in the Danish venture market. The proposed framework provides best practices specific to seed-, early- and late-stage venture financing. This research area is relevant as traditional investment theories do not apply to startups due to the lack of reliable information. The investment decision is therefore influenced by other parameters, which this thesis is motivated to investigate. The thesis’ best practice framework is based on academic theories and a methodological triangulation approach with both qualitative and quantitative analysis of empirical data. The empirical data consist of interviews with six experts from the Danish venture market and a questionnaire survey with responses from 57 Danish venture investors including Business Angels and Venture Capital Funds. Additional empirical data is collected through indepth interviews with six respondents from the questionnaire. The best practice framework is structured after screening, valuation, and contracting, which are interdependent in the investment decision making process of a venture investor. In the screening process, the parameters critical to assessing a startups potential are team, traction, technology, transformative, total addressable market, timing, and total return. The results of the analysisindicate the team asthe most important parameter for a startups success and the total return being the result of performance on all screening parameters. The analysis has found that valuation methods on the Danish venture market consists of a combination of negotiation, rules of thumb based on experience and a consideration of a multiple valuation. The relative importance of the three methods varies across the financing stages. The investment decision making process, is finalized through contracting. The focus regarding the contractual considerations should be on streamlined interests, motivation of founder(s) and investor(s), and protection of minority interests. Negotiation affects the contracting process, why both valuation, risk and return are affected by terms in the final contract. Valuation and contracting can thus be seen as an iterative process in practice. Validation of the framework has been approached through qualitative and quantitative case studies of more than 100 startups. The validation is furthermore supported by the expert panel’s assessment. Applying this master thesis’ best practice framework in an investment decision making process on the Danish venture market is expected to increase the probability of achieving a successful investment.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages224