Empirical Study of Valuation of Growth Companies in Practice

Kris Høygaard Haase & Daniel Frøslev Søndergaard

Student thesis: Master thesis


Our Master thesis deals with the valuation of growth companies. The thesis is motivated by our great desire to come up with new knowledge that can help to reduce the uncertainty in the valuation of growth companies. This is done on the basis of a theoretical and empirical study, in which subsequently a best-practice framework will be designed. The study is based on 28 interviews with the associated questionnaire, which is generated based on venture capital companies, private equity companies and financial advisors. We have noticed that the practicians associate a valuation of a growth company with a greater degree of uncertainty. According to several of the practicians, the uncertainty lies especially in the forecast estimates. This is due to a lack of data and input factors. In connection with the handling of the uncertainty for estimating the input factors, several of the practicians use sensitivity analyzes or scenario analyzes. Valuation models are common among practicians and the DCF model and multiples are the most common models applied by practicians. The 3th most applied valuation model is the EVA model and the real options theory are 4th applied. Our study also shows that practitioners use more than one model when valuing a company. When estimating input factors for valuation models, practicians mainly use strategic analyzes as an information source. Benchmark companies subsequently come. Historical financial reports as a source of information are rarely used by practicians. The practitioners use analytical factors such as dialogue with management, the budgets of the company and business plans when generating input data. Finally, the practicians use the mindset behind strategic analyzes, such as Porter’s Five Forces and Value Chain Analysis in relation to valuation of growth companies. Based on our study, a best-practice framework has been designed. We advise practicians to use a DCF model as the main element. This is also backed by a multiple-based valuation. If the assumptions and resources allow it, it might be an advantage to include the real options approach. To generate input factors, we will guide the practicians to apply a strategic analysis that includes PEST(EL), Porter’s Five Forces, Value Chain Analysis and SWOT. In addition we also want to guide the use of analytical factors such as dialogue with the management, know-how of the organization, budgets of the company and the business plans. By applying this framework we are convinced that the practicians can minimize the risk regarding the input factors when valuing growth firms.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages318