The Entrepreneur’s Equity Issue: A Valuation of the Startup With High Growth

Mathias Isidor Andersen

Student thesis: Master thesis

Abstract

This thesis seeks to provide the reader with a thorough examination and analysis of the valuation process of a startup company experiencing a high level of growth. The examination will involve a study of multiple factors that are thought to influence the final valuation. The main purpose of the thesis is to provide a reliable valuation method, which will secure a more transparent and efficient access to equity finance in order to sustain the high level of growth for startups.
Without and efficient source of financing, the startups will be forced to slow down their growth, which could lead to lost potential of the firm and the nearby community. The thesis studies the process of equity finance, sources of equity finance, market efficiency, available valuation methods and finishes with empirical data concerning practical experiences of valuations of startups.
The thesis concludes, that the efficiency of the market for equity financing of startups is relatively inefficient, due to high level of asymmetric information. Furthermore, the examination of the available valuation methods shows that all methods contain a high level of uncertainty in their valuation estimate. The liquidation method is concluded to be reliable, but only representing the liquidation value, which do not account for the going concern value. The relative method lacks data about comparable companies and contains a majority of subjectively chosen approaches, which therefore reduce the reliability of the estimate. The present value methods contain a high level of risk in its valuation estimate, due to the sensitivity in the estimation of the key value drivers. However, the combined methods will provide vital information that will be of good use in the negotiation process.
The analysis of the empirical data shows, that there are several approaches to the estimation of a company’s value and reveal that the negotiated price is strongly correlated with the new owner and partner’s capability of running the company. As a result thereof it is concluded, that the process is bound to identify the optimal buyer, in order to maximize the company’s value.
Finally, the thesis concludes that the valuation methods are not entirely applicable for the valuation purposes of startups, but will provide significant information for the negotiation process, which is quite complex, due to the identification of the incoming owner or partner’s capability of running the company towards a higher value

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages130