Venture Capital Valuation and StructuringReal Money Rummy Supervisor
Date6th Nov 2020
Time09:00 AM
Venue Webex
PAST EVENT
Details
Start-ups in the early stages often require funds to take their business to the next level. This is where venture capital comes in and, because of their unique expertise in screening, negotiation and tracking, it plays avitalrole in early-stage financing.In addition to facilitating finance, venture capitalists also add value to their portfolios through team building, operations, mentoring, capability building, customer growth, analysis, and network.For any country, the combination of entrepreneurial efforts with VC funding has proven to be a success, so there is muchinterest in understanding the relationship between them. One such significant element inVC funding is valuing a new venture. Since start-ups often have no sales, little accounting history, no comparable firms, and unproven business models, it is so crucial that it is oftenas challenging as it can getto value a youngcompany. Due to a lack of information and hybrid business models, it is difficult to use conventional valuation approaches to estimate the valuation.When it is difficult to value a young firm based on output (e.g. future cash-flows, growthrate andrevenues), pricing it based on inputs (e.g. Venture, industry andVC characteristics etc.) may be a better alternative.For our first study, we investigate the effect of VC, Entrepreneurial firmandDeal characteristics on Venture Valuation.This studyextendstheresearch lineby acknowledgingtheimportance of VC, Entrepreneurial firmandDeal characteristics influence onthe negotiated venture value.Another interesting component of venture funding is VC-entrepreneur contracting. For early-stage ventures with a limited track record, there is often significant information asymmetry between the Entrepreneur and the investor as the Entrepreneur owns the idea and often has domain expertise that is considerably higher than the investors.Given the nature of the venture industry, the Entrepreneur has an incentive to conceal negative information to secure investment or be rated highly.Investors are aware of such instances of information asymmetry,which could lead to moral hazard or agency costs. The contract between VC and Entrepreneur isanticipated toresolve these issues bybalancingincentives between Venture Capitalist and the Entrepreneur and to exert maximum efforts by inducing venture capitalist and Entrepreneur, finally preventing window dressing and opportunistic actions by the Entrepreneur. Allof this can be accomplished by selecting the right securitiesand structuring the VC contract at time of investment.Our aim in this researchis to understand the degree and circumstancesofsecurity selection and downsideprotection in Venture investments.This research provides useful insights to many stakeholders such as VC investors, entrepreneurs and researchers and policymakers. Knowing the factors influencing the valuation and contractstructuringwould help investors and entrepreneurs make better decisions, help in risk mitigation, performance and monitoring. While recognizing the impact of background in security selectionand valuation, we expect the findings will contribute significantly to our existing understanding ofValuation and Venture Capital contract structuring.
Speakers
Ramesh Kuruva (MS15D020)
DOMS