VC valuation and multiples: an exploration of comparable analysis of software start-ups

Master thesis (2022)

Authors

L. Struyvelt Technology, Policy and Management

Contributors

A. Giga Delft Centre for Entrepreneurship (supervisor 1)
Aleksandrina Ralcheva Economics of Technology and Innovation - TPM (supervisor 2)
V.E. Scholten Delft Centre for Entrepreneurship (coach)
Cees van Beers Economics of Technology and Innovation - TPM (coach)
Faculty
Technology, Policy and Management
Copyright: © 2022 Loïc Struyvelt
Software Venture Capial Start-up Valuation Comparable analysis
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Published Date

2022

Language

English

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Faculty

Technology, Policy and Management

Abstract

This master thesis seeks to better understand the investment valuation procedure followed by software venture capitalists (VC) in the European context. I explain how VCs perform fair value estimations of software start-ups with the emerging comparable analysis technique. Furthermore, this study examines the relative importance of start-up characteristics in determining the multiple and how these factors influence the VC’s valuation behaviour. Additionally, I explore whether this behaviour and the multiples paid can be explained by differences in VC firm experience at a time of historically low interest rates and record-breaking fund inflows. Based on 36 interviews with European VCs, primarily from the Benelux region, I find that all start-up characteristics matter in the determination of the multiple, but the management team a little more. As a result, software VCs are willing to pay higher multiples for stellar management teams than for exceptional business characteristics. In contrast with the other characteristics, poor traction does not necessarily kill the deal, but VCs might rather use it to enforce a lower valuation. Overall, VC firm experience is not a strong predictor of the valuation behaviour and ARR multiples paid for deals. However, I do find that more experienced VCs are willing to pay higher premiums for benchmark-exceeding traction than their less experienced counterparts.