Asian Journal of Innovation and Policy

Asian Society for Innovation and Policy (아시아기술혁신학회)
권호 표지
DOI QR코드

DOI QR Code

Venture Capitalist's Stake and Valuation of Privately-held Firms in India

  • Received : 2022.12.19
  • Accepted : 2023.01.19
  • Published : 2022.12.31
Download PDF
⟨ Previous Next ⟩

Abstract

This study examines the implications on the valuations of privately held firms when stakes are acquired by venture capitalists in India. In addition, the effect of fund size and revenue multiple is considered as a determinant of firm value. The study is based on a sample of 1229 rounds of funding during the period 2007-2015. The data was obtained from Venture Intelligence. Three major observations emerged based on an OLS regression. Firstly, it is observed that the stake acquired by venture capitalists has a negative effect on firm value. It supports the belief that when a firm reaches its maximum valuation from the promoter's perspective, there is a tendency to liquidate additional stakes. Secondly, a positive association between the revenue multiple and valuation is recognized. Thirdly, the convex relationship (U-shaped) between the fund size and firm valuations as seen in the case of developed economies, appears to be non-existent in India.

Keywords

Acknowledgement

This work was presented at the 12th ASIP Conference 2022 held during Nov 24- 26, 2022, hosted jointly by IISC Bangalore (India), Ramaiah University of Applied Sciences (India), DiSTEP (Korea) and KiSTi (Korea) and was awarded the best paper (under student category). We express our sincere regards to the reviewers for their expert comments.

References

  1. Ahn, B.S. (2011). The Study on Public Diplomacy Professionalism From the Perspectives of International Public Relations: Focus on Cultural Centered Approach, Journal of Public Relations, 15(4), 36-78. https://doi.org/10.15814/JPR.2011.15.4.36
  2. Armstrong, C., Davila, A. and Foster, G., (2006). Venture-backed private equity valuation and financial statement information. Review of Accounting Studies, 11(1), pp.119-154. https://doi.org/10.1007/s11142-006-6398-8
  3. Buckland, R. and Davis, E.W., (1990). The pricing of new issues on the unlisted securities market: the influence of firm size in the context of the information content of new issue prospectuses. The British Accounting Review, 22(3), pp.207-222. https://doi.org/10.1016/0890-8389(90)90003-z
  4. Cochrane, J.H., (2005). The risk and return of venture capital. Journal of financial economics, 75(1), pp.3-52.
  5. Cumming, D. and Dai, N., (2011). Fund size, limited attention and valuation of venture capital backed firms. Journal of Empirical Finance, 18(1), pp.2-15. https://doi.org/10.1016/j.jempfin.2010.09.002
  6. Damodaran, A., (2002). Investment valuation, 2. Aufl., New York, 817.
  7. Hand, JR, (2005). The value relevance of financial statements in the venture capital market. The Accounting Review, 80(2), pp.613-648. https://doi.org/10.2308/accr.2005.80.2.613
  8. Gompers, P. and Lerner, J., (2000). Money chasing deals? The impact of fund inflows on private equity valuation. Journal of financial economics, 55(2), pp.281-325. https://doi.org/10.1016/S0304-405X(99)00052-5
  9. Hochberg, Y.V., Ljungqvist, A. and Lu, Y., (2010). Networking as a barrier to entry and the competitive supply of venture capital. The Journal of Finance,65(3), pp.829-859. https://doi.org/10.1111/j.1540-6261.2010.01554.x
  10. Hsu, D.H., (2004). What do entrepreneurs pay for venture capital affiliation?.The Journal of Finance, 59(4), pp.1805-1844. https://doi.org/10.1111/j.1540-6261.2004.00680.x
  11. Kaplan, S.N. and Lerner, J., (2010). It ain't broke: The past, present, and future of venture capital. Journal of Applied Corporate Finance, 22(2), pp.36-47. https://doi.org/10.1111/j.1745-6622.2010.00272.x
  12. Kaplan, S.N. and Stromberg, P.E., (2004). Characteristics, contracts, and actions: Evidence from venture capitalist analyses. The Journal of Finance,59(5), pp.2177-2210. https://doi.org/10.1111/j.1540-6261.2004.00696.x
  13. Kelly, P. and Hay, M., (2003). Business angel contracts: the influence of context. Venture Capital, 5(4), pp.287-312. https://doi.org/10.1080/1369106032000141940
  14. Mason, C.M. and Harrison, R.T., (1995). Closing the regional equity capital gap: The role of informal venture capital. Small Business Economics, 7(2), pp.153-172. https://doi.org/10.1007/BF01108688
  15. Sohl, J., (2003). The private equity market in the USA: lessons from volatility.Venture Capital: An international journal of entrepreneurial finance, 5(1), pp.29-46. https://doi.org/10.1080/1369106032000062713