M13 - New Firms; StartupsReturn

Does an early-stage startup have future potential or not? This is a question that many investors or start-up appraisers ask themselves. A qualified answer to this question can be obtained by learning how and why experienced business angel investors, who are those who invest substantial sums in early-stage start-ups, make empirical decisions. In this article, we identify the key signals that are decisive for Mr. Jiří Hlavenka, a experienced Czech angel investor in IT sector with a history of more than 50 invested start-ups and several thousand analyzed investment opportunities. The results show that the angel investor’s decision is primarily a “bet on people” – his decision to invest in an early-stage start-up is most influenced by the specific set of skills and abilities of the founder(s), namely: (i) the ability to execute a business, (ii) being a good leader, (iii) being a good merchant, (iv) ability to build a team, (v) all-round versatility, (vi) carrying a strong vision. The findings of this article may be of interest, among other things, to appraisers, investors who estimate the future potential of new start-ups, or start-up founders who use the investments themselves in the early stages of their business.

This article describes approaches and methods related to venture capital valuation namely, start-up valuation. New venture value concepts have emerged within venture transactions. The pre-money valuation shows the value of the start-up before new capital infusion, while the post-money valuation shows the value of the start-up including a new capital infusion. Approaches of venture capital valuation (VCV) are, in principle, coincident with approaches of public equity valuation. Four approaches of VCV can predict the start-up value in two directions of future expected earnings, the first direction - post-money value including a new capital infusion and the second direction - pre-money value excluding capital investment/infusion. In the extreme scenario where a start-up without capital infusion ceases to exist because there are no venture capital providers, the expected profit will be zero, which means zero pre-money valuation. Ultimately, it is very difficult to determine whether the start-up value is before or after the new capital infusion and, thus, the start-up valuation becomes a matter of negotiation process between the founder and the venture investor as it depends on a new capital infusion, to what extent, it affects the enterprise value of a start-up or it has an impact on its future exit.

This article systematically organized the fragmented literature into a comprehensive overview and provides compact information on qualitative criteria aimed at the future success of an IT start-up at an early stage phase. The capital infusion in the form of substantial VC investment is a gauge of success. The qualitative criteria may be considered by valuers or analysts when drawing up a financial plan (investment model). Three directions of research on start-up valuation emerged from the literature overview. Current valuation practice has sophisticated methods of public equity valuation, which mature companies are, while private equity valuation is cloaked in mystery and black magic. The first direction develops and deepens methods of public equity valuation. The second and third directions develop the field of private equity valuation (i.e., VC investments) and look for a link between the acquisition of a substantial VC investment and the factors themselves that lead to the acquisition of the VC investment. The second direction defines obtaining a VC investment as a success criterion, while the third direction analyses the individual factors present in successful start-ups.