We thank Thomas Hall, Christoph Kaserer, participants of the 2002 FMA European Conference, the 2002 conference of the German Finance Association, the quantitative finance seminar at Humboldt, and in particular an anonymous referee for valuable comments on an earlier draft of this paper. We are grateful to the German Venture Capital Association (Bundesverband Deutscher Kapitalgesellschaften, BVK) for providing us with data on their member firms.
How Fundamental are Fundamental Values? Valuation Methods and their Impact on the Performance of German Venture Capitalists
Article first published online: 12 NOV 2004
European Financial Management
Volume 10, Issue 4, pages 609–638, December 2004
How to Cite
Dittmann, I., Maug, E. and Kemper, J. (2004), How Fundamental are Fundamental Values? Valuation Methods and their Impact on the Performance of German Venture Capitalists. European Financial Management, 10: 609–638. doi: 10.1111/j.1354-7798.2004.00268.x
- Issue published online: 12 NOV 2004
- Article first published online: 12 NOV 2004
- venture capital;
This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.