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Firm Valuation in Venture Capital Financing Rounds: The Role of Investor Bargaining Power

Authors

  • Andy Heughebaert,

    1. The authors are from Ghent University and Vlerick Leuven Ghent Management School. They gratefully acknowledge the financial support of the Flemish Policy Research Center for Entrepreneurship and International Business (STOIO) and the Hercules Fund (Ghent University). The paper benefited from comments and suggestions from participants of the 2009 Annual Corporate Finance Day (Antwerp), the 2010 Advanced Seminar in Entrepreneurship and Strategy (Chamonix), the 2010 Babson College Entrepreneurship Research Conference (Lausanne) and the 2011 JBFA Capital Markets Conference (London).The authors would like to thank the editor and the anonymous referee for their detailed feedback on previous versions of this paper.
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  • Sophie Manigart

    Corresponding author
    1. The authors are from Ghent University and Vlerick Leuven Ghent Management School. They gratefully acknowledge the financial support of the Flemish Policy Research Center for Entrepreneurship and International Business (STOIO) and the Hercules Fund (Ghent University). The paper benefited from comments and suggestions from participants of the 2009 Annual Corporate Finance Day (Antwerp), the 2010 Advanced Seminar in Entrepreneurship and Strategy (Chamonix), the 2010 Babson College Entrepreneurship Research Conference (Lausanne) and the 2011 JBFA Capital Markets Conference (London).The authors would like to thank the editor and the anonymous referee for their detailed feedback on previous versions of this paper.
      Sophie Manigart, Ghent University, Kuiperskaai 55E, B-9000 Ghent, Belgium. e-mail: sophie.manigart@UGent.be
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Sophie Manigart, Ghent University, Kuiperskaai 55E, B-9000 Ghent, Belgium. e-mail: sophie.manigart@UGent.be

Abstract

Abstract:  This study explores the impact of the bargaining power of venture capital (VC) firms on the valuation of their portfolio companies. VC firm types with greater bargaining power vis-à-vis the entrepreneur are expected to negotiate lower valuations compared with VC firm types with less bargaining power. Consistent with this hypothesis, university and government VC firms, which have comparatively greater bargaining power, negotiate lower valuations compared with independent VC firms. The valuations of captive VC firms equal those of independent VC firms. Our findings suggest that valuations in the VC contract reflect the relative bargaining power of the VC investor.

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