Investment Apprisl Techniques Essay Example | Topics and Well Written Essays - 1500 words

Investment Apprisl Techniques - Essay Example I will prticulrly provide literture review of few contemporry theoreticl pproches to the issue. Recent reserch (Steier & Greenwood, 2005) hs shown tht the due diligence process is n itertive one, where the first step is to ssess whether proposl meets the investment criteri of the venture fund (e.g., with respect to the investment stge, sector, or mgnitude of the investment proposl) nd whether the proposl is vible t first sight. forml vlution of compny will only be performed when the proposl psses this initil test. Other economic gents hve to vlue compnies in other settings; e.g., investment bnkers hve to determine the introduction price of new compny on stock mrket or they hve to pprise tke-over cndidte. Finncil nlysts hve to ssess whether the stock mrket vlue of compny is significntly higher or lower thn its 'true' economic vlue, in order to decide when to sell or buy stocks. The venture cpitlist's vlution process, however, is likely to differ from the ones used for these purposes, becuse of the very different nture of the compnies they hve to vlue. Investment proposls, recei ved by venture cpitl funds, re often very risky, due to the erly stge of development of the compny, the lck of trck record of the compny, or the degree of innovtion of products or mrkets. Moreover, the compnies re not quoted on stock mrket, so publicly vilble informtion is limited. The present study sheds light on this neglected re through n exmintion of how Europen venture cpitlists proceed in this difficult tsk. The vlution of investment proposls is importnt for venture cpitlists becuse the vlue of the compny determines the proportion of shres they receive in return for their investment nd thus their ultimte return. It is importnt for entrepreneurs, too, becuse vlution tht is too low will led to n excessive dilution of their shre in the compny. Moreover, when entrepreneurs know how venture cpitlists vlue investment proposls, they re better prepred to dpt their business pln to the needs of investors. They will be ble to produce the required informtion nd to understnd the wy venture cpitlists use the informtion. The vlution process consists of three sequentil steps. First, informtion is gthered on the venture, its mngement tem, nd its future prospects. Second, this informtion is used to pprise the risk of the venture nd hence the required return on the investment, nd to estimte the (future) csh flows nd profit potentil. Finlly, one or more vlution method is used, which combines the elements of risk, return, nd profits or csh flows in order to compute the vlue of the compny. Becuse non-public compnies hve few legl informtion requirements, the gthering of informtion is more difficult thn with public compnies. Due to dverse selection nd informtion symmetry problems, this is nonetheless one of the most crucil phses in coming to decision. One of the most importnt sources of informtion is the business pln, which projects the future of the compny, together with historic ccounting dt (especilly the blnce sheet nd profit nd loss sttement), nd future ccounting dt (especilly csh flow forecsts). mit et l. (2003) point to the fct tht the mngeril trck record of the entrepreneur nd his or her fmilirity with the product nd the sector my provide some hints s to the future success of the venture. However, venture cpitlists fce importnt informtion symmetries with respect to compny-specific dt, since the entrepreneurs my disclose only wht they deem necessry in