Ebook: Valuation of Internet Start-ups: An Applied Research on How Venture Capitalists value Internet Start-ups : An Applied Research on How Venture Capitalists value Internet Start-ups

This book deals with the valuation of Internet start-ups after the burst of the dot-com bubble. The objective is to fill some of the existing gaps in order to contribute to the development of this field of study. Indeed, it is a relatively recent subject, and the research devoted to it, is still limited. The valuation of an Internet start-up does not only depend on ist stage of development, but also on five qualitative factors, namely the team, the business model, the market, the risk, and the exit options. In fact, venture capitalists base their valuation on the perceived growth potential of the company. Subsequently, this book addresses the issue of intangible assets. In fact, an Internet company derives most of ist value from the intellectual capital, the brand equity, and the website. The author analyses these intangible assets and their accounting treatment. The discounted cash flow valuation method is based on financial projections, and the relative valuation method. These factors are identified and examined in detail. Their analysis is crucial for it determines the valuation of an internet start-up. Auszug aus dem Text Text Sample: Chapter 3.1., Identification: In today’s world, intangible assets represent an increasing proportion of the value of a company. This can be demonstrated thanks to some estimation made in 2000, which results showed that more than US$ 1 trillion were invested in intangible assets. The most interesting observation made was the same intangible assets were capitalized at more than US$ 6 trillion. This clearly demonstrates that, in the new economy, which is to say the Internet industry, companies derive most of their value from intangibles assets such as intellectual capital, brand equity, and website. And this is also the reason that explains Internet companies have to be valued differently from the other conventional valuing conventional companies. 3.1.1, Intellectual Capital: Intellectual capital can be described as the set of intangibles assets that encompasses human capital, structural capital, and relational capital. It should be noticed that some refer to the intellectual capital as knowledge assets. Intellectual capital has a double role: first, it supports the capabilities, and second, it transforms them into core competencies. Human capital, also called human resource, is the ‘knowledge provided by employees in forms of competence, commitment, motivation and loyalty as well as in form of advice or tips’. In other words, it is the value that employees bring to the company, which is the most difficult thing to estimate in a business. One of the most relevant components of the human capital is the employees’ flexibility, which is a key attitude in investments related processes; such as, for instance, expanding or abandoning. In fact, as it has been stated, ‘such flexibility itself is a source of value since it helps managers avoid decisions that lock into negative value outcomes’. And finally, human capital is also a source of competitive advantage, since competition is partially based on human capabilities and competencies. Structural and relational capitals include elements such as patents, trademarks, copyrights, and customer lists. The valuation of these intangibles assets is easier than that of human capital. In fact, for what concerns technological patents, for example, there are many different benchmarks and technical measurements that can me very useful during the valuation. Between the different methods that can be used by experts, some are focused on the phases of development, the testing cycles, and the patent approvals. Thanks to the facility to evaluate structural capital, this kind of intangible assets can be transferred or sold easily to another company. Technical patents were taken as an example, but the same thing can also be said for other assets, such as customer lists. Moreover, as it was true for human capital, structural and relational capitals can bring competitive advantage to the company as well, for example, through differentiation. Furthermore, these capitals can be subject of licensing agreements. To conclude, it can be affirmed that as it is true for other intangible assets, intellectual capital is relatively complicated to measure. For this reason, it is often extremely difficult to precisely determinate how much an Internet company really worthy. To support this idea, it has been stated that ‘the traditional valuation tools (…) do not fully capture how intellectual capital contributes to firm value’.