Market valuations of start-up ventures around the technology bubble

Abstract

This study explores whether, and how, the relevance of financial information for valuation of start-up ventures changed during the period of a technology bubble and the fluctuations that occurred in the capital market after the bubble burst. We find that since the bubble burst, there has been a learning curve and a period of market adjustment. Specifically, during the time of the bubble the market did not rely on accounting information with respect to the valuation of start-ups. After the bubble burst the market became overly conservative, relying predominantly on accepted accounting fundamentals – book value of equity and earnings. In later years, as the process stabilized, the market gradually moved away from these measures and began relying on growth in sales, which may serve as an indication of technological feasibility and the venture’s market potential. The study also explores the effect of market cycles on investor reliance on multiples. We find that, despite over/underpricing effects when using the benchmark multiples of comparable firms in valuating start-ups, these remain the accepted tool, probably due to the absence of alternative valuation methods.