The use of cost-benefit analysis in venture capital investment decisions
Abstract
This research work focuses on the differences in the approaches and methods used by venture
capital firms to evaluate potential investment. This includes: due diligence, sources of
information in preparing valuations and the valuation methods used. Then how cost-benefit
analysis could be used in such investment in Norway is further explored. The study aims to
describe the cost-benefit analysis process by which venture capital firms operating in Norway
use to evaluate funds to minimize the loss of capital invested and enhance a good return on
investment. The dissertation is based on a 2-staged questionnaire survey process with venture
capitalists operating in Norway. In the first phase of the study, fifteen (15) venture capitalist
firms participated in a telephone interview followed by a set of questionnaires via email
aimed at discussing the differences in the approaches and methods used in evaluating
potential investment. In the second phase of the study, five (5) venture capital firms gave
insight into the role of cost-benefit analysis in the investment decision processes. The
questionnaire survey reveals that a relatively high proportion of Norwegian venture capital
firms place special importance on the curriculum vitae of management and interview with
entrepreneurs, in evaluating their potential investments. At the same time, they use the
payback period and capitalized maintainable earning (P/E multiples) as the valuation method
and not cost-benefit analysis. However, it seems that venture capital firms who performed
cost-benefit analysis used the internal rate of return as a measure of the discount rate and the
determination of the discount rate is the most important factor taking into consideration
systematic and non-systematic risk. The discount rate used by Norwegian venture capitalists
is more intuitive and have about the same interval as in the rest of the world depending on the
company stage.
Description
Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2009