Academic journal article Business: Theory and Practice

Valuation Model of New Start-Up Companies: Lithuanian case/Naujai Isteigtu Imoniu Vertinimo Metodai: Lietuvos Atvejis

Academic journal article Business: Theory and Practice

Valuation Model of New Start-Up Companies: Lithuanian case/Naujai Isteigtu Imoniu Vertinimo Metodai: Lietuvos Atvejis

Article excerpt

1. Introduction

Nowadays a huge number of new ventures are emerging. The problem is that new entrepreneurs typically have a great idea which could be transformed into business, but do not have any capital, or their budget is very limited. The only way to get financing and experienced advice is from the external sources.

Just before financing, new venture must always be evaluated by investors whether is it worth to invest or not. It is very hard to evaluate the new firm, as most of the models and methods are based on the accounting information, however, new firms usually do not have such information. They also do not have any tangible wealth, therefore it becomes impossible to evaluate them. There is a lack of evaluation models which could take into account other data rather than accounting.

The model, proposed in this article, evaluates new firms from relative investor's perspective and considers both their financial performance and overall attraction. It is based on a multi-criteria decision strategy using the SAW method and its advantages to combine, find relations and evaluate both qualitative and quantitative criteria. Proposed model is based on the main concept of multi-criteria evaluation methods--the integration of the criteria values and weights into a single magnitude.

In this paper the general SAW model framework is adopted to suit specifically new venture firms. The model could be used by any simple individual investor having information available to the public to evaluate the new firm's performance in near future and make the decision on his own. The model was applied to two different Lithuanian new venture capital companies.

The actuality of the research appeals for the reason that there are no appropriate methodologies to evaluate the optimal new start-up company according to individual investor's and owner's of the firm preferences.

It is not quite clear what criteria are the most important and should be considered when choosing. Though, it is difficult to find effective methodology that would allow an investor to evaluate a new firm without knowing the accounting information. Particularly in Lithuania, where the concept of funding as external source of finance is not yet complete and the investment culture is not as advanced.

The main goal of the paper is to propose the new venture evaluating model, test it empirically and illustrate how to choose the most suitable company for individual investor to invest.

The main tasks of the research are:

1. To reveal the main funding possibilities for new ventures.

2. To indentify the main factors influencing the value of new ventures.

3. To adopt the multi-criteria decision method based on SAW into start-up valuation process.

4. To test the model applicability and to evaluate two Lithuanian newly established companies.

The model is applied using 6 criteria groups dividing them into 22 sub-criteria and creating 2 alternatives to new Lithuanian companies.

2. Previous research

The term "entrepreneur" originated in French economics in the 17th century and indicated someone who shifts economic resources out of an area of lower and into an area of higher productivity and greater yield (Carpenter II 2009). This conventional view suggests the primary function of an entrepreneur in starting new profit-seeking business ventures, especially ones involving financial risk.

The equity is the most important problem to solve for almost all entrepreneurs. More often an entrepreneur has got an interesting idea which should be transformed into business idea. To realize it--he needs money.

The key areas, which confirm an objective financial position of the venture and the entrepreneur's attitude toward the venture's funds, are capital and cash flows. Small ventures with strong capital support are much more likely to succeed than those that are capital deficient (Brzozowska 2008). …

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