Survey on Private Equity Valuation Methods (Part 1)

Vivian Fu (MBA II), Johnson Graduate School of Management, Cornell University

5 minutes to read

VC Experts would like to invite you to visit the Private Equity Data Center, a collection of interactive tools allowing investors and companies to determine where they stand in the ever-changing world of private equity and venture capital.


Survey on Private Equity Valuation Methods

Course Project for NBA 678 - Advanced Private Equity
Survey on Private Equity Valuation methods
By Vivian Fu (MBA II), Johnson Graduate School of Management, Cornell University
May 30, 2006

Private Equity Valuation

In the Venture Capital and Private Equity industry, with the investment opportunities are evaluated based on a lot of factors but with less public information available in the private sector, it becomes a big challenge for the industry to come up with an appropriate valuation measures for them to come up with the right price for making the investment decision.

This survey is conducted to analyze which valuation methods are widely adopted by the Venture Capital and Private Equity industry and what factors would affect their use of valuation methods.

Survey Methodology and Overview

The survey is sent out to a list of Venture Capital and Private Equity firms mainly generated by Thomson VenturExpert. The list contains 1170 email addresses with 193 of them are non-deliverable. Finally, 127 responses were received. The response rate is 13% which is a reasonable rate for survey. The survey has a total of 18 questions and covered topics for both Venture Capital and Private Equity (Buyout) firms.

The first 9 questions are for getting background information from VC and PE firms to understand the stages of investment, size of investment, companies invested and number of analysts hired within the firm. In order to understand whether the industry that VC and PE firms are investing in will affect the use of valuation, the survey is designed by restricting the selection to be one industry that they have the most investment and asked them to indicate the valuation methods being used accordingly. Last part of the survey contains 4 questions asking them about general questions related to the industry standard of valuation and performance attribution. Below are the questions and summary statistics of the answers. The answer of each question that has the highest frequency is highlighted.

(1) If you are working in a VC firm, which of the following stages does your firm normally invest in? (Please go directly to Question 4 if you are at a PE firm.)

Responses Percentage
Seed 41 32.3%
Early 69 54.3%
Expansion 39 30.7%
Later 25 19.7%
Bridge 6 4.7%
Other 3 2.4%

(2) How much cash-for-equity investment does your VC firm invest over the life of a given company, which would include follow-on rounds?

Responses Percentage
Less than $250,000 1 0.8%
$250,000 - $1 Million 9 7.1%
$1 Million - $5 Million 43 33.9%
$5 Million - $10 Million 33 26%
$10 Million - $20 Million 12 9.4%
$20 Million or above 4 3.1%



(View Chart)

(3) Which of the following round(s) do you normally invest in?

Responses Percentage
Series A 68 53.5%
Series B 66 52%
Series C or later 46 36.2%
Other (please specify) 6 4.7%



(View Chart)

(If you are in VC firm, please skip Question 4 & 5)

(4) If you are working in a PE (aka Buyout) Firm, which of the following stages does your firm normally invest in?

Responses Percentage
Mezzanine - debt 12 9.4%
Buyout 36 28.3%
PIPES 10 7.9%
Turnaround 7 5.5%
Distressed 4 3.1%
Other (please specify) 8 6.3%



(View Chart)

(5) Which of the following cash-for-equity investment price ranges does your PE firm invest in?

Responses Percentage
Less than $5 Million 8 16%
$5 Million - $10 Million 12 24%
$10 Million - $20 Million 13 26%
$20 Million - $50 Million 9 18%
$50 Million - $100 Million 5 10%
$100 Million or above 3 6%



(View Chart)

Questions for both VC and PE firms:

(6) How many portfolio companies has your firm invested across all funds per year on average?

Responses Percentage
0 - 9 114 89.9%
10 - 19 12 9.4%
20 - 29 1 0.8%



(View Chart)

The mean number of portfolio companies that VC and PE firms have invested in is 4.84 with a margin of error of 0.54. With 95% confidence level, they tend to invest in between 4 to 5 (rounded number) per year on average.

(7) How many portfolio companies has your firm invested across all funds since the firm was founded?

Responses Percentage
0 - 10 17 13.6%
10 - 20 43 34.3%
20 - 40 40 32%
40 - 100 17 13.6%
100 or above 8 6.4%



(View Chart)

(8) What is your preferred investment horizon?

Responses Percentage
1 - 3 years 8 6.3%
3 - 5 years 90 70.9%
5 - 10 years 32 25.2%
10 years or above 3 2.4%



(View Chart)

(9) How many analyst(s) or staffs are responsible for performing valuation analysis in your firm?

Responses Percentage
1 - 5 110 87.3%
6 - 10 13 10.3%
11 - 20 3 2.4%
21 - 50 0 0%
50 or above 0 0%



(View Chart)

Further analysis has been done for those VC and PE firms that have 1-5 analysts doing valuation analysis. The methodology is that in regardless of the stage that VC and PE firms are investing, we give one count to each one of those 8 valuation methods (including "Other") that they have selected in the answer for question 11. In general, it is found that for the given industry that they have stated, on average they would use 3 valuation methods (rounded figure of 3.11 with 0.27 as margin of error at 95% confidence level).

Join us later this week as we present the remainder of this article!

The above publication was produced with the help of WebSurveyor.