How to evaluate startups and SMEs? A study of French analysts’ IPO reports

This paper presents a study of the valuation methods used by analysts to price small and medium-sized enterprises (SMEs) and startups, characterized generally by a lack of accounting history, an absence of comparable firms, and a high growth potential, or even going through a stage of hypergrowth, despite operating in a particularly uncertain environment. According to a sample of 203 analysts? IPO reports on Euronext Paris, it is noted that analysts are restricted to using a limited number of valuation models for startups and SMEs, despite the multitude of available assessment methods. The data strongly proved that the discounted cash flow method (DCF) is the most widely used model for startups and SMEs. The real options model, recognized by the literature as the most suitable model for these firms, has never been used. All the valuation methods tend to overestimate firms. Furthermore, the given estimates in the reports were closer to the stock price values one month after the IPO. Regressions prove that the analysts? choice to use the comparables method depends significantly on the activity sector of the assessed firm. JEL classification: G32, G24