Empirical evidence on investment valuation models used by Spanish venture capital companies: special reference to the discounted cash flow method's implementation

The goal of this paper is to analyse the investment valuation decisions by Spanish venture capitalists (VCs) according to their experience and the investee's stage of development (early stage vs. late stage investments) with particular reference to the variables used in applying the discounted cash flow (DCF) method. Based on a questionnaire sent to 51 Spanish VCs, we find that, when selecting an investment project, the expected return on investment (ROI) is the most important factor considered by Spanish VCs. The stage of development has a decisive influence on the selection of the valuation method used, as DCF is the most commonly used method for early-stage investment projects. Our paper also provides first evidence on the way VCs operationalise the key variables in the DCF method, such as the discount rate, the risk premium and the terminal value. The results of this study have important implications. By gaining insight into the investment decision criteria of Spanish VCs, Spanish entrepreneurs will be able to develop better and more targeted materials to maximise their success rate in attracting capital. VC firms can use the information from this study to better understand their decision processes, both individually and relative to competitors.