This paper studies how the use of alternative valuation methodologies affects investment performance for a sample of 53 German venture capitalists. We measure investment performance by the amount of investments they need to write off and by the number of companies they take public. We find that a significant number of investment managers use discounted cash flow (DCF) techniques, but only a minority appears to use a discount rate related to the cost of capital. The majority applies DCF using subjective discount rates. We present evidence that the use of DCF is correlated with superior investment performance only if applied in conjunction with an objectifiable discount rate. Also, funds that invest with a longer horizon perform better. The use of multiples is not significantly correlated with investment performance. We conclude that a focus on fundamental values confers an advantage.

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European Financial Management
Erasmus School of Economics

Dittmann, I., Maug, E., & Kemper, J. (2004). How fundamental are fundamental values? Valuation methods and their impact in the performance of German venture capitalists. European Financial Management, 10(4), 609–638. doi:10.1111/j.1354-7798.2004.00268.x