Business-cycles and Cash-on-Market: Pre-money Startup Valuation in the Macroeconomic Environment

TL;DR

This paper investigates how macroeconomic business cycles influence startup valuations in the EU, revealing both direct and indirect effects through venture-capital market size using structural equation modeling.

Contribution

It introduces a structural equation model to analyze macroeconomic impacts on startup valuations, highlighting indirect transmission channels and expanding understanding of macro-financial influences.

Findings

Business cycles affect startup valuations directly and indirectly.

Venture-capital market size mediates the impact of macroeconomic factors.

Most determinants act as transmission channels rather than independent drivers.

Abstract

How do business-cycles impact startup-valuations? While several studies explore VC startupecosystems and pre-money valuations, relatively-few delve deeper into the role of macro-level economic factors in influencing those startup deals valuations. Using a dataset of 1,089 venturecapital investments in European Union and European Economic Area markets, this article examines macroeconomic, cyclical and macro-sectoral influences on VC startups pre-money VC valuations. Our findings show that business-cycles impact startup-valuation both directly and indirectly. Beyond DCF factors, startup-valuations are impacted via by business-cycles directly, and via local venture-capital market-size. By using a Structural Equation Model approach, our findings contribute to entrepreneurship and financial-intermediary literature by exploring indirect and endogenous relationship possibilities finding that most determinants are transmission-channels rather than independent drivers. Our findings effectively tie-together startup-valuations, intermediary markets, and macroeconomic determinants.