Firm Valuation in Venture Capital Financing Rounds: The Role of Investor Bargaining Power

Abstract

This study explores the impact of bargaining power of venture capital (VC) firms on the valuation of their portfolio companies. We argue that VC firm types with greater bargaining power vis-a-vis the entrepreneur negotiate lower valuations compared to VC firm types with less bargaining power. We find that VC firm types with stronger bargaining power, namely university and government VC firms, value investments lower compared to independent VC firms. The valuations of captive VC firms equal those of independent VC firms. Our findings suggest that valuations in the VC contract reflect the relative bargaining power of the VC investor.