Non-accounting drivers of start-up valuation by early-stage equity investors: literature review and future research agenda

The central importance of early-stage equity investors to the funding of innovative start-ups has been widely acknowledged in the entrepreneurial finance literature and is recognized by policymakers and entrepreneurs. Early-stage equity investors are equipped to overcome information asymmetries surrounding the financing of innovation. They employ structured investment processes and selection criteria, which help them to deal with the uncertainty surrounding the commercialization of new products and services by innovative start-ups. However, traditional accounting methods such as the Discounted Cash Flow (DCF), asset based and earnings multiple approaches are inadequate to value this type of firm. This has induced scholars and investors to explore new routes to value innovative start-ups. Recent research suggests that non-accounting drivers might be particularly important in this realm. To this extent, the contribution of this manuscript is threefold. First, moving from a literature review on the valuation of innovative start-ups by early-stage equity investors, we advance a theory-informed taxonomy of non-accounting drivers covered by extant research. Second, we identify three main areas to improve the valuation process for innovative start-ups, namely (i) heterogeneity appraisal of innovative start-ups; (ii) consideration of innovative start-ups' origin; and (iii) more theory-informed valuation approaches. Third, to address the aforementioned problems and advance research and practice of valuation, we propose a focus on university-based dimensions as promising example of non-accounting driver supporting the valuation of innovative start-ups.