Pre-Money Valuation of Startups in Japan

－An Empirical Analysis on the Bargaining Power of Entrepreneurs and Investors－

Abstract

One of the biggest concerns of entrepreneurs and investors regarding the equity financing of startups is the post-financing equity shareholding structure. The process of pre-money valuation, which establishes this shareholding structure is determined by negotiations between the entrepreneurs and investors. In this paper, we explore and validate the nature of entrepreneurs and investors who demonstrate a strong bargaining power in their pre-money valuation decisions, based on the first round of equity financing of domestic startups in Japan. The results show that entrepreneurs with a strong bargaining power over investors, have work experience and a background in the concerned industry. Additionally, domestic venture capital (VC) firms that are private and independent, (business) companies, and angel investors are identified as investors with a strong bargaining power over entrepreneurs.