Venture capital investments have become a major contributor the growth of start-up firms. Investing in start-up firms carries a substantial risk of failure, only a minority of start-ups is high-return investments. This put great responsibility to the valuation methods used by the venture capital firm. It is argued that when uncertainties about future pay-offs are high traditional valuation tools are of little help, they are said to be too static and not to comply with change. A valuation method that is alleged to act in accordance with a changing environment where uncertainty is high is real option which is said to consider these variables, thus giving a more accurate valuation. The structure of venture capital funding can be seen as well suited for real option valuation.

The authors find it interesting to find out how venture capitalists screen possible investments, if the traditional valuation methods hold in proportion to the challenges they face and if the real option approach could be suitable.

The purpose is to describe and analyze how Swedish venture capital firms can valuate investments.

The research was carried out using a qualitative method. We conducted interviews with four venture capital firms that operate in Sweden. The participating firms were: Industrifonden, Itact, FöretagsByggarna and LinkMed.

The authors found in their research that the most important factors when screening the possible investments are the market and the entrepreneur. The venture capital firms use of valuation methods differ significantly. LinkMed and Industrifonden apply traditional valuation tools in contrast to Itact and FöretagsByggarna that rely on personal experience and expertise. Limitations found in the traditional models were lack of accurate and reliable estimations. The structural outlay of the investment is in line with that of the real option approach and the authors believes that real options exist embedded in the respondent’s investments. This implies that a real option approach is suitable for them.