Memoire Online - An exploration of tools of analysis commonly used by private equity in making investment decision

AN EXPLORATION OF TOOLS OF ANALYSIS COMMONLY USED BY PRIVATE EQUITY IN MAKING INVESTMENT DECISION

Presented as part of the requirement for the award of MBA at University of Wales Institute Cardiff (UWIC)

The concept of investing behaviour regarded as a probable cause of the decline in the number of investment activities of venture capital over the last three years constitutes the background of this dissertation. Its aims are to investigate the classic tools of analysis, which could be found in the financial literature, when it comes to make investment decision. Another objective is to determine the applicable technique of evaluating flexible and reversible start-ups' investment proposals. The third aim consists of conducting a survey of venture capital analysts to find out their practice by way of capital budgeting for start-ups. The fourth is to suggest beneficial solutions to both parties involved in making such an investment decision, that is to say private equity analyst and start-up company. The research questions are: what are the classic methods capable of helping venture capitalist to make investment decision devoid of any flexibility with regard to start-up companies? In case the newly created firm's project gets some flexible and reversible aspects, how should the venture capitalist make investment decision? What can we learn from an inquiry into the practice of venture capitalist in the field of determining the investment decision for newly created companies? Are the findings from the investigation into the way the venture capitalists make investment decision in practice profitable to both the main players, namely venture capital firms and new entrepreneurs? Both discounted and non-discounted cash flow methods are usable classic methods for appraising newly created firms' capital expenditure. Moreover, in making flexible investment decision for start-ups, real options turn out to be suitable. Furthermore, it emerged from data collected with the help of an electronic questionnaire and analysed in accordance with the qualitative philosophy of research that 50 percent of private equity firms were more attracted by investing in Health care. Concerning the techniques used by venture capital analysts in making start up organisations' non-flexible capital budgeting decision devoid of any flexibility, we noticed that a third of those analysts said referring to NPV. Conversely, the revelation appeared to be that private equity analysts did make a sweep clean of the IRR technique in this respect. Thirdly, by way of making flexible capital budgeting decision for start up organisations, the NPV method was in the lead with 37.5% of use when real options only scored 12.5%.

We would like to extend our warmest thanks to all those people and firms whose reviews and suggestions contribute to the achievement of this dissertation.

CHAPTER I INTRODUCTION................................................................................... 5

CHAPTER II LITERATURE REVIEW ....................................................................8

CHAPTER III RESEARCH METHODOLOGY ......................................................21

CHAPTER IV FINDINGS AND DATA ANALYSIS ...............................................31

BIBILOGRAPHY..................................................................................................59

APPENDIX ............................................................................................................. .....63

1.1 RESEARCH CONTEXT

There are a number of venture capitalists whose aims are to provide capital to ventures, which failed to obtain funds from the conventional sources such as banks as suggested by Wright and Robbie (1998).This does not mean that nothing could be easier than being funded by venture capitalists for start-up companies. In fact, in accordance with the British Venture Capital Association (BVCA), «Private Equity and Venture Capital firms invested £7.5 billion globally in 2009, compared to £19.5bn invested in 2008 and £31.6bn in 2007. In 2009, 987 companies received private equity or venture capital backing, in contrast to 1,672 in 2008 and 1,680 in 2007» (Private Equity and Venture Capital Report on Investment Activity, 2009).

Clearly, the above figures suggest investment activities of venture capitals have declined significantly reaching a half comparing with what they were 3 years ago. To what could this drop attribute? Broadly speaking, some (such as «2009 Fidelity Investments Couples Retirement Study, Executive Summary» cited by Roszkowski and Davey, 2010, p. 42-43) have put all the blame on the 2008 global economy collapse. Whereas, other have pointed out the notion of risk, especially the concepts of «risk tolerance» and «risk perception» arguing that both of those risks determine investing behaviour (Roszkowski and Davey, 2010, p. 43). The topic of this research rests on this background. Having said that, what are the objectives of this dissertation?

1.2 RESEARCH OBJECTIVES

The purpose of this investigation is to examine the various tools, which could be considered in a particular way when it comes to make investment decisions for new ventures. Because we are, to some extent, in favour of the second argument mentioned in the end of the previous section, we will further explore the different methods, whether based on the theory and / or practical point of view, and used by venture capitals to grant funds to start-up companies. Indeed, our objectives are:

1. To carry out a meticulous breakdown of the traditional tools, which could be used to determine what real assets of a newly created firm the venture capitalist should invest in.

2. To find out which method can be applicable when the start-up organisation's project in question is to some extent flexible and reversible.

3. To survey some venture capital firms in order to catch on what techniques they use in practice to analyse investment project of start-up industries.

4. And to recommend solutions based on my research, which will help venture capitalists as well as fresh entrepreneurs to identify what criteria could be much more suitable to distinguish fruitful ventures from unsuccessful projects.

1.3 RESEARCH QUESTIONS

In order to attain the above set objectives, the following questions are raised:

1. What are the classic methods capable of helping venture capitalist to make investment decision devoid of any flexibility with regard to start-up companies?

2. In case the newly created firm's project gets some flexible and reversible aspects, how should the venture capitalist make investment decision?

3. What can we learn from an inquiry into the practice of venture capitalist in the field of determining the investment decision for newly created companies?

4. Are the findings from the investigation into the way the venture capitalists make investment decision in practice profitable to both the main players, namely venture capital firms and new entrepreneurs?

In any case, we should now turn to know more about the answers from the scientific writings on this topic in chapter 2. Moreover, chapter 3 constitutes the research methodology while chapters 4 and 5 are respectively devoted to data analysis and findings, and conclusion and recommendations.

The purpose of this chapter consists in shedding more light on the relevant scientific writings referring to the methods ordinarily used by private equity finance when it comes to make investment decision for start-up companies. Boosted by what precedes, it would be methodical to define any key concept of this topic. For that aim, a deductive reasoning will be employed; therefore this work will by turns scrutinize the concepts of «private equity» first, «investment decision» secondly and a wide range of «tools» that allow private equity to determine what real assets need to be invested in finally. This literature review will then ended with the bare bones of the main points raised.

2.1 THE CONCEPT OF PRIVATE EQUITY

The roots of «private equity», with regard to the attention the academic community paid to that term at least, can be stretched far back into the 80s as argued by Wright and Robbie (1998). In any case, the notion of «private equity» has recently been devised in a broad sense as «[involving] investment in unquoted companies, [and it includes] both early stage venture capital, and later stage buyouts» (Wood and Wright, 2009, p. 361).

This conception of the term «Private equity» echoes that of Brealey, Myers and Allen (2008). Indeed, according to these authors the notion of private equity could be defined as «equity that is not publicly traded and that is used to finance business start-ups, leveraged buyouts, etc.» (Brealey, Myers and Allen, 2008, p. G-10).

Clearly, from the above definitions there is a convergence on the broad understanding of «private equity» because of its features, namely money invested in venture and not listed companies. Moreover, this conception has been adopted in practice. In fact, the British Venture Capital Association (2010) states «the term private equity is generally used in Europe to cover the industry as a whole, including both buyouts and venture capital» (BVCA, 2010, p. 14). However, the BVCA itself carries on drawing the difference between private equity and Venture capital. The former «describes equity investments in unquoted companies, often accompanied by the provision of loans and other capital bearing an equity-type risk». The latter, however, constitutes a «subcategory covering the start-up to expansion stages of investment» (BVCA, 2010, p. 14).

With regard to the concept of start-up, Arnold (2004) suggested a definition in 2004. In his opinion, a start-up company or «startup» is a company with a limited or non-existing operating history (Arnold, 2004, p. 388). These companies, generally newly created, are in a phase of development and research for markets. The term became popular internationally during the dot-com bubble covering roughly 1995-2000 when numerous dot-com organisations were created ( http://en.wikipedia.org/wiki/Dot-com_bubble).

At any rate, throughout this paper private equity will be perceived in a broad sense. This is due to the fact that the focus here are the techniques used to carry out investment appraisal for start up companies. The term «private equity», under this consideration, will therefore allude to «venture capital». We should now turn to scrutinise how the scientific writings consider the concept of «investment decision»

2.2 THE NOTION OF INVESTMENT DECISION

To start with, it should be appropriate to comprehend the concept of investment decision by examining the scientific writings on «investment» and «investment decision» successively.

2.2.1 Investment

Generally speaking, «investment» means the use of money in the hope of making more money. (www.encarta.msn.com/encnet/dictionary/dictionaryhome.aspx).

Two authors, Arnold (2008) and Chandra (2008), further develop this conception of the term «investment». According to the former (2008), «investment involves resources being laid aside to produce a return in the future, for instance, today's consumption is reduced in order to put resources into building a factory and the creation of machine tools to produce goods in later years.» (Arnold, 2008, p. 20). In addition, the latter (2008) conceives investment as «a sacrifice of current money or other resources for future benefits.» (Chandra, 2008, p. 3). What about investment decision especially?

2.2.2 Investment decision

As far as corporate finance is concerned, there are two essential issues that need to be addressed. «First, what real assets should the firm invest in? Second, how should the cash for the investment be raised? The answer to the first question is the firm's investment, or capital budgeting, decision. The answer to the second is the firm's financing decision» (Brealey, Myers and Allen, 2008, p. 4). Capital budgeting is also named by scholars «Capital expenditure -capex-», that is the «selection of investment projects» (Arnold, 2008, p. 50).

From all what precedes, there is no doubt that the second decision is by far out of the remit of this research topic. As a result, venture capitalist should have to find only answers to the first question. Doing so, the sheer scale of the problem has something to do with the methods he or she will use for the purpose of investment appraisal. We should now turn to examine this issue in the light of the relevant academic research.

2.3 FINANCIAL THEORIES ON TECHNIQUES USED BY PRIVATE EQUITY FOR INVESTMENT APPRAISAL

There has been a wide range of academic writings on private equity's investment appraisal as a whole. In fact, those writings were focussing in particular on standards that venture capital firms refer to in making investment decision. This has been shown by the following authors: MacMillan, Siegel and Subbanarasimha (1985), MacMillan, Zemann and Subbanarasimha (1987), and Zacharakis and Meyer (2000). Primarily, the aforementioned benchmarks are consisted of four components: firstly product characteristics, secondly market characteristics, thirdly company's financial position and outlook, and finally the characteristics of the entrepreneur or management team.

Five years later, Wright and Proimos (2005) carried out a pilot study of venture capital investment appraisal in Australia. They explored both the «investment process and some of the strategies used by [Venture Capitalists] for reducing selected risks. The specific source of risk examined [was] information asymmetry, which is caused by lack of information on the part of the [Venture Capitalists], and which can lead to the added risks of adverse selection and moral hazard» ( Wright and Proimos, 2005). Broadly speaking, this work concentrated mainly on the investment process. In fact, by surveying four Australian venture capital firms these authors found that those organisations did utilise Berger and Udell's (1998) three stages of investment model, that is to say selection, contracting and monitoring.

It has to be pointed out to both Wright and Proimos (2005) credits that their paper seems to be a clear and recent contribution to the understanding of the series of actions taken into consideration by private equity for making investment decision, albeit it does not dwell that much upon the methods as such used whilst appraising proposals. We should therefore move on to the investigation of any tools of investment evaluation.

With respect to that purpose, financial theories provide numerous techniques for investment evaluation, for example Net present Value, Internal rate of return, Payback period, Profitability index, Accounting rate of return and Real options. The latter, which has come to light in the 80s, started attracting scholars attention in the 90s as suggested by Borison (2005, p. 17); thus it is deemed as a recent means of investment appraisal whereas the five other out of the list could be called classics methods.

2.3.1 Traditional tools of investment assessment

Prior research into traditional tools of investment appraisal makes out discounted cash flow that can be distinguished from non-discounted cash flow methods. ( www.swlearning.com/finance/brigham/ifm8e/web_chapters/webchapter28.pdf , p.28-1; www.//portal.lsclondon.co.uk/resources/file.php/879/Lec_23/Investment_Appraisal.pdf , p. 15). This philosophy will be taken up here and further followed under this section. Be that as it may, the rule of time value of money constitutes the basis of that distinction as shown for instance by Arnold (2008, p. 50), Chandra (2008, p. 116) and Vernimmen et al. (2009, p. 289). In fact, these last authors make use of a metaphorical quote to represent the time value of money in these terms: «a bird in the hand is worth two in the bush». Roughly speaking, this prime financial principle suggests for example that a pound today is more valuable than a pound a year hence. As support for such a claim, Chandra (2008, p. 116) highlighted two major reasons. Firstly, if someone makes up his mind to invest his pound now, it can be a source of positive returns. Secondly, a pound today stands for a more meaningful purchasing power than a pound a year later than now in case of inflation especially.

2.3.1.a. Discounted cash flow techniques

As previously mentioned, Net present value (NPV) and Internal rate of return (IRR) are on focus here.

Concerning the former, previous academic writings have viewed it as a «project's net contribution to wealth» (Brealey, Myers and Allen, 2008, p.G-9). According to Vernimmen et al., (2009), there is a triple interpretation of the notion of Net present value. To start with, Net present value refers to «the value created by an investment - for example, if the investment requires an outlay of €100 and the present value of its future cash flow is €110, then the investor has become €10 wealthier.» Moreover, Net present value means «the maximum additional amount that the investor is willing to pay to make the investment - if the investor pays up to €10 more, he/she has not necessarily made a bad deal, as he /she is paying up to €110 for an asset that is worth 110.» At last, Net present value is also «the difference between the present values of the investment (€110) and its market values (€100).» (2009, p. 296).

Relating to Net present values calculations, since the 80s, there has been a widespread agreement among scholars with regard to the estimation of cash flows as suggested by the writings of the following authors: McMahon (1981), Mukherjee (1988), and Patterson (1989).

Even more recently, Brealey, Myers and Allen, (2008, pp. 160-161), Vernimmen P. et al., (2009, p. 296), consider cash flow calculations in a particular way. Kalyebara and Ahmed (2011, pp. 63-64), further enumerate 10 general principles for doing so. However, these rules could be simplified to a set of 3 related benchmarks. In the first place, in order to avoid bad judgment a financial manager should make sure he or she does «discount cash flows, not profit». In the second place, he or she should ensure the project's incremental cash flows are assessed, that is «the difference between the cash flows with the project and those without the project». In the third place, he or she needs to «treat inflation consistently.» (Brealey, Myers and Allen, 2008, pp. 160-161). The Chief Finance Officer of a private equity firm for example should now turn to rank the project properly speaking.

In order to so, he or she will look at the project Net Present Value. If this is greater than zero, the proposal will be accepted. Nonetheless, the project will be rejected on the contrary circumstances. As generally admitted by the academics, the Net present value rule «measures the creation or the destruction of value that could result from [...] making investment [decision]» (Vernimmen et al., 2009, p. 302). Because maximising the value of shareholders wealth is the core objective of the firms, a positive net present value means in a simply way that the return of the selected project goes beyond the investor's expectations. Therefore, there is to this extent a consensus among academics. In fact, many authors such as Arnold (2008, p. 56), Vernimmen et al. (2009, p. 296), Droms and Wright (2010, pp. 193-194) and Kalyebara and Ahmed (2011, p.54) do agree with the idea that Net present value method constitutes the route that goes to good investment decision. However, the Net present value seems not to be a «panacea».

As a matter of fact, the Net present value shortcomings have been pointed out. To begin with, Vernimmen et al., (2009) find that technique difficult to figure out instinctively and directly. Moreover, Net Present value does not have a high opinion of «the value of managerial flexibility, in other words the options that the manager can exploit after an investment has been made in order to increase its value» (Vernimmen et al., 2009, p. 297). Finally, thanks to its easiness of use, the figure arising from the Internal Rate of Return attracts more financial managers than that of the Net Present value tool does. An evidence of the widespread use of The Internal rate of return can be found in a survey of 4,440 United States organisations conducted by Graham and Harvey (2001) 10 years ago. Their results showed that «74.9% [chief finance officers] always or almost always use the internal rate of return», which was roughly 1% more than those who referred to the Net present value criterion. (Graham and Harvey, 2001, p. 193).

Relating to the latter discounted cash flow tool, it should be noted that this method is regarded by the entire academic community (Brealey, Myers and Allen, 2008, p. 117; Vernimmen et al., 2009, p. 297) as an earnest challenger of the net present value method. Notwithstanding, what does the Internal rate of return technique mean?

Droms and Wright (2010, p. 194) suggest that it is the «discount rate that exactly equates the present value of the expected benefits from a project to the cost of the project». This conception echoes with that of Brealey, Myers and Allen (2008). They devise the Internal rate of return as the «discount rate at which investment has zero net present value» (Brealey, Myers and Allen, 2008, pp. G-7).

Regarding its calculation, there is also a consensus on the view that it is found with the help of «trial and error» in a customary way (Droms and Wright, 2010, p. 194; Brealey, Myers and Allen, 2008, p.122). In brief, there are three steps in determining the IRR. First, a financial manager should figure out a NPV (a) at one discount rate (a %); then he/she should find a second NPV (b) at (b %), and as last in the series, interpolate, that is find the value of the approximate IRR that lies between the two NPVs, often by means of graph. The formula could result in this way:

Concerning the IRR rule, it simply states that whenever an investment's rate of return is beyond the investor's minimum acceptable rate of return on a project, it is accepted (Vernimmen et al., 2009, p. 309; Brealey, Myers and Allen, 2008, p. 123).

Nevertheless, the IRR criterion can undergo some limits highlighted by financial literature as well. Thus, Brealey, Myers and Allen (2008) have pointed out numerous problems with the IRR. Indeed, many internal rates of return for a project can result from lots of changes in the sign of cash flows. In addition, in case of proposals that are mutually exclusive, the IRR can probably give a deformed idea of the projects value. As the final point, the IRR method does not take into account the relative size of projects. ( http://portal.lsclondon.co.uk/resources/course/view.php?id=871).

To sum it up, over and above of these methods that take into account one of the core principle of financial theory relating to the investment decision making, which is the rule of time value of money, there are other non-discounted cash flows techniques. These tools are worth a visit now.

Under this section, will be explored the Payback period, the Profitability index, and the Book or Accounting rate of return methods.

Concerning the Payback period, it can be conceived as the length of time within a project repays its initial cost. To Droms and Wright, (2010) the payback rule simply consists of selecting «any project with the shortest payback period» (Droms and Wright, 2010, p. 191). However, according to Brealey, Myers and Allen (2008), two examples of thing can go wrong with the payback technique. First, it does not encompass «all cash flow after the cut-off date; [secondly, the] «payback rule gives equal weight to all cash flows before the cut-off date», (Brealey, Myers and Allen, 2008, p. 121).

With regard to the profitability index, it essentially provides an answer to the following concern: «How highest NPV are we getting per pound invested?» Whenever funds are lacking, only projects that match the insufficient supply of money should be selected. The formula of the Profitability index is known as followed:

With respect to the accounting rate of return, it should be mentioned that it amounts to determining the potential book income «as a proportion of the book value of the assets that the firm is proposing to acquire». Its formula can be read as followed:

Accounting or Book rate of return = book income ÷ book assets (Brealey, Myers and Allen, (2008, p. 119). Because the book rate of return is a sort of means across the total activities of the organisation, we should not dwell too much upon it. Indeed, this paper's focus rests on the methods private equity use for investment decision making for start-up companies.

In any case, we should now turn to explore the financial literature on recent methods of investment appraisal.

2.3.2 Recent tools of investment assessment: real options

Three points need to be thought through under this subdivision. First of all, the concept of real options will be expounded; in the second place the defining features that make an investment proposal eligible to real options, and in the third place, what we shall name the «competitive advantage», which such techniques can procure to private equity firms in investment assessment of newly created firms.

Expression created by Myers (1977) and, as stated supra, the notion of real options began to be of any centre of interest of academics in the 80s. Since that period, there have been a number of conferences and writings on this topic to such an extent that real options have evolved from a less valuable topic «to one that now receives active, mainstream academic and industry attention» (Borison , 2005, p. 17). Be that as it may, real options method is suitable to any situation where there is a certain amount of flexibility. In such cases, the venture capitalist is in the same situation as the financial manager who can increase or decrease his position in a security given predetermined conditions. A venture capital manager can also be compared to a financial manager who holds an option. Flexibility of an investment has a value, the value of the option associated with it. For example, in the field of industrial investments, real options are equivalent of «the right not the obligation, to change an investment project, particularly when new information on its prospective returns becomes available» (Vernimmen et al., 2009, p. 374). This definite property of a flexible investment is referred to as a real option. Conversely, in the circumstances where it is hard to recognize the adaptability of an investment, Vernimmen et al., (2009) describe that as «hidden options» (Vernimmen et al., 2009, p.374).

An investment proposal needs to meet three factors in order to be qualified to real options. First, there must be some uncertainty surrounding the project. Secondly, there should be additional information arriving over the course of time. Thirdly, there must be the possibility to make significant changes to the project on the basis of this information.
A number of various types of real options can be presented in investment projects: the option to launch a new project; the option to expand, reduce or abandon the project; or the possibility to defer the project or delay the progress of work. According to the first type, Vernimmen et al., (2009) put forward that it is similar to a «call option on a new business. Its exercise price is the start up investment, [a significant element] in the valuation of many companies. In these cases, they are not valued on their own value, but according to their ability to generate new investment opportunities, even though the nature and returns are still uncertain.» (Vernimmen et al., 2009, p. 374).

Finally, the benefits of real options have been highlighted by Krychowski and Quélin (2010) in the following way: «The main contribution of RO [Real Option] is to recognize that investment projects can evolve over time, and that this flexibility has value. Myers (1984) considered that RO is a powerful approach to reconcile strategic and financial analysis» (Krychowski and Quélin, 2010, p. 65).

As it has earlier been mentioned in this work, it could add value to the current literature on methods assessing investment decision by means of a survey of venture capital firms to find out what techniques they use in practice concerning investment. Of course, a pilot study has already been carried out in the fields of venture capitalist investment appraisal in Australia ( Wright and Proimos, 2005). But it was, to some extent, narrow since it was focussed on a specific source of risk named information asymmetry, «which is caused by lack of information on the part of the VCs, and which can lead to the added risks of adverse selection and moral hazard» ( Wright and Proimos, 2005, p. 272). Anyway, what are the bare bones of this literature review?

2.4. SUMMARY OF ACADEMIC OVERVIEW OF METHODS OF INVESTMENT ASSESSMENT USED BY PRIVATE EQUITY

Before leaving this chapter, it is useful to summarise the main tools commonly used by private equity analysts in making investment decisions, as noted from the literature review.

First, it should be highlighted that there does not appear to be any previous research on this topic per se in the United Kingdom, and even abroad. Necessarily therefore, some resort to general knowledge is called for. There is a widespread agreement among scholars on the meaning of the concept of private equity. Indeed, private equity is widely defined as equity «that is not publicly traded and that is used to finance business start-ups, leveraged buyouts, etc.» (Brealey, Myers and Allen, 2008, p. G-10; Wood and Wright, 2009, p. 361).

Secondly, investment decision or «capital expenditure» is the «selection of investment projects» (Arnold, 2008, p. 50). Financing decisions, as opposed to Investment decisions, are however not within the scope of this piece of research.

Thirdly, there are many techniques used by private equity specialists in making investment decisions. We weigh up to gather them together this way: traditional and recent tools. Concerning classic tools, academics such as Arnold ( 2008, p. 50); Chandra (2008, p. 116) and Vernimmen et al., (2009, p. 289) used the sacrosanct principle of time value of money in order to distinguish discounted cash flows from non-discounted cash flow tools. The former encompasses the Net present Value (NPV) and its prime competitor, that is the Internal rate of return (IRR) techniques whereas the latter alludes to the payback period, the profitability index and the accounting or book rate of return.

Relating to the recent methods of evaluation of investment proposal, they consist of real options. Created by Myers (1977), real options have steadily been on focus in the scholars community, reaching a peak of interest of both academics and practitioners in the early years of this 21^stcentury as put forward by Borison (2005, p. 17). Because investment decision is far from being, shall we say, a sort of a «noli-me-tangere» issue, the flexibility gained from real options makes a feature of this method. Real options are the possibility to «modify, postpone, expand, or abandon a project» (Brealey, Myers and Allen, 2008, p. G-11). Nevertheless, Vernimmen et al. (2009) described the opposite of real options as «hidden options» (Vernimmen et al. 2009, p. 374).

This chapter intends to answer the following concerns by turns: what does the concept research means? What is research methodology? What does research strategy mean? What is the signification of the concept of research design? What does the notion of data collection methods express and what is the approach adopted for this work?

In order to comprehend this concept, it would be worth starting with its negative meaning, in other words, what research is not, or to be more specific, the wrong meaning of that word. In accordance with this view, Walliman (2005, p.8) listed four erroneous senses of «research». First, to him a simple collection of facts or information is nothing but an «important part of the research». Secondly, according to him, «moving facts from one situation to another» regardless of interpretation is far away from being the whole research; it is merely an additional element of research. Thirdly, he further suggested that research is not an «esoteric activity, far removed from practical life»; it is an exploration of the universe, arisen from the strong desire to explain it instead. Fourthly, research is not a term to «get your produce noticed»; put it another way, in this case, research is only a result of a seat-of-the-pants activity.

Probably, the wrong sense of the concept of research has also something to do with its daily use in such a way that it turns out to be a virtually commonplace. In fact, there is a sort of ubiquity of the word «research», since it can be found in the newspapers, on television or radio throughout wide range of phrases, such as the «findings of market research companies' surveys», research as support of political decisions, and «results of research» in the field of advertisement, (Saunders, Lewis and Thornhill, 2007, p. 4). For clearing up the notion of research, we should now turn to its proper meaning, or positive sense.

For that purpose, Walliman (2005) have put forward three distinctive features of the concept research, videlicet a systematic data collection, a systematic data interpretation, and an unambiguous aim, that is «to find things out». Research therefore means «something that people undertake in order to find things in a systematic way, thereby increasing their knowledge» (Walliman, 2005, p. 5). The concept of «research» can also be defined as a «methodical investigation into a subject in order to discover facts, to establish or revise a theory, or to develop a plan of action based on the facts discovered» ( http://encarta.m00sn.com/encnet/features/dictionary/dictionaryhome.aspx.). In a more concise form, Kumar (2008) argued «the search for knowledge through objective and systematic method of finding solution to a problem is research» (Kumar, 2008, p. 2).

Having defined what research is it seems now more suitable to examine the concept of research methodology.

This couple of meaning of the concept methodology only dwell upon the word method. However, this view of the notion of methodology merely tends to reduce that concept to one of its components. In fact, the scope of methodology is wider and more inclusive than that as explained infra.

Concerning the phrase «methods of research», it is devised as all the techniques that «are used by the researcher during the course of studying his research problem» (Kumar, 2008, p. 4). Those techniques could be formed into three groups as Kumar (2008, p. 4) suggested:

- the first group encompasses data collection methods. They enable the researcher facing with insufficient availability of data to get answers that he is after.

- the second set of methods is made up of statistical tools that help relating data to unknown.

- the third category is concerned with the techniques of assessing the exactitude of results.

With respect to the expression research methodology, it refers to the «theory of how research should be undertaken, including the theoretical and philosophical assumptions upon which research is based and the implications of these for the method or methods adopted» (Saunders, Lewis and Thornhill, 2007, p. 602). Once again, research methodology could be viewed as the whole lot whereas research methods are just components of that entirety. Therefore, as Kumar (2008) concluded «when we talk of research methodology, we not only talk of the research methods but also, consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique and why we are not using others so that research results are capable of being evaluated either by the researcher himself or by others» (Kumar, 2008, p. 5).

Having highlighted that, research methodology does obviously raise the following three overriding concerns such as:

To start with, a terminological precision needs to be stressed. It is about research philosophy and research strategy. Some academics make use of the first to allude to the second actually. For instance, Saunders, Lewis and Thornhill (2007, p. 102), regarding what they named «research onion», they argued that research philosophy, located in the first layer from the surface, includes the following sets of idea: positivism, realism, objectivism, subjectivism, interpretivism, pragmatism, radical humanist, radical structuralist, functionalist, and interpretative. However, to their viewpoint, research strategy encompasses experiment, survey, case study, action research, grounded theory, ethnography, and archival research. Nonetheless, to others the first group constitutes research strategy whilst the second should be called research design (Bennison, 2006).

As a matter of fact, what precedes does give an account of just a difference of terminology, because when it comes to look at the components of each concept, we could easily conclude that they are alike. In any case, throughout this paper we should refer to the concept of research strategy to allude to research philosophy. Notwithstanding, when it will come to talk about what Saunders, Lewis and Thornhill (2007, p. 102) named research strategies, we should refer to as research design instead in order to avoid being muddled.

Having noted that, it should be stated that research strategy rests on the idea that it determines the basic philosophy whereby a subject could be approached. There are a number of abstract concepts that form research strategy as said supra, but we will only examine three out of the list, namely axiology, epistemology, and ontology.

3.3.1. Axiology as research strategy

From Greek «axia», that is value and «logos», that means study of, axiology can thus be defined as that subdivision of philosophy that concerns with the study of values ( http://en.wikipedia.org/wiki/Axiology).

The usefulness of axiology as strategy of research has been highlighted by Saunders, Lewis and Thornhill (2007, p. 110). They argued that the values of the researcher irrigate all his work. For example, they suggested that a selection of a given topic rather than another shows the researcher believes the chosen topic is much more interesting. However, apart from axiology that concerns the values of the researcher and those of the people he interacts with, the researcher needs to be aware of the scope and nature of the knowledge he is in search of. Epistemology meets this want.

3.3.2. Epistemology: a research strategy

The word epistemology derives from the Greek «episteme», signifying knowledge, science, and «logos» meaning study of ( http://en.wikipedia.org/wiki/Epistemology). Epistemology, therefore, is a division of philosophy that deals with the nature and scope of knowledge.

Thanks to epistemology, the researcher could differentiate between belief and opinion. In short, there are a number of epistemological stances that a researcher can adopt. If he or she leans towards the application of natural sciences, he or she will be deemed to adopting positivism as epistemological position. But, since the complexity of the social world of business and management is reluctant to a «series of law-like generalisations» that for example physical sciences allow (Saunders, Lewis and Thornhill, 2007, p. 106), interpretivism would be resorted to instead. What do we think about ontology then?

3.3.3. Ontology: a strategy of research

The concept of ontology comes from Greek «ov, genitive» meaning of that which is, and «logia», that is study, science, or theory, ( http://en.wikipedia.org/wiki/Ontology). Part of metaphysic, ontology is the philosophic activity that concerns with the existence of entities.

Boosted by the significance of the word ontology, it should moreover be noted that as a research strategy, it implies two distinct positions. First, the researcher could adopt an objectivist posture. This ontological stance advocates, «things exist in reality external to people» (Bennison, 2006).

Secondly, the subjectivism, also known as constructionism (Remenyi et al., 1998, p.35), refers to the reverse order of objectivism. To be more specific, a subjectivist researcher claims, «social phenomena are created from the perceptions and consequent actions of social actors» (Saunders, Lewis and Thornhill, 2007, p. 108).

From all what precedes, we could get a clear insight into the concept of research strategy and shall now move on gathering the phrase of research design.

Alongside the research strategy, research designs appear as a landmark of the research methodology insofar as it is a source of benchmark for data collection. We, thus, should have a look at different research processes before examining the various sorts of research designs as such.

3.4.1. Research processes

As far as research processes are concerned, two major types of reasoning are on focus:

Relating to inductive reasoning, Walliman (2005) suggested that it consists of the «inference of a general law from particular instances. Our experiences lead us to make conclusions from which we generalize» (2005, p. 433). The inductive reasoning is also called «bottom-up» approach (Bennison, 2006).

With regard to the deductive reasoning, or «top-down approach», it works anticlockwise to that of the inductive does. In this view, its starting point is a theory or a general idea, which gradually becomes narrower down to hypotheses. These hypotheses are to be confirmed or not by data collected. Be that as it may, the framework of data collection and analysis could be in the form of some sorts of research designs.

3.4.2. Research designs

Under this subdivision, will be by turns examined the following wide range of research designs:

With respect to the experimental design, its aim is to examine causal relationship effect (Saunders, Lewis and Thornhill, 2007, p. 136). There are two types, namely the classic and the quasi-experimental design. Concerning the former, two groups on focus are established: a treatment group and a control group. Then people are randomly divided up to each group. There is a pre-text of each group before the experiment and at the end of the day, there is as assessment of dependant variable before and after the experiment. However, in case of quasi-experiment, there is no control group and the independent variable is measured before and after.

Concerning the cross-sectional design, it is often called «social survey design» because it does resort to survey strategy (Easterby-Smith, Thorpe and Lowe, 2002). According to Kumar (2010, p. 107), the cross-sectional design, also referred to as «one shot or statues study» constitutes the most famous design in the social sciences. Its objective is to depict variation between people for example, and in a single point in time. Also, the cross-sectional design is aimed at describing the impact of a fact or an occurrence that can be observed. Moreover, it intends to give an account of in what way factors are connected within an organisation as suggested by Saunders, Lewis and Thornhill, (2007, p. 148).

With regard to the longitudinal design, its aims are to track changes over time instead. Therefore, in accordance with that research design, «the study population is visited a number of time at regular intervals, usually over a long period» as claimed by Kumar (2010, p. 390) and Kumar (2008, p. 10). The longitudinal research design has the distinctive feature of allowing the researcher to manage variables that he concentrates mainly on as long as there is no influence of research process per se on them as argued by Adams and Schvaneveldt (1991).

Concerning the case study design, Robson (2002) conceives it as a «strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence» (Robson, 2002, p. 178). In 2003, the relevance of the concept of context has been put forward by Yin (2003). In fact, according to him, there is not a real watertight compartment between the phenomenon that is subject matter of the study and the context within which it is carried out. There are various sorts of case study designs. When a case study aims at the veracity of a hypothesis, it is called a critical case. However, when its purposes are to deeply understand a particular case on the one hand, and closely investigate an issue which has been neglected on the other hand, it is appropriately named unique case then. With respect to the unique case study, Saunders, Lewis and Thornhill (2007) have suggested triangulation as a method of data collection. The notion of triangulation is regarded as «the use of different data collection techniques within one study in order to ensure that the data are telling you what you think they are telling you.» (Saunders, Lewis and Thornhill, 2007, p. 139). For instance, it is possible to value a questionnaire as a technique of gathering quantitative data thanks to semi-structured group interview. Concerning the unit of analysis, Yin (2003) distinguishes «embedded case study» from «holistic case study». The former consists in investigating some sub-units of a firm, such as departments or teams whilst the latter intends to examine the whole organisation instead.

Relating to the comparative design, it tends to give accounts for similarities or differences in order to encourage comprehension. In doing so, Bennison (2006) suggested the recourse to cross-sectional techniques like cross national, cross cultural, cross organisational, cross cultural, cross divisional methods.

In any case, whatever the research designs might be, the researcher needs to collect data.

To start with, it is worth saying that data can be described as «a series of facts that have been obtained by observation or research and recorded» (Bocij et al., 2006, p. 794). Concerning data collection methods, they could be identified according to the type of research strategy or design the work has adopted. Under this section, shall we say, the «Ariadne's thread» is to distinguish depending on whether quantitative, or qualitative strategy is on focus.

In case of a quantitative strategy, associated with an experimental design, the researcher has to rely, to a greater extent, on numerical data. Furthermore, he or she will resort to a «structured approach in order to reduce [his or her] influence on the research» (Bennison, 2006).

In the event of qualitative strategy, connected with case study design, the researcher will have to «use open ended methods of data collection to capture a wide variety of opinions» ( bennison, 2006).

Anyway, data collection methods, such as structured observations, interviews, and questionnaires sound more appropriate to quantitative strategy. Whereas observation, semi structured Interviews, questionnaires, focus or discussion groups appear to be suitable to qualitative methods. Relating to questionnaires as method of data collection, it has been devised as «a general term [including] all techniques of data collection in which each person is asked to respond to the same set of question in a predetermined order» (De Vaus, 2002). There are a wide a range of kinds of questionnaires depending on the way they are administered. When a questionnaire is filled by respondent himself, it is known as «self-administered» questionnaire. This sort of questionnaire can be electronically answered through internet or intranet, or mailed to respondent who will return it after completion. Conversely, whenever a questionnaire is answered during a physical contact with the respondent, it is named «interviewer-administered» questionnaire as claimed by Saunders, Lewis and Thornhill, (2007, pp. 356-357).

First of all, this paper does take into consideration some research strategies like axiology, ontology and epistemology. Axiology has been taking into account upstream from the selection of this topic. Actually, because it seems not to exist prior research on the techniques of investment appraisal used by private equity firms per se, we were led to all the relevance of this exploratory research. Furthermore, in the course of surveying the previously mentioned firms, we should be aware of their values and would be keen to admit them without passing any sort of judgment as demands the basic requirement of axiology strategy. Epistemology, and to be more accurate, interpretivism is considered throughout this work due to the specificity of business study; so, the qualitative philosophy of research will be utilised in order to interpretate, understand and conduct a thick description of reality of tools of investment appraisal used by private equity. Ontology is concerned here insofar as we should bear in mind enough objectivity in making analysis of data collected.

Secondly, as far as research design is concerned, this paper has opted for the cross-sectional design as long as patterns of association will be looked for and data collection will be based on electronic questionnaires.

The purpose of this chapter is to give an account of data collected in order to provide answers to the research questions that pertain to this work. To do that, as we have highlighted supra, questionnaires were opted for as methods of collecting data. As a matter of fact, 25 venture capital firms have received an electronic questionnaire via Survey Monkey. Only 13, that is almost half of them have provided responses, which have been deemed as a somewhat representative sample of the threshold population. The first task consists in analysing answers given by those respondents and the second task has something to do with summarising findings. Prior to these activities, it is worth reminding that ethical considerations, such as anonymity are taken into account in this work; thus, neither questions relating to personal details of the respondent nor the results of this study will be published.

In order to get a sound insight into the data collected within the framework of this study, both the display and analysis approach of Miles and Huberman (1994) have been adopted. Relating to data display and analysis in this work, it deals with an organisation and comment of data that are primarily related to research questions into diagrams. We will, therefore, give an account of the data collected compared with the following concerns:

- What are the classic methods of analysis used in practice by private equity firms in capital budgeting for start-ups devoid of any flexibility?

- What is the recent practice of private equity analysts in respect to techniques of start-ups companies flexible capital budgeting?

- What can we learn from an inquiry into the practice of venture capitalist in the field of determining the investment decision for newly created companies?

- Are the findings from the investigation into the way the venture capitalists make investment decision in practice profitable to both the main players, namely venture capital firms and new entrepreneurs?

4.1.1. Traditional tools of analysis used in practice by venture capitalist in making investment decision

We can learn from information gathered that Private equity firms, whatever industries they belong to (as shown on the first graph hereafter), do utilise classic methods for evaluating proposals. Those techniques include discounted cash flows methods such as the Net Present Value and the Internal Rate of return. Furthermore, venture capitalist does also resort to non-discounted cash flows methods, notably the payback rule, the profitability index and the accounting or book rate of return in making investment decision. These successive graphs are therefore an illustration of that state of affairs.

The above column chart indicates the 07 sorts of industries within the dozen of Private equity firms that have been surveyed could probably invest. On the whole, it is clear that Private equity analysts rather preferred health care and Consumer goods and services investment proposals to any other out of the list.

In fact, there was a sharp identical percentage, notably 33.3 percent, in the number of private equity, which could happily grant funds to technology industries start-ups as well as financial ventures. Concerning the former, telecommunication sector itself, included fixed line and mobile, and information technology were parts of technology sector. Relating to the latter, real estate, financial services per se, figured in financial component part. In addition, there was another identical proportion in the number of industry sectors selected by private equity organisations. In effect, approximately 8 percent of private equity analysts were choosing to spend money on basic materials, and oil and gas sectors likewise. Basic materials referred to chemicals, forestry and paper, industrial metals and mining, whilst oil and gas comprise alternative energy, oil and gas producers, and oil equipment services and distribution.

However, only probable acceptances of industrial investment projects represented a sixth of the number of private equity organisations on focus here. Industrial proposals alluded to aerospace and defence, construction and materials, electronic and electrical equipment, engineering, general industries, support services and transportation.

To sum up, it can be seen that Health care industry sector constituted the most popular choice out of the seven kinds of sectors of industry. Notwithstanding, private equity analysts did utilise classic methods for appraising venture start-up companies, regardless of the sector of industry they belonged to as demonstrated infra.

The above pie chart displays information about the percentage of techniques that take into consideration the sacrosanct principle of the time value of money in making investment decision for new ventures. Overall, it is obvious that the Internal Rate of return was the discounted tools of analysis most used by private equity in making investment appraisal.

As a matter of fact, the percentage of private equity firms that resorted to the Internal Rate of Return (IRR) constituted roughly the double of the proportion of those that utilised the Net Present Value (NPV), namely almost 67 percent.

To conclude, there is no doubt that the Internal rate of Return was by far the most popular method used by private equity analysts for making investment decision for start-ups. It should be worth moving on the question of what private equity firms think about these two classic discounted cash flows methods.

This stacked bar chart illustrates the views that surveyed private equity analysts took about the utility of a couple of discounted cash flows methods for capital expenditure of newly created firms. Generally speaking, the IRR technique did attract numerous private equity analysts.

In fact, as far as one of the overriding rules of financial theory is concerned, namely the time value of money, roughly half of the venture capital firms analysts did tend toward the use of the IRR method. Although there was one skipped question concerning this category, it did not affect the final results in terms of dominance of the IRR technique. Indeed, the results relating to NPV as discounted cash flows were completed and less than half of respondents were in favour of that method. Conversely, 6 among 12 private equity firms analysts did prefer IRR technique. The unique assumption that we could make is that if the participant who refrained from answering to that question selected any option apart from «agree», the superiority of IRR would still be valid.

Moreover, the trend of the prime importance of the IRR was further strengthened by the number of people who strongly disapproved the NPV as a practical means of evaluating start-ups investment proposals. Actually, only one venture capital analyst disagreed with the use of IRR whereas two people did not share the view that the NPV rule does recognise the principle of the time value of money.

With regard to the point of mutual exclusive proposals and the use of the NPV technique, it is clear that there was an enormous increase in the number of neutral participants, approximately 60 percent. Furthermore, there was a slight drop in the number of approvals of NPV as one useful technique of making investment decision for start-ups in case of non-concurrent projects.

In conclusion, regarding the opinion of private equity analysts about the usefulness of discounted cash flows tools of evaluating start-ups capital expenditure, the IRR method was more popular than its competitor, namely the NPV, notwithstanding one skipped question in the number of respondents related to the IRR as a discounted cash flows technique. This trend has been confirmed even in a more general aspect as shown in the next diagram.

The pie chart that appears at the bottom of the previous page displays information about the percentage of choice of two discounted cash flows methods for appraising start-up companies. On the whole, the gap in the selection between the IRR and NPV method by private equity analysts was not that large.

As a matter of fact, more than the half of the participants were attracted by the IRR as a technique of evaluating capital budgeting for newly created ventures. To be more specific, 53.8 percent of private equity firms did prefer IRR method to the NPV technique.

Nonetheless, NPV as a tool of analysis of investment appraisal of start-up firms was only selected by 46.20 percent of private equity firms that took part in this survey.

Finally, it is obvious that private equity analysts do prefer the IRR method to the NPV tool when it comes to make investment decision for start-up companies. These results seemed far too much similar to the findings of Graham and Harvey (2001) released 10 years ago. Their results showed that «74.9% [Chief Finance Officers] always or almost always use the internal Rate of return», which was roughly 1% more than those who referred to the Net present value criterion (Graham and Harvey, 2001, p. 193). Nevertheless, some distinction still needs to be drawn since Graham and Harvey (2001) did survey only Chief Finance Officers of 4,400 American firms, with the exception of Venture capital organisations. We should now move on finding out what the information collected reveals with respect to the use of non-discounted cash flows methods for capital expenditure of new ventures.

This line graph demonstrates the number of private equity firms that utilised non-discounted cash flows methods in making investment decision for start-up companies. As far as the overall trend is concerned, there was a gradual decline in the number of users of methods, which did not take into consideration the sacrosanct rule of the time value of money in making capital expenditure decision for start up companies.

At the beginning, among the 13 private equity analysts who took part in this survey five confirmed that they utilised the payback rule as a non-discounted cash flows technique of evaluating capital budgeting proposals for newly created ventures. That was a sharp percentage of 41.7.

In contrast, 33.30%, that is to say four respondents chose the profitability index; only a quarter was interested in the accounting or book rate of return as a criterion of an investment decision into start up firms' proposals. Unfortunately, there was one skipped question with respect to the issue of the use of non-discounted cash flows methods for appraising capital budgeting of start up companies; therefore, the above-mentioned proportions are no more and no less symptomatic of 12 effective respondents.

In a completely different respect, it has been argued that, although it was in a more general perspective, among non-discounted cash flows methods of capital budgeting the accounting or book rate of return looks like a poor relation with approximately 12 percentage of use by Chief Finance Officers (Graham and Harvey, 2001, p. 193). This trend has been somewhat confirmed here as long as only 25 percent of private equity analysts did say they resorted to that technique of capital budgeting for start up companies.

By way of conclusion, it can be seen that the payback rule was the most attractive technique among private equity organisations as far as non-discounted cash flows techniques that they resorted to in making investment decision for start-up companies were concerned. We should now examine the viewpoint of these private equity analysts about the realistic aspect of the previously mentioned non-discounted cash flows methods for evaluating investment decision for start up organisations.

The above chart constitutes an illustration of information concerning the perception that 13 private equity firms had about the practical aspect of three non-discounted cash flows tools of analysis for start-ups' capital expenditure. On the whole, it is obvious that point of views did not wildly fluctuate between the payback rule, the profitability index and the accounting or book rate of return.

Without any doubt, about 50 percent, in other words 6 out of 12 ( because there was one skipped question) private equity firms thought that the payback rule, as a method for evaluating investment decision for newly created ventures, was practical.

In addition, 4 private equity analysts out of 12 who really did answer this question, were attracted by the realistic feature of the accounting or book rate of return. This number stood for roughly 33 percent of the whole responses relating to the issue of the practical characteristic of non-discounted cash flows techniques of appraising start ups capital budgeting.

Conversely, the non-discounted cash flows method of capital expenditure for start-up organisation regarded as the least realistic, turned out to be the accounting or book rate of return. Oddly, only a sixth of private equity firms thought that that capital budgeting technique was practical for start up companies whilst a quarter previously claimed its utilisation in accordance with the results of the previous line graph that appeared at the bottom of page 34 of this work. Probably, there were other bases of that use, which the participants did not specify even though they have been suggested to do so within the framework of the questionnaire.

To sum up, it is clear that when it came to make investment decision for start up companies based on non-discounted cash flows methods, private equity analysts did consider the payback rule as more realistic than the two other techniques, namely the accounting or book rate of return and the profitability index. This work will hereafter inquire data in comparison with start up companies' capital budgeting where proposals cannot be adapted to a new situation.

This bar chart is a display of information about the best techniques that private equity analysts referred to when it comes to make capital budgeting decision that is devoid of any flexibility for newly created ventures. In general, for that purpose, all participants tended toward choosing among one of these methods, namely the profitability index, the payback period, and the NPV, excepted for the IRR.

As a matter of fact, a third of private equity analysts did prefer the Net present Value method in making non flexible capital budgeting decision for start up firms.

However, according to a quarter of private equity firms, the accounting or book rate of return was the best tool of analysis that they referred to in making non flexible investment decision for start up companies. Moreover, the same proportion considered the profitability index technique and the payback period as the best method of analysis on the subject aforementioned. Nevertheless, the IRR technique looked like a poor relation in the eyes of private equity analysts. In fact, none of the 13 private equity analysts who took part in this survey regarded this method as a useful technique in making non-adaptable investment decision for newly created ventures.

In summary, when it comes to make start up companies investment decision devoid of any flexibility, a simple majority of 4 out of 13 private equity analysts did prefer relying on the NPV technique rather than others classic methods such as the payback rule, the profitability index, and the accounting or book rate of return. The comment on this trend is that one of the Net Present Value's principal challengers, the Internal rate of Return method, has to say the least been downgraded, even ignored by the respondents. The peculiarity of these results stands out against prior research on the use of traditional methods of making investment decision in corporate finance as shown by scholars such as Graham and Harvey (2001, p. 193). Having said that, what practical tool of analysis do private equity firms resort to in making flexible investment decision for start-ups organisations?

4.1.2. Recent technique of analysis used in practice by venture capitalist in making flexible and reversible investment decision for start-up companies

The aim of this subdivision is to describe and explain the points of view of 13 private equity analysts with regard to the tools they use in making flexible investment decision for newly created ventures. Because capital budgeting seems far from being a commonplace decision on the one hand, and completely lacking of adaptability to new circumstances on the other hand, the financial theory developed by scholars like Myers (1977), Borison (2005, p. 17), Vernimmen et al., (2008, p. 374), Krychowski and Quélin, (2010, p. 65) has put forward real options. This work will thus make some incidental comparisons with previous studies. Boosted by what precedes, we should therefore examine viewpoints of private equity analysts as successively shown in the following figures.

Methods used by private equity analysts in making flexible investment decision for start-ups companies	Response count from 8 private equity analysts	Percentage
IRR	2	25%
NPV	3	37.5%
Real options	1	12.5%
The accounting or book rate of return	1	12.5%
The payback rule	1	12.5%
The profitability index	1	12.5%

Table 1: What do you resort to in making flexible investment decision for start-ups organisations?

The above table is a display of 08 out of 13 viewpoints of private equity analysts (as long as there were 5 skipped questions) with respect to the methods that they resort to when the investment projects submitted to them by start-ups are adaptable and / or reversible. Broadly speaking, it can be noticed that their opinions were eclectic enough.

First of all, 3 over 8 private equity analysts did maintain that they had recourse to the Net Present Value method of capital budgeting for newly created ventures. That figure stood for 37.5 percent and was the most used technique as far as private equity firms were concerned when it comes to make flexible investment decision for start-up companies. Moreover, a quarter, in other words 25 percent of these private equity analysts has claimed an exclusive recourse to the Internal Rate of Return.

However, only 12.5 percent of the respondents said that they utilised one of the following tools of analysis in assessing start-ups capital budgeting : real options, the accounting or book rate of return, the payback rule, and the profitability index.

To conclude, the findings regarding the techniques that private equity analysts do have recourse to in evaluating start-ups flexible capital expenditure clearly demonstrate the prime importance of NPV method over others. This result is surprising at least for a couple of reasons. In the first place, the shortcomings of the NPV tool of analysis per se have been deplored in a numerous financial academic writings as noted earlier in this work on page 10. Secondly, Net Present value does ignore «the value of managerial flexibility, in other words the options that the manager can exploit after an investment has been made in order to increase its value» (Vernimmen et al., 2009, p. 297). In the face of this situation, there is no need to make a mountain out of a molehill as long as private equity analysts should refer to real options in order to adjust the aforementioned NPV's restricting flaws.

Table 2: How do you rate Real options relating to making better flexible capital expenditure decision for start-up organisations?

Rating average

Response

count

Real options provides us with a better adaptability in the management of proposal

0.0%

(0)

0.0%

(0)

0.0%

(0)

8.3 %

(1)

50%

(6)

16.7%

(2)

0.0%

(0)

16.7%

(2)

0.0%

(0)

8.3% (1)

6.00

The table that comes into view at the bottom of the previous page displays information about the rating scale of real options as a technique of appraising flexible start-up firms' capital expenditure as far as private equity analysts are concerned. Overall, it is obvious that there was a substantial participation on behalf of private equity analysts regarding that question because 12 out of 13 private equity firms did give an effective response to that issue.

To start with, half of private equity analysts set value on real options as a technique whereby they evaluated flexible proposal from start-up companies. Indeed, on the scale of 10, 50 percent of respondents gave a rate of 5 to real options like a satisfactory tool of assessing reversible and / or flexible start-ups investment projects.

Furthermore, there was a double similarity in the number of respondents who concurred that real options were a helpful technique for making better flexible investment decision. Firstly, 8.3% of private equity analysts ascribed a rate of 4 over 10 to real options on the one hand, and a rate of 10 over 10 to real options on the other hand. The latter rate sounded somewhat astonishing and probably derived from the unique private equity analyst who pretended to refer to real options method according to the previous table. Secondly, roughly twice of the previous percentage, (in other words 16.7%) regarded real options as a useful method for evaluating start-up companies' flexible capital budgeting. In accordance with this viewpoint, 2 people gave a rate of 6 over 10 and 8 over 10 to real options respectively.

However, the scale rates of 1 to 3 as well as 7 have not been selected at all by private equity analysts in rating real options as a method that helps improving the evaluation of start-up companies' capital budgeting.

To sum up, it is clear that the rating average of real options conceived as a helpful technique that improves the adaptability of investment decision as far as start-ups companies was 6.00. We should now move on the question to find out the most used method for evaluating capital expenditure of start-up organisations regardless on the potential flexibility or not of the proposals.

Table 3: Out of the following, what is the most used technique in appraising project in your organisation?

Methods	Response percent	Response count
NPV	33.3	4 over 12
IRR	8.3	1 over 12
The payback rule	33.3	4 over 12
The profitability Index	25.0	3 over 12
The accounting or book rate of return	0.0	0
Real options	0.0	0

This table shows information with regard to the most attractive technique of investment appraisal used by 12 over 13 private equity analysts (because there was one skipped question). As far as the overall trend is concerned, it is clear that those private equity analysts were attracted by methods such as NPV, IRR, the payback rule, the profitability index, except for the accounting or book rate of return and real options.

To begin with, a third of private equity analysts said that the most used techniques for assessing investment projects submitted to them by start-up organisations were both the NPV and payback period methods. Therefore, we could argue that those two tools of analysis, which are discounted and non-discounted cash flow techniques respectively, were equally placed. These findings appear to be inconsistent in relation to those expounded at an earlier occasion supra, for example on page 34, under figure 2. To tell the truth, it is not the case. In fact, the finding, which stated that the NPV and payback period techniques were equally placed by private equity analysts, came from the question intending to determine which of the seven methods met with the greatest extent or frequency of utilization, regardless of its discounted or non-discounted characteristic. However, the results that regarded the NPV method as the most used discounted cash flow technique (as derived from analysis of figure 2 that appeared on top of page 34) aim at selecting between two discounted cash flow techniques, namely the NPV and the IRR.

Besides, only a quarter of private equity analyst said to make largely use of the profitability index whilst the IRR technique has, strangely enough, been most utilised by just 8.3 percent of private equity analysts. Unfortunately, the worst case comprised the accounting or book rate of return and real options techniques, which scored 0.0 percent of frequency of utilization.

To conclude, it is clear that private equity analysts had recourse to a couple of techniques, notably the NPV and the payback rule, to the greatest extent. As a result, the rest of five methods were further to be in the forefront. Be that as it may, it seems worth summarising the findings of this data analysis, which constitutes the second task of this chapter as stated right at the beginning.

The aim of this section consists in summarising the findings that derived from the analysis of data collected by means of an electronic questionnaire (comprising 10 questions as a sample is appended) sent to 25 private equity firms. Only 13 over those 25 private equity firms did return their responses to us with regard to the tools of analysis they referred to when it came to make investment decision for start up companies. These 13 participants, in other words roughly 50% of the threshold population, were deemed enough meaningful of the aim of catching on the practice of private equity organisations regarding methods of assessing start ups' capital budgeting. At any rate, in order to give a shortened version of the findings, we should refer to its main points that provide answers to the research questions that pertain to this work.

To start with, as far as sectors of industries were concerned, information collected taught us that 50 percent of private equity firms were happier with investing in Health care and approximately the same percentage in Consumer goods and services likewise. These findings would probably be beneficial to both parties involved because any start-up company would submit an investment proposal, which belongs to a relevant sector of industries for example.

With regard to the classic tools of analysis, which could be used by private equity firms in making investment decision for start-ups, we found that they resorted to both discounted and non-discounted cash flow techniques. Relating to the former, results demonstrated that 66.70 percent of private equity analysts did utilise the IRR technique whereas 33.30 percent claimed using NPV method. Moreover, that trend of the dominance of the IRR method over the NPV technique has been sealed by answers on what was the preference of private equity analysts out of those two techniques on the one hand. In fact, 53.80 percent said preferring the IRR technique whilst 46.20% selected the NPV method. These results appeared to get, shall we say, a sort of «family ties» with the findings of Graham and Harvey (2001) released 10 years ago. Their results showed that «74.9% [Chief Finance Officers] always or almost always use the internal Rate of return», which was roughly 1% more than those who referred to the Net present value criterion (Graham and Harvey, 2001, p. 193). Nevertheless, our results still stand out from Graham and Harvey (2001) findings as long as they did survey only Chief Finance Officers of 4,400 American firms, with the exception of Venture capital organisations, which were on focus here instead. Furthermore, the viewpoint of private equity analysts relating to the usefulness of those methods was another confirmation of the superiority of the IRR on the second hand. For the sake of illustrating, when asked to choose between IRR and NPV, the method that most abode by the sacrosanct principle of time value of money, roughly half ( that is to say 6 over 12 because of one skipped question) of the venture capital firms analysts did tend toward the use of Internal Rate of Return (IRR).

With respect to non-discounted cash flow method for evaluating newly created ventures' capital expenditure, 41.7% of venture capital analysts said using the payback period. In addition, when assessing investment proposals from start up companies, 33.3 percent of private equity analysts referred to the profitability index technique and only a quarter claimed the utilisation of the accounting or book rate of return as a criterion of an investment decision into start up firms' proposals. These latter findings could be regarded as an echo of the widely known argument that among non-discounted cash flow methods of capital budgeting, the accounting or book rate of return looks like a poor relation with approximately 12 percentage of use by Chief Finance Officers (Graham and Harvey, 2001, p. 193).

Another concern, which has possibly been sorted out by findings from surveying venture capital organisations, had something to do with their points of view with respect to the accuracy of non-discounted cash flow methods for evaluating start up firms' capital budgeting. In fact, 50% did approve the realistic aspect of the payback rule in making investment decision for start up companies when roughly 33% did so for the accounting or book rate of return.

Nonetheless, the non-discounted cash flows method of capital expenditure for start-up organisation regarded as the least realistic, turned out to be the accounting or book rate of return. There seemed to be something odd about this latter finding. In fact, only a sixth of private equity firms thought that the accounting or book rate of return, as a capital budgeting technique, was practical for start up companies whilst a quarter previously claimed its utilisation in accordance with the results of the previous line graph that appeared at the bottom of page 38 of this work. This result sounded to suggest that the percentage of use of the accounting or book rate of return was higher than that of its satisfaction, which its users could have with respect to its accuracy. To tell the truth, the reason of such a discrepancy in these percentages resides somewhere else. Probably, there were other bases of the use of accounting or book rate of return, which the participants did not specify even though they were required to do so within the framework of the questionnaire ( In fact, a line for «other» has been provided under this question yet).

As far as techniques used by venture capital analysts in making capital budgeting decision for start up organisations, which are lacking even a dash of flexibility were concerned, we found that a third of those analysts said referring to NPV. Conversely, one of main competitors of NPV technique, in other words the IRR method, has not been selected at all. This result sounded in contradiction with the classic corporate finance theory as illustrated by academics such as Graham and Harvey (2001, p. 193), Brealey, Myers and Allen (2008).

Concerning the method used by venture capital analysts when it comes to make flexible investment decision for newly created ventures, findings demonstrated that there was a somewhat eclectic taste in the answers of participants. As a matter of fact, the NPV method was in the lead with 37.5% of use when real options only scored 12.5%.

But the poor score of real options has been improved when private equity firms were asked to say to what extent they were happy with using a recent tool ( that is to say real options), which provides private equity analysts with better adaptability in the management of start-ups' investment. Indeed, 50 percent of venture capital analysts did approve the view that real options met their need of flexibility in making start-up firm's capital expenditure decision. This result was deemed symptomatic of the progress in practice of real options, despites its recent character as method for evaluating capital budgeting decision.

At last, private equity analysts were asked to state the technique of investment appraisal that they more often resort to. Our findings showed that a couple of techniques, notably the NPV and the payback rule, were used in the greatest extent. As a result, the rest of five methods were further to be in the forefront.

Highlighting the main points of this work on the one hand and making relevant suggestions on the other hand, are the purpose of this chapter. Notwithstanding, a sort of, shall we say, `exit' section will mainly concentrate on limitations because none of academic writing can neither be excellent or ideal in every way, nor an easy concern.

To begin with, in chapter one, which dealt with the introduction, we have outlined that the context of this research resides on the discussion between academics about the cause of the significant decline in the number of investment activities of venture capital organisations. Indeed, according to the British Venture Capital Association (BVCA), 3 years ago, 1680 firms were funded by private equity while in 2009 only 987 organisations obtained similar funds (Private Equity and Venture Capital Report on Investment Activity, 2009).That fall could be due to the 2008 global economy collapse in the eyes of some. However, investors' behaviour probably was an explanation of the aforementioned decline maintained other (Roszkowski and Davey, 2010, p. 43).

Because we agreed with the latter scholars, our aim was to go beyond the notion of investing behaviour and find out the various techniques, which they have recourse to in making investment decision for newly created ventures. In doing so, our objectives were first to investigate the classic tools of analysis, which could be found in the financial literature. Secondly, our aim was to determine the applicable technique in case of evaluating flexible and reversible start-ups' investment proposals. Thirdly, our objective consisted of conducting a survey of venture capital analysts to find out their practice by way of capital budgeting for start-ups. In the fourth place, this dissertation was aimed at suggesting beneficial solutions to both parties involved in making such an investment decision, that is to say private equity analyst and start-up company.

Achieving the goals previously mentioned demanded some research queries. Therefore, the following questions were raised: what are the classic methods capable of helping venture capitalist to make investment decision devoid of any flexibility with regard to start-up companies? In case the newly created firm's project gets some flexible and reversible aspects, how should the venture capitalist make investment decision? What can we learn from an inquiry into the practice of venture capitalist in the field of determining the investment decision for newly created companies? Are the findings from the investigation into the way the venture capitalists make investment decision in practice profitable to both the main players, namely venture capital firms and new entrepreneurs?

As far as the second chapter, which was entitled literature review was concerned, there seemed not to exist in the United Kingdom, and even abroad prior research itself on financial tools of analysis commonly used by private equity in assessing start-ups capital expenditure. In order to give an account of the relevant scientific writings that pertain to this work, we opted, therefore, for a deductive reasoning. In other terms, we resorted to some general knowledge contained in both books and articles and relating to any key word of our topic. Thus, from doing so it emerged that the concept of private equity was generally regarded both in the eyes of scholars (such as Brealey, Myers and Allen, 2008, p. G-10; Wood and Wright, 2009, p. 361), and professionals (namely, the BVCA, 2010, p.14), as money invested in venture and not listed companies. Moreover, regarding the meaning of the term start-up firm, it referred to as a start-up company or «startup» is a company with a limited or non-existing operating history (Arnold, 2004, p. 388). Furthermore, the notion of investment decision was devised as synonymous with capital budgeting decision (Brealey, Myers and Allen, 2008, p. 4) or «Capital expenditure -capex-», that is the «selection of investment projects» (Arnold, 2008, p. 50).

Concerning the financial theory on tools of analysis used by private equity in making investment decision, as mentioned earlier in this conclusion, there did not appear to be prior research in the United Kingdom, and even abroad. To tell the truth, numerous scholars tended to focus in particular on standards that venture capital firms refer to in making investment decision. For the sake of illustration figured the works of authors such as MacMillan, Siegel and Subbanarasimha (1985), MacMillan, Zemann and Subbanarasimha (1987), and Zacharakis and Meyer (2000). Primarily, the aforementioned benchmarks are consisted of four components: firstly product characteristics, secondly market characteristics, thirdly company's financial position and outlook, and finally the characteristics of the entrepreneur or management team. Besides, a survey of four Australian venture capital firms has been conductor by Wright and Proimos (2005). These authors found that those organisations did utilise Berger and Udell's (1998) three stages of investment model, that is to say selection, contracting and monitoring. To the credits of their paper, we thought that it seems to be a clear and recent contribution to the understanding of the series of actions taken into consideration by private equity for making investment decision. Nevertheless, Wright and Proimos (2005) did not dwell that much upon the methods as such used whilst appraising capital budgeting proposals. Boosted by all what precedes, we were to scrutinise the general financial knowledge on methods of evaluating capex.

In accordance with this view, there were both classic and recent techniques of making investment decision. As far as the former methods were concerned, we took up the distinction between discounted cash flow and non-discounted cash flow methods. The rule of thumb on which resided that difference was the sacrosanct principle of time value of money as argued by Arnold (2008, p. 50), Chandra (2008, p. 116), and Vernimmen et al. (2009, p. 289). Net present value (NPV) and Internal rate of return (IRR) were components of the discounted cash flow techniques. Broadly speaking, NPV was conceived as «project's net contribution to wealth» (Brealey, Myers and Allen, 2008, p.G-9). In referring to NPV method for evaluating a project, it was clear that a positive NPV meant that shareholder's wealth was better off when a negative NPV was tantamount to a non acceptance of the project. Because NPV was far from being a supposed for all investment appraisal problems, its flaws were highlighted by Vernimmen et al., (2009). He has criticised the lack of easiness in working it out instinctively and directly. In addition, to him NPV did not have a dash of high opinion of «the value of managerial flexibility, in other words the options that the manager can exploit after an investment has been made in order to increase its value» (Vernimmen et al., 2009, p. 297).

The shortcoming of NPV, which had something to do with its complex calculations, had been overcome by one of the NPV's principal competitors, in other words the IRR technique. This was defined by Brealey, Myers and Allen as the «discount rate at which investment has zero net present value» (Brealey, Myers and Allen, 2008, pp. G-7). Regarding the IRR calculation, academics suggested that it was found with the help of «trial and error» in a customary way (Droms and Wright, 2010, p. 194). With respect to the IRR rule by way of investment appraisal, it simply states that whenever the rate of return of an investment is beyond the minimum acceptable rate of return on a project of an investor, it is accepted (Vernimmen et al., 2009, p. 309; Brealey, Myers and Allen, 2008, p. 123). However, we found that the IRR method, likewise the NPV its challenger, could undergo some limits. In fact, Brealey, Myers and Allen (2008) have pointed out a wide range of problems with the application of the IRR technique. Indeed, many internal rates of return for a project could result from lots of changes in the sign of cash flows. In addition, in case of proposals that are mutually exclusive, the IRR probably provided with a deformed idea of the projects value. As a final point, the IRR method did make a clean sweep of the relative size of projects. ( http://portal.lsclondon.co.uk/resources/course/view.php?id=871).

Other than the NPV and IRR techniques of evaluating capex on the basis of discounted cash flows, we investigated non discounted cash flow methods, such as the Payback period, the Profitability index, and the Book or Accounting rate of return. As far as the Payback period was concerned, we learnt that it consists of selecting «any project with the shortest payback period» (Droms and Wright, 2010, p. 191). According to Brealey, Myers and Allen (2008), two examples of thing could go wrong with the payback technique. First, it does not encompass «all cash flow after the cut-off date; [secondly, the] «payback rule gives equal weight to all cash flows before the cut-off date» (Brealey, Myers and Allen, 2008, p. 121). With respect to the profitability index, the golden rule was to only choose the projects with the uppermost NPV per pound of initial amount of money spend. Relating to the book or Accounting rate of return, finally, Brealey, Myers and Allen (2008) taught us that it aimed at finding the potential book income «as a proportion of the book value of the assets that the firm is proposing to acquire» (Brealey, Myers and Allen, (2008, p. 119). Because the book rate of return is a sort of means across the total activities of the organisation, we considered that it was unlikely to be worthwhile dwelling too much upon it. As a matter of fact, we were exclusively focussed on the methods private equity use for investment decision making for start-up companies.

As far as recent tool of appraising capital budgeting was concern, we found the need of flexible investment proposals had been met by real options. In fact, flexibility of an investment has a value, the value of the option associated with it. For the sake of example, Vernimmen et al., (2009) have suggested that in the field of industrial investments, real options are equivalent of «the right not the obligation, to change an investment project, particularly when new information on its prospective returns becomes available» (Vernimmen et al., 2009, p. 374). Moreover, we took up the advantageous view of real options as highlighted by Krychowski and Quélin (2010) in the following way: «The main contribution of RO [this stands for Real Options] is to recognize that investment projects can evolve over time, and that this flexibility has value. Myers (1984) considered that RO is a powerful approach to reconcile strategic and financial analysis» (Krychowski and Quélin, 2010, p. 65).

We needed to find answers to research questions that pertained to this paper. Therefore, the primary purpose of the third chapter was to comprehend the notion of research methodology in the first place, and expound the approach that we selected in order to achieve our set objectives in the second place. With regard to the former aim of the third chapter, we shared the viewpoint of Saunders, Lewis and Thornhill on the notion of research methodology. In fact, it could be defined as the «theory of how research should be undertaken, including the theoretical and philosophical assumptions upon which research is based and the implications of these for the method or methods adopted» (Saunders, Lewis and Thornhill, 2007, p. 602).

Relating to the latter aim of that third chapter, we outlined the approach used in this work in order to attain our objectives. In this respect, we argued that this paper did take into consideration some research strategies like axiology, ontology and epistemology. Axiology was taken into account upstream from the selection of this topic. Actually, because it seemed not to be prior research on the techniques of investment appraisal used by private equity firms per se, we were led to all the relevance of this exploratory research. Furthermore, in the course of surveying the previously mentioned firms, we were aware of their values and strove to admit them without passing any sort of judgment in accordance with the core requirement of axiology strategy. Epistemology, and to be more accurate, interpretivism was considered throughout this work due to the specificity of business study; so, the qualitative philosophy of research was be utilised in order to interpretate, understand and conduct a thick description of reality of tools of investment appraisal used by private equity. Ontology was concerned here insofar as we were to bear in mind enough objectivity in making analysis of data collected. Finally, as far as research design was concerned, this paper opted for the cross-sectional design as long as patterns of association has been looked for and data collection based on electronic questionnaire designed with the help of a software called Survey Monkey.

From the fourth chapter, which dealt with data analysis and findings, it emerged firstly that 50 percent of private equity firms were more attracted by investing in Health care and roughly the same proportion in Consumer goods and services than technology industries, financial ventures, Basic materials, oil and gas, and industrials. Secondly, as far as techniques used by venture capital analysts in making capital budgeting decision for start up organisations, which are lacking even a dash of flexibility were concerned, we found that a third of those analysts said referring to NPV. In this respect and conversely, the revelation appeared to be that private equity analysts in making non-flexible investment decision for start-up firms did make a sweep clean of the IRR technique. Thirdly, by way of making flexible capital budgeting decision for start up organisations, the NPV method was in the lead with 37.5% of use when real options only scored 12.5%. However, relating to that latter tool of analysis and the viewpoint of their users on the satisfaction they got from it, 50 percent of venture capital analysts did approve the view that real options met their need of flexibility in making start-up firm's capital expenditure decision.

This paper was focussing on the tools of analysis commonly used by private equity in making investment decision. Broadly speaking, we noticed that private equity analysts did make capex decision in accordance with the general final knowledge as imparted by most of the textbooks. However, some suggestions could be made in such a way those investment decision be more fruitful and realistic. In addition, recommendations for further research have been taken into consideration.

Ø Private equity analysts should at least be aware of the use of IRR method and its advantages by way of making non-flexible investment decision for start up organisations.

Ø In case of flexible capital budgeting projects for newly created ventures, venture capital analysts should only refer to real options, so long as real options are the recent tool tailored for that purpose.

Ø In order to come off better, start up firms should strive in submitting investment projects that belongs to one of the most attractive sector of industry in the eyes of private equity analysts, namely health care and / or consumer goods and services.

Ø Most should be done in order to further make real options wildly understandable and appreciate by professionals.

· A sound inquiry into the private equity analysts' practice of real options appears to be relevant in understanding its relative achievement by way of investment appraisal for start up organisations.

· A paper, which only focuses on project analysis per se, would be both beneficial to all the parties involved. To be more specific, an exploration study of the usable techniques like Monte Carlo simulation, break-even analysis, and sensitivity analysis of identifying critical factors, which could undermine a start-up's project, should be significant.

Just like any other human activities, conducting a research appears not to be a small task. This sort of `exit' section aims at outlining, therefore, some factors that stood in the way of the easy progress of this piece of work.

Because there seemed not to be prior studies on the tools of analysis commonly used by private equity in making investment decision for start up companies in the United Kingdom and even abroad, we were to collect primary data in order to be consistent in our findings. In doing so, some private equity firms refrained from taking part in our survey under the grounds of confidentiality and privacy of the information needed. On top of that, they argued that their schedule at work was busiest.

In response to those difficulties in getting information, we were to opt for an electronic questionnaire as a non-time consuming way of collecting data and did attach a cover letter to the electronic mail that we sent to our sample population made of 25 private equity firms. At the end of the day, half of them were kind enough to come back to us.

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This survey comes within the academic framework of a Master in Business Administration dissertation in Finance, currently written by the interviewer. The aim of this questionnaire is to find out more about actual practice of private equity analyst in investment appraisal. There will neither be any question relating to personal details of the respondent and the results of this survey will nor be published. Therefore, the entire voluntary participation of the respondent as well as the confidentiality of his answers is absolutely ensured. Your opinion is very important and will be highly appreciated.

1. Are you interested in investing in?

Technology (hardware, software, telecommunication and computer services)	Basic materials	Consumer goods and services	Health care	Financials	Industrials	Oil and gas
Other (please specify)

2. Do you use these discounted cash flow methods for evaluating startup projects?

3. What is your viewpoint regarding the usefulness these two discounted cash flows methods for newly created ventures capital budgeting?

	Strongly disagree	Disagree	Neutral	Agree	Strongly agree
NPV method is sensible since it recognizes the time value of money.
IRR technique is sensible as long as it takes into account the time value of money.
NPV tool is preferable in case of mutually exclusive projects.

4. Between these two discounted cash flow techniques of investment appraisal, what do you rather prefer?

5. Do you use these non-discounted cash flow methods for evaluating projects?

6. Among the following non-discounted cash flow techniques of investment appraisal, what do you think is more realistic in judging capital budgeting proposal for start-ups?

7. When projects to evaluate are devoid of any flexibility, to your mind what is the best analysis tool of investment appraisal for startup companies?

8. What do you resort to in making flexible investment decision for startup?

9. How do you rate Real options relating to making better flexible capital expenditure decision for start-up organisations?

	1	2	3	4	5	6	7	8	9	10
Real options provides us with a better adaptability in the management of proposal

10. Out of the following, what is the most used technique in appraising project in your organisation?