Biases in Management Forecasts of Venture-Backed Start-Ups Revisited: Evidence from Internal Due Diligence Documents of VC Investors

This study provides evidence of significant biases in multi-year management forecasts by analyzing a proprietary dataset on venture-backed start-ups in Germany. In contrast to prior research we do not detect "strategically" understated one-year-ahead forecasts for revenues and expenses. Rather, revenues and expenses are highly overstated in each of the investigated one-to five-year-ahead planning periods. Regarding the accuracy of the forecasts, further analyses uncover that prior start-up experience increases forecast biases while higher asset verifiability and corporate lead investors lead to smaller forecast errors. All key results hold if bias is either measured using a cross-sectional projection approach based on historical accounting data or by traditionally comparing forecasts to ex-post realizations. Consequently, we document that the so far unevaluated projection method developed by prior research performs well and has promising features for future research and practice.