Venture capitalists' decision criteria in new venture evaluation

What criteria do venture capitalists use to make venture investment decisions? The criteria venture capitalists use to make their venture investment decisions are of interest for several reasons. First, venture capitalists are conspicuously successful in their investment decisions. The success rate of venture capital-backed ventures is significantly higher than the success rate of new ventures generally (Dorsey 1979: Davis and Stetson 1984). A better understanding of the criteria used could lead to a better understanding of the reasons for this success.Second, a better understanding of the criteria for successful new ventures could lead to an improvement in the success rate of new ventures. Although there is no clear agreement on the precise rate, the failure rate among new ventures is generally viewed as significantly higher than the average failure rate (Dun and Bradstreet 1984; Van de Ven 1980; Shapero 1981).Finally, venture capitalists' investment criteria are of enormous import to entrepreneurs seeking venture funding. Such entrepreneurs require a significant infusion of capital in order to grow their businesses, and knowledge of the criteria sought by venture capitalists can aid entrepreneurs in gaining the necessary financing.This study attempts to uncover the criteria used by venture capitalists through semistructured interviews and verbal protocol analysis of venture capitalists' evaluations of actual venture proposals. Sixteen verbal protocols—in which the participants “think aloud” as they review business proposals— were made of venture capitalists' venture evaluation decisions.The findings of this study suggest that venture capitalists screen and assess business proposals very rapidly: the subjects in this study reached a GO/NO-GO decision in an average of less than six minutes on initial screening and less than 21 minutes on proposal assessment. In venture capitalists' initial proposal screening, key criteria identified include fit with the venture firm's lending guidelines and the long-term growth and profitability of the industry in which the proposed business will operate. In the second stage of proposal assessment, the source of the business proposal also played a major role in the venture capitalists' interest in the plan, with proposals previously reviewed by persons known and trusted by the venture capitalist receiving a high level of interest.In addition to the specific criteria identified and how they were used in reaching GO/NO-GO decisions, the findings of this study also were surprising for the lack of importance venture capitalists attached to the entrepreneur/entrepreneurial team and the strategy of the proposed venture during these early stages of the venture evaluation process.     

Limited attention and the role of the venture capitalist

This research analyzes the venture capitalist's incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund. Venture capital is a professionally managed pool of capital invested in equity-linked private ventures. Entrepreneurs turn to venture capitalists for financing because high-technology startup firms have low or negative cash flows, which prevent them from borrowing or issuing equity. In addition, venture capitalists are actively involved in management of the venture to assure its success. This solves the problem of startup firms that do not have the cash flows to hire management consultants.Venture capital contracts have three main characteristics: (1) staging the commitment of capital and preserving the option to abandon, (2) using compensation systems directly linked to value creation, and (3) preserving ways to force management to distribute investment proceeds. These characteristics address three fundamental problems: (1) sorting the venture capital among the entrepreneurial ventures, (2) providing incentives to motivate venture capitalists to maximize the value of the funded ventures, and (3) providing incentives to motivate entrepreneurs to maximize the value of the ventures. Venture capitalists fund only about a dozen projects a year out of a thousand evaluated. Each project may receive several rounds of financing. Payoffs to VCs can be very high or be a complete loss.The typical venture capital (VC) firm is organized as a limited partnership, with the venture capitalists serving as general partners and the investors as limited partners. General partner VCs act as agents for the limited partners in investing their funds. VCs invest their human capital by placing their reputation on the line. The goal is to begin to convert the investment into cash or marketable securities, which are distributed to the partners. VC management companies receive a management fee equal to a percentage (usually 2.5%) of the capital of each fund. They also receive a percentage (15–30%) of the profits of each fund, called carried interest. Periodic reports are made by the VC firm to the limited partners. Usually these are only costs of managing the fund, and so revenues are negative. Most contracts specify the percentage of time that the VC will devote to managing the fund.The analysis of this research deals with the incentives of the VC who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding. The analysis shows that the VC, as agent for both the entrepreneur and the general partners, does not have the incentives required to maximize their profits. The VC allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs' and limited partners' profits. However, the VC does maximize the total profits of all ventures. Because the VC considers the opportunity cost of attention, the VC's allocation of attention is efficient. The implication of this result is that, although the entrepreneurs and limited partners could be made better off with a different allocation of the VC's time, this would be an inefficient use of the VC's time.     

Passion for entrepreneurship or passion for the product? A conjoint analysis of angel and VC decision-making

Passion is important to venture investors, but what specifically do they want entrepreneurs to be passionate about? This study theorizes that angel investors and venture capitalists consider both entrepreneurs' passion for activities related to the product or service the venture provides (i.e., product passion) and passion for founding and developing new ventures (i.e., entrepreneurial passion). We demonstrate that both types of passion become more appealing when the investor perceives that the entrepreneur is highly open and receptive to feedback, suggesting that openness to feedback mitigates potential concerns associated with passion in its extremes. We further find that venture investors differ in their consideration of passion; angel investors and venture capitalists with more investing experience place greater emphasis on the combination of product passion and openness to feedback, whereas those with more entrepreneurial experience emphasize the combination of entrepreneurial passion and openness to feedback.     

Hybrid conjoint analysis: An estimation probe in new venture decisions

How venture capitalists select start-ups for financing has been an interesting topic for many researchers and practitioners. The underlying assumption is that people who make money investing in new businesses by assessing the proposals should be experienced enough to distinguish losers from winners. Our research study tested three models (self-explicated, conjoint and a hybrid—comprising the two previous ones—conjoint) in order to find out: 1. if these models could be applied to venture capital decision making and if so 2. to demonstrate the potential of conjoint analysis as a practical research method. 3. To test whether or not the characteristics of the entrepreneur, the product and the market replicate the venture capital decision.This research study confirms what normative literature on decision-making emphasizes: that in the first stage of an evaluation (screening), venture capitalists focus on a small subset of criteria in a non-compensatory process (i.e., an unacceptable value on one criterion cannot be offset by a high value of another one). The important criteria in this phase appear to be the entrepreneur's experience and the existence of a prototype for some decision-makers or unique features of the product for others. The screening step is more judgemental than analytic.In a second stage (the evaluation phase), however, venture capitalists end a detailed examination (due diligence process) by choosing the most preferred ventures through processes approximating compensatory rules; that is, a low but acceptable value on one criterion can be compensated by a high value on another. The most important criteria identified by the research in this second stage are criteria found in the previous stage, product gross profit margin and patent.Our research demonstrates agreement among venture capitalists in terms of one criterion to evaluate research proposals: managerial experience. As to the rest of the attributes tested, there was variation in the weights assigned to them.The findings of this pilot study also confirm the applicability of conjoint analysis as a research method in venture capital decision. The approach helps shed light on the decision rules applied, and permits the testing of previously researched criteria for predictive validity. The method has the advantage of retaining individual preferences and clustering them around venture capitalists' demographic and psychographic backgrounds (i.e., years of experience, type of education, life-style, and the like) or other types of information such as venture fund policies (size of the investment, type of industry, etc.).The major implication of the study for entrepreneurs is the importance of previous experience in the industry where they expect to develop their ventures, and a deep knowledge of the product (advantages over competition, technical, production, and cost feasibility) they are to produce and market. These are the factors that have the greatest influence on venture capitalists' evaluation of such projects.     

Criteria used by venture capitalists to evaluate new venture proposals

A questionnaire was administered to one hundred venture capitalists to determine the most important criteria that they use to decide on funding new ventures. Perhaps the most important finding from the study is direct confirmation of the frequently iterated position taken by the venture capital community that above all it is the quality of the entrepreneur that ultimately determines the funding decision. Five of the top ten most important criteria had to do with the entrepreneur's experience or personality. There is no question that irrespective of the horse (product), horse race (market), or odds (financial criteria), it is the jockey (entrepreneur) who fundamentally determines whether the venture capitalist will place a bet at all.The question is if this is the case, then why is so much emphasis placed on the business plan? In a business plan there is generally little to indicate the characteristics of the entrepreneur—it is generally devoted to a detailed discussion of the product/service, the market, and the competition. To us, the implications are obvious—such content is necessary, but not sufficient. The business plan should also show as clearly as possible that the “jockey is fit to ride” —namely, indicate by whatever feasible and credible means possible that the entrepreneur has staying power, has a track record, can react to risk well, and has familiarity with the target market. Failing this, he or she needs to be able to pull together a team that has such characteristics and show that he or she is capable of leading that team.Factor analysis of the results indicate that venture capitalists appear to assess ventures systematically in terms of six categories of risk to be managed. These are: risk of losing the entire investment: risk of being unable to bail out if necessary; risk of failure to implement the venture idea; competitive risk; risk of management failure; and risk of leadership failure.Finally, three clusters of venture capitalists were identified: those who carefully assess the competitive and implementation risks: those who seek easy bail out; and those who deliberately keep as many options open as possible.     

FOCUS: Risks in Business Ethics and Venture Capital

By creating new ventures and new job opportunities venture capital is essential to a dynamic economy. But it should also be fair and ethical at every stage. Professor Fassin explores the various ethical issues which arise between venture capitalists, entrepreneurs and investors. He teaches at the University of Mons (FUCAM) and has written widely on management. From 1988-1991 he was Secretary General of the European Venture Capital Association. He is partner of the Veerick School of Management of the University of Ghent.     

The advantage of experienced start-up founders in venture capital acquisition: evidence from serial entrepreneurs

Entrepreneurs with prior firm-founding experience are expected to have more skills and social connections than novice entrepreneurs. Such skills and social connections could give experienced founders some advantage in the process of raising venture capital. This paper uses a large database of venture-backed companies and their founders to examine the advantage associated with prior founding experience. Compared with novice entrepreneurs, entrepreneurs with venture-backed founding experience tend to raise more venture capital at an early round of financing and tend to complete the early round much more quickly. In contrast, experienced founders whose earlier firms were not venture-backed do not show a similar advantage over novice entrepreneurs, suggesting the importance of connections with venture capitalists in the early stage of venture capital financing. However, when the analysis also takes into account later rounds of financing, all entrepreneurs with prior founding experience appear to raise more venture capital. This implies that skills acquired from any previous founding experience can make an entrepreneur perform better and in turn attract more venture capital.     

The CEO,venture capitalists,and the board

An element in the never-ending debate about the process of funding highpotential businesses is the extent to which venture capitalists add value besides money to their portfolio companies. At one end of the spectrum, venture capitalists incubate start-ups and nurture hatchlings, while at the other extreme, so-called “vulture” capitalists feed on fledgling companies. A very important way in which venture capitalists add value other than money to their portfolio companies is by serving on boards of directors. Hence, by studying the role of outside directors, especially those representing venture capital firms, we were able to shed light on the issue of value-added.In the first phase of the research, we studied 162 venture-capital-backed high-tech firms located in California, Massachusetts, and Texas. In the second phase (with data from 98 of the 162 firms), the lead venture capitalists on the boards were classified according to whether or not they were a “top-20” firm.Board Size The average board size was 5.6 members, which was somewhat less than half the size of the board of a typical large company. Board size increased from 3 to 4.8 members with the first investment of venture capital.Board Composition and Control The typical board comprised 1.7 inside members, 2.3 venture capital principals, .3 venture capital staff, and 1.3 other outsiders. Insiders constituted 40% or less of the members of 82% of the boards, while venture capitalists made up over 40% of members of 55% of the boards. When a top-20 venture capital firm was the lead investor, then 55% of the board members were venture capitalists; in contrast, when the lead was not a top-20 firm, only 23% of board were venture capitalists.Value-Added Overall, our sample of CEOs did not rate the value of the advice of venture capitalists any higher than that of other board members. However, those CEOs with a top20 venture capital firm as the lead investor, on average, did rate the value of the advice from their venture capital board members significantly higher—but not outstandingly higher—than the advice from other outside board members. On the other hand, CEOs with no top-20 as the lead investor found no significant difference between the value of the advice from venture capitalists and other outside board members. Hence, in our sample, we could not say that there was a noticeable difference in the value of valueadded by top-20 boards and non-top-20 boards.The areas where CEOs rated outside board members (both venture capitalists and others) most helpful were as a sounding board, interfacing with the investor group, monitoring operating performance, monitoring financial performance, recruiting/replacing the CEO, and assistance with short term crisis. That help was rated higher for early-stage than later-stage companies.Our findings have the following implications for venture capitalists, entrepreneurs, and researchers.Venture Capitalist The main product of a venture capital firm is money, which is a commodity. It's impossible to differentiate a commodity in a martetplace where the customers have perfect information. As venture capitalists learned since the mid-1980s, their customers (entrepreneurs) now have an abundance of information that, while it may not be perfect, is certainly good enough to make a well-informed decision when selecting a venture capital firm. Hence, value-added may be the most important distinctive competence with which a venture capital firm—especially one specializing in early-stage investments—can differentiate itself from its competitors. If that is the case, then venture capital firms need to pay more attention to their value-added, because CEOs, overall, do not perceive that it has a great deal of value to their companies. The top-20 appear to be doing a somewhat better job in that area than other venture capital firms.Entrepreneurs If an entrepreneur wants outside board members who bring valueadded other than money, it appears that they can do as well with non-venture capitalists as with venture capitalists. The entrepreneurs we talked to in our survey gave the impression that board members with significant operating experience are more valued than “pure” financial types with no operating experience. If venture capital is an entrepreneur's only source offunding, then the entrepreneur should seek out firms that put venture capitalists with operating experience on boards. It also appears that an entrepreneur, will, on average, get more value-added when the lead investor is a top-20 firm, but there is a drawback: when a top-20 is the lead investor, it is more likely that venture capitalists will control the board. No entrepreneur should seek venture capital solely to get value-added from a venture capitalist on the board, because outside board members who are not venture capitalists give advice that is every bit as good as that given by venture capitalists.Researchers Value-added is a fruitful avenue of research. From a practical perspective, if valueadded exists it should be measurable. So far the jury has not decided that issue. Some finance studies of the performance of venture-capital-backed initial public offerings (IPOs) claim to have found valueadded, some claim to have found none, and at least one study claims to have found negative value- added. From a theoretical perspective, value-added is relevant to agency theory, transaction cost economics, and the capital asset pricing model. It also is relevant to strategic analysis from the viewpoint of distinctive competencies.     

Novice,portfolio, and serial founders: are they different?

There is growing interest in entrepreneurs who have been involved in more than one venture, yet to date there has been relatively little theoretical development and systematic empirical examination of the topic. In particular, there has been little attention to the potential heterogeneity of habitual entrepreneurship. This study aims to contribute to this emerging area in two ways. First, it outlines a conceptual typology of habitual entrepreneurs who have founded, purchased, or inherited businesses. Second, the empirical part of the study focuses on owner-managers, providing an exploratory analysis of the characteristics and effects of independent business ownership by novice, portfolio, and serial founders. Novice founders are those that have no prior entrepreneurial experience as either a founder, an inheritor, or a purchaser of a business. Portfolio founders retain their original business and inherit, establish, and/or purchase another business. Serial founders are those who sell their original business but at a later date inherit, establish, and/or purchase another business.The study derives propositions suggesting differences among the three types of founders. At the individual founder level of analysis, similarities as well as differences in the personal background, work experiences, reasons leading to the start-up of businesses, and personal attitudes to entrepreneurship of these three types of entrepreneurs are explored. At the organizational level of analysis, finance, employment and performance differences among the businesses owned by the three types of entrepreneurs are presented.The issues are examined using a sample of entrepreneurs who were the principal owner-managers of independent businesses in Great Britain. The sample included 389 novice founders (62.6%), 75 portfolio founders (12.1%), and 157 serial founders (25.3%). No statistically significant differences were found among the three groups of entrepreneurs with regard to the main industrial activity, geographical location, and the age of their businesses. Univariate and multivariate tests were used to examine potential differences between the groups.The results of the study show significant differences between portfolio and serial founders with regard to their parental background, work experience, and their age when they started their first business. Differences were also found with respect to reasons leading to start-up, personal attitudes to entrepreneurship, and sources of funds used during the launch period of the surveyed business. These findings suggest that habitual entrepreneurs cannot be treated as a homogeneous group. The analysis, however, failed to find any significant differences between the performance of the surveyed firms owned by habitual founders and novice founders and between the two types of habitual founders.The findings of the study indicate for researchers that there is a need to carefully define the unit of analysis in any examination of entrepreneurs. In particular, there is a need to take note of the heterogeneity of types of entrepreneur and to consider the entrepreneur as the appropriate unit of analysis rather than simply the firm. Although this study focused on habitual founders of businesses, the theoretical section of the study also identified other types of habitual entrepreneurs, such as serial corporate entrepreneurs and serial management buy-out and buy-in cases. These other types of habitual entrepreneurs would appear to warrant further analysis.The findings of this study have a number of implications for practitioners, especially venture capitalists. The absence of significant performance differences between novice and habitual entrepreneurs, which is consistent with the results from other studies, emphasizes the need for venture capitalists screening potential investees not to rely solely on previous experience.The study also has implications for policy-makers, especially with respect to decisions concerning the allocation of resources to assist nascent entrepreneurs, novice entrepreneurs, and habitual entrepreneurs. The similarities in business performance among novice, serial, and portfolio entrepreneurs suggests that policy-makers need to be careful in targeting scarce resources. Most notably, targeting resources to encourage talented nascent entrepreneurs to become novice entrepreneurs may offer returns which are at least as good as targeting resources to more experienced entrepreneurs.     

New venture strategy and profitability: A venture capitalist's assessment

This study uses theoretically justified criteria from the industrial organization (IO) strategy literature and applies it to a new domain, namely, venture capitalists' decision making. Specifically, the study investigates the types of information venture capitalists utilize when evaluating new ventures and how venture capitalists use this information to assess likely new venture profitability. In the interest of advancing our understanding of the decision making policies of venture capitalists, this study addresses many of the limitations of previous research.A review of IO research suggests important relationships between a number of strategy variables and new venture profitability. Some of the relationships proposed by IO strategy research are contingent in nature. The strategy variables and their relationships with profitability are investigated in the domain of venture capitalists' decision making. Individual and aggregate decision making analyses identified those strategy variables (criteria) venture capitalists utilize in assessing likely new venture profitability, namely, timing, key success factor stability, lead time, competitive rivalry, educational capability, industry-related competence, timing × key success factor stability interaction, timing × lead time interaction, and timing × educational capability interaction.On average, the most important criterion for venture capitalists in their assessment of profitability is industry-related competence. The second tier of importance is competitive rivalry, timing, and educational capability. The third tier of importance is lead time, key success factor stability, and timing × lead time interaction. Other interactions are less important. Therefore, while venture capitalists use contingent decision policies, main effects dominate. If venture capitalists use a reported 8 to 12 minutes on average to evaluate a business plan (Sandberg 1986), then this study's findings may help the inexperienced venture capitalist allocate time towards assessing those attributes of primary importance. Although more complex relationships exist between the attributes, the inexperienced venture capitalist can take comfort from this study's findings that main effects dominant amongst senior venture capitalists. Senior venture capitalists may take less comfort from their importance placed on main effects in light of research from IO, which suggests the importance of contingent relationships. The results may also have practical application towards training.How should venture capital firms train their new employees? Should venture capital firms rely solely on experienced venture capitalists lecturing the inexperienced on the criteria they use in assessing a new venture proposal? Like most decision makers, venture capitalists have limited insight into their assessments and venture capital firms need to be aware of the gap between “espoused” policies and policies “in use.” The information being taught needs to be supplemented with venture capitalists' decision-making research that investigates decision policies “in use”, such as this study. Venture capitalist training could also involve experiential learning, in conjunction with cognitive feedback about the decision policies used, to accelerate the learning process. Experiential learning using cognitive feedback maximizes industry related learning while minimizing the cost of inexperienced decisions. For the entrepreneur seeking capital, this increased understanding of venture capitalists' decision making may help them better target their business plans and presentations at those criteria venture capitalists' find most critical to the profitability of a new venture.     

Why do venture capital firms exist? theory and canadian evidence

This paper investigates the role of venture capitalists. We view their “raison d’être” as their ability to reduce the cost of informational asymmetries. Our theoretical framework focuses on two major forms of asymmetric information: “hidden information” (leading to adverse selection) and “hidden action” (leading to moral hazard). Our theoretical analysis suggests four empirical predictions.1. Venture capitalists operate in environments where their relative efficiency in selecting and monitoring investments gives them a comparative advantage over other investors. This suggests strong industry effects in venture capital investments. Venture capitalists should be prominent in industries where informational concerns are important, such as biotechnology, computer software, etc., rather than in “routine” start-ups such as restaurants, retail outlets, etc. The latter are risky, in that returns show high variance, but they are relatively easy to monitor by conventional financial intermediaries.2. Within the class of projects where venture capitalists have an advantage, they will still prefer projects where monitoring and selection costs are relatively low or where the costs of informational asymmetry are less severe. Thus, within a given industry where venture capitalists would be expected to focus, we would also expect venture capitalists to favor firms with some track records over pure start-ups. To clarify the distinction between point 1 and point 2, note that point 1 states that if we look across investors, we will see that venture capitalists will be more concentrated in areas characterized by significant informational asymmetry. Point 2 says that if we look across investment opportunities, venture capitalists will still favor those situations which provide better information (as will all other investors). Thus venture capitalists perceive informational asymmetries as costly, but they perceive them as less costly than do other investors.3. If informational asymmetries are important, then the ability of the venture capitalist to “exit” may be significantly affected. Ideally, venture capitalists will sell off their share in the venture after it “goes public” on a stock exchange. If, however, venture investments are made in situations where informational asymmetries are important, it may be difficult to sell shares in a public market where most investors are relatively uninformed. This concern invokes two natural reactions. One is that many “exits” would take place through sales to informed investors, such as to other firms in the same industry or to the venture’s own management or owners. A second reaction is that venture capitalists might try to acquire reputations for presenting good quality ventures in public offerings. Therefore, we might expect that the exits that occur in initial public offerings would be drawn from the better-performing ventures.4. Finally, informational asymmetries suggest that owner-managers will perform best when they have a large stake in the venture. Therefore, we can expect entrepreneurial firms in which venture capitalists own a large share to perform less well than other ventures. This is moral hazard problem, as higher values of a venture capitalist’s share reduce the incentives of the entrepreneur to provide effort. Nevertheless, it might still be best in a given situation for the venture capitalist to take on a high ownership share, since this might be the only way of getting sufficient financial capital into the firm. However, we would still expect a negative correlation between the venture capital ownership share and firm performance.Our empirical examination of Canadian venture capital shows that these predictions are consistent with the data. In particular, there are significant industry effects in the data, with venture capitalists having disproportionate representation in industries that are thought to have high levels of informational asymmetry. Secondly, venture capitalists favor later stage investment to start-up investment. Third, most exit is through “insider” sales, particularly management buyouts, acquisitions by third parties, rather than IPOs. However, IPOs have higher returns than other forms of exit. In addition, the data exhibit the negative relationship between the extent of venture capital ownership and firm performance predicted by our analysis.     

Specialization versus diversification as a venture capital investment strategy

Much important work has informed us of rates of return earned by venture capitalists, the importance of venture capitalists to the “going public” process, and the criteria venture capitalists use to evaluate deals. This paper seeks to add to the literature by testing hypotheses, based upon both the finance and strategic management literature, regarding certain venture capitalist investment practices.Venture capitalists seek to control or manage risk (Driscoll 1974; MacMillan, Siegel, and SubbaNarasimha 1985). Financing structure and investment strategy provide several means for venture capitalists to do this. Tools available to the venture capitalist include portfolio diversification to spread risk across different industries, firms, or hot/cold IPO markets to minimize unsystematic or investment-specific risk. Information sharing, networking, and specialization can also be used to control unsystematic risk.Several hypotheses are developed from these conflicting perspectives. Data used to test the hypotheses are derived from responses to a survey of venture capitalists. Three hundred surveys were mailed to venture capitalists; 98, or 32.7%,returned usable responses.Portfolio diversification is a well-known means to control risk exposure by reducing unsystematic or specific risks. However, Bygrave (1987, 1988), as well as financial intermediation theorists, argues that maintaining a high degree of specialization is useful for controlling risk as well as for gaining access to networks, information, and deal flow from other venture investors. The analyses of this paper build upon Bygrave's work. We construct more rigorous tests to resolve the conflict between the diversification and information-sharing hypotheses. Our hypothesis tests were usually resolved in favor of the information-sharing view. For example, venture capitalists in the sample that were heavily involved in seed round financing were diversified across fewer numbers of firms and industries.Further evidence in favor of information sharing is seen in investment patterns across different financing stages. Diversification would imply maintaining a portfolio of investments across the different investment stages. The information sharing/specialization view would argue that it is best to stay focused on a single stage or several “connected” stages. The empirical evidence from the sample once again favors the specialization perspective.This research provides information of use to venture capitalists, as they seek information on how best to control risk; to entrepreneurs, as they learn of the factors venture capitalists consider in determining their investment strategy; and to academicians, as such studies provide insight to general industry practice and thus help to form the basis of classroom discussion and future research endeavors.     

非对称信息条件下风险投资者与多个风险投资家的委托——代理分析

风险投资者与多个风险投资家建立合同关系,多个风险投资家共同为该投资者经营一个风险投资项目,易导致搭便车行为。在连续支付模式下,引入有效的激励机制能够提高各风险投资家努力的积极性,提高项目的投资效率和成功率。通过对风险投资者与多个风险投资家之间委托-代理关系的进一步分析可知,在连续基金周期中,各风险投资家只有充分地发挥自己的努力水平,才能达到一个马尔科夫完美均衡(MPE)。     

Prediction and control under uncertainty: Outcomes in angel investing

Venture investing plays an important role in entrepreneurship not only because financial resources are important to new ventures, but also because early investors help shape the ventures' managerial and strategic destiny. In this study of 121 angel investors who had made 1038 new venture investments, we empirically investigate angel investors' differential use of predictive versus non-predictive control strategies. We show how the use of these strategies affects the outcomes of angel investors. Results show that angels who emphasize prediction make significantly larger venture investments, while those who emphasize non-predictive control experience a reduction in investment failures without a reduction in their number of successes.     

Entrepreneur opportunity costs and intended venture growth

This study investigates how entrepreneur opportunity costs influence the intended future size of new ventures. In particular, using a survey of nascent entrepreneurs in the process of starting a venture, this paper examines how intended future sales revenue is influenced by entrepreneur current household income, education, and managerial experience. Consistent with opportunity cost and human capital arguments, it is found that individuals with higher current household income and greater supervisory experience have higher levels of intended firm size in 5 years time. While this study finds that entrepreneur stated preferences for growth also influence intended future sales of the venture, the association between nascent entrepreneur opportunity costs and venture scale is complementary to these stated preferences.     

Insights on the mentorship and coachability of entrepreneurs

Mentorship from other experienced individuals has become essential to entrepreneurs and their fledgling ventures, particularly in today’s accelerators. However, even with the acknowledgment that mentoring and coaching improve an entrepreneur’s likelihood of success, we know very little about the nuances of mentor-mentee relationships or the individual characteristics important to an entrepreneur’s coachability. Therefore, we examined mentors and founders across entrepreneurial support organizations to investigate the factors that influence an entrepreneur’s coachability, how coachability translates to venture outcomes, and whether or not the mentor-mentee relationship met the entrepreneur’s expectations. We found that entrepreneurs that are more coachable are ultimately more successful during their time in these programs and are more satisfied with their mentorship experience. This article provides insights for the leaders of accelerators to improve mentorship opportunities and suggestions for entrepreneurs to improve their coachability.     

Venture capitalist governance and value added in four countries

The rapid internationalization of markets for venture capital is expanding the funding alternatives available to entrepreneurs. For venture capital firms, this trend spells intensified competition in markets already at or past saturation. At issue for both entrepreneurs and venture capital firms is how and when venture capitalists (VCs) can provide meaningful oversight and add value to their portfolio companies beyond the provision of capital. An important way VCs add value beyond the money they provide is through their close relationships with the managers of their portfolio companies. Whereas some VCs take a very hands-off approach to oversight, others become deeply involved in the development of their portfolio companies.Utilizing surveys of VCs in the United States and the three largest markets in Europe (the United Kingdom, the Netherlands, and France), we examined the determinants of interaction between VCs and CEOs, the roles VCs assume, and VCs' perceptions of how much value they add through these roles. We examined the strategic, interpersonal, and networking roles through which VCs are involved in their portfolio companies, and we analyzed how successful such efforts were. By so doing we were able to shed light on how and when VCs in four major markets expend their greatest effort to provide oversight and value-added assistance to their investment companies.Consistent with prior empirical work, we found that VCs saw strategic involvement as their most important role, i.e., providing financial and business advice and functioning as a sounding board. They rated their interpersonal roles (as mentor and confidant to CEOs) as next in value.Finally, they rated their networking roles (i.e., as contacts to other firms and professionals) as third most important. These ratings were consistent across all four markets. VCs in the United States and the United Kingdom were the most involved in their ventures, and they added the most value. VCs in France were the least involved and added the least value; VCs in France appeared to be least like others in terms of what factors drove their efforts. Our theoretical models explained a greater proportion of variance in governance and value added in the United States than elsewhere. Clear patterns of behavior emerged that reflect the manner in which different markets operate. Among the European markets, practices in the United Kingdom appear to be most like that in the United States.Determinants of Governance (Face-to-Face Interaction)We operationalized VC governance or monitoring of ventures as the amount of face-to-face interaction VCs had with venture CEOs. We found some evidence that VCs increase monitoring in response to agency risks, but the results were mixed. Lack of experience on the part of CEOs did not prompt significant additional monitoring as had been predicted. A more potent determinant was how long the VC-CEO pairs worked together; longer relationships mitigated agency concerns and reduced monitoring. Contrary to expectations, perceived business risk in the form of VCs' satisfaction with recent venture performance had little impact on face-to-face interaction. Monitoring was greatest in early stage ventures, indicating that VCs respond to high uncertainty by increased information exchange with CEOs. We measured two types of VC experience and found different patterns for the two. Generally speaking, VCs with greater experience in the venture capital industry required less interaction with CEOs, whereas VCs with greater experience in the portfolio company's industry interacted more frequently with CEOs than did VCs without such experience.Determinants of Value AddedWe argued that VCs would most add value to ventures when the venture lacked resources or faced perceived business risks, when the task environment was highly uncertain, and when VCs had great investing and operating experience. Contrary to expectations, VCs added most value to those ventures already performing well. As we had predicted, VCs did add relatively more value when uncertainty was high: e.g., for ventures in the earliest stages and for ventures pursuing innovation strategies. Finally, we found that VCs with operating experience in the venture's focal industry added significantly more value than those with less industry-specific experience. These results are consistent with anecdotal evidence that entrepreneurs have a strong preference for VCs with similar backgrounds as their own. We found no evidence that experience in the venture capital industry contributed significantly to value added. Together, these results suggest that investigations of the social as well as economic dimensions of venture building may prove a fruitful avenue for future study. Overall, the results showed that value-added is strongly related to the amount of face-to-face interaction between VC-CEO pairs and to the number of hours VCs put in on each individual venture.Implications for Venture CapitalistsThe competition for attractive investments is heating up as economies become more globalized. Thus, the pressure on venture capital firms to operate both efficiently and effectively is also likely to build. It is as yet unclear whether the recent trend toward later stage, safer investments will continue, and how those venture capital firms following this path can differentiate themselves from other sources of capital. Venture capital firms that are able to choose the appropriate bases for determining governance effort and the appropriate roles for delivering added value to their portfolio companies will be those most likely to survive.In the largest, most robust markets (i.e., the United States and the United Kingdom), more effort is expended by venture capitalists to deliver something of value beyond the money. This suggests that the tradeoff preferred by those succeeding is to be more rather than less involved in their investments. Our results indicate that VCs clearly economize on the time they devote to involvement in their portfolio companies. However, our results also indicate that they do this at the great peril of producing value insufficient to justify the cost of their product.Implications for EntrepreneursOur findings provide two important insights for entrepreneurs. First, they show that where and when they obtain venture capital is likely to have an impact on the extent and nature of effort delivered by their venture capital investors. It appears that on average entrepreneurs receiving venture capital in the United States and the United Kingdom will be more closely monitored and will receive more value-adding effort from their VCs than will those in France or the Netherlands. Needless to say, entrepreneurs should consider their preferences for level and type of involvement from their investors as they consider their choice of partners. In France, for example, VCs put great emphasis on their financial role in comparison with other roles, but they contribute much less than VCs elswhere via other strategic, interpersonal, and networking roles.The second key implication of our findings is that entrepreneurs may be able to gauge what roles VCs will see as most important, when VCs are more or less apt to become involved in their companies, and when they believe they can most add value. Such knowledge may help CEOs anticipate VC activity, be aware of the parameters of VCs' preferences, communicate their own preferences, and negotiate the timing and extent of interaction. For example, although our results indicate that geographic distance significantly limits face-to-face interaction, it appears to have less impact on the amount of value added.Implications for ResearchersMuch more can be learned about the relative efficiency and effectiveness of alternative governance arrangements. Little is known about how formal structures such as contract covenants and board control work in conjunction with informal oversight and interaction. Even less is known about how value is added and how it is best measured. Although this study took a step toward developing a model of the circumstances under which value is added, the theory and its operationalization await further development.     

Does money matter?: Wealth attainment as the motive for initiating growth-oriented technology ventures

The desire to attain personal wealth has long been regarded as the foremost motive for entrepreneurship. Other goals and values, however, may also contribute to entrepreneurial motivation. Thus, the extent to which money matters relative to other motives is an empirical question. In this study we examine the role of wealth as the motive for the decision to found new ventures. Three focal questions guide our research: 1) does money matter more relative to other decision dimensions in deciding to start a new high-technology venture? 2) does money matter more to entrepreneurs compared to non-entrepreneurs? and 3) does money matter in absolute terms, that is, does a decision model that focuses solely on the motive of wealth attainment parsimoniously predict entrepreneurs' start-up decisions?We conducted in-depth interviews with 51 entrepreneurs and a control group of 28 senior managers who decided not to start ventures (non-entrepreneurs) in the high-technology industry in British Columbia to address our research questions. The motives we examined are wealth attainment and an aggregate of other dimensions identified by entrepreneurs and managers. We considered three components of values: participants' ratings of the importance of various decision dimensions, their rating of the salience of these dimensions, and their satisfaction with prior levels of attainment on those decision dimensions. We assessed beliefs as participants' perceived probability of attaining their desired level of a particular decision dimension in each of three alternatives: the position held at the time the venture decision was made, the venture itself, and the next best career alternative at that time. The data were analyzed to compare entrepreneurs' values and beliefs regarding wealth with an aggregate of other decision dimensions (our relative hypotheses), and with those of non-entrepreneurs (our comparative hypotheses).Our findings do not support the common perception that money is the only, or even the most important, motive for entrepreneurs' decisions to start new ventures. Wealth attainment was significantly less important to entrepreneurs relative to an aggregate of 10 other decision dimensions, and entrepreneurs did not rate wealth as any more important than did non-entrepreneurs. Non-entrepreneurs rated wealth as no more important than other motives. Wealth attainment was also significantly less salient to entrepreneurs' decisions to venture than were other motives. Non-entrepreneurs reported that wealth was significantly more salient to their decision against founding a venture than other dimensions. In fact, non-entrepreneurs rated wealth attainment as significantly more salient to their decision against founding than entrepreneurs rated it for their decision to proceed with starting a high-technology business. A significant number of entrepreneurs started businesses even when they believed that doing so offered them a lower probability of obtaining their most desired level of wealth than did one of their other alternatives.Satisfaction ratings and stated beliefs also dispute classical predictions. Just prior to making the decision to venture, the entrepreneurs in our study were as satisfied with wealth as they were with other decision dimensions. The non-entrepreneurs were actually more satisfied with wealth attainment than with other dimensions. A comparison of the groups revealed no difference in satisfaction with wealth attainment levels. Entrepreneurs did believe that their chances of attaining their desired level of wealth were much greater through founding a new high-technology venture than through their other alternatives. This difference in beliefs, however, was not significantly greater than their optimistic beliefs about chances of attaining desired levels of other dimensions. It was significantly higher compared to the non-entrepreneurs' belief difference measures for wealth. In fact, the entrepreneurs' stated beliefs regarding the chances of attaining their desired levels of all dimensions were higher than those of the non-entrepreneurs, suggesting that entrepreneurs were simply more optimistic at the time of their decision than non-entrepreneurs.Salience findings suggest that these optimistic beliefs about wealth did not motivate the founding decision alone.We can distinguish those people who successfully started ventures by their regard for wealth as a less salient factor, and their beliefs in higher chances of a venture producing monetary and other returns. Other motives, such as innovation, vision, independence, and challenge were more important and much more salient to this sample of entrepreneurs.Our findings have implications for practice, teaching, and research. Venture capitalists who partially base their assessment of entrepreneurs on the extent to which they are motivated to make a great deal of money may benefit from reconsideration of this criterion. We have evidence of one group of high-technology entrepreneurs who achieved success without placing much decision weight on attainment of personal wealth. Nascent entrepreneurs and those who teach entrepreneurship can use this empirical finding to argue two main points: 1) not all entrepreneurs found a business for personal wealth reasons, and 2) one need not be motivated by personal wealth attainment to be a successful entrepreneur. Similarly, theoretical models that assume money is the primary motive for entrepreneurial activity require re-examination. Future research in entrepreneurship should focus less on wealth attainment and more on other motives for the venturing decision. A multiple-attribute decision model may be able to more fully explain venturing decisions.     

The informal venture capital market: Aspects of scale and market efficiency

Risk capital is a resource essential to the formation and growth of entrepreneurial ventures. In a society that is increasingly dependent upon innovation and entrepreneurship for its economic vitality, the performance of the venture capital markets is a matter of fundamental concern to entrepreneurs, venture investors and to public officials. This article deals with the informal venture capital market, the market in which entrepreneurs raise equity-type financing from private investors, (business angels). The informal venture capital market is virtually invisible and often misunderstood. It is composed of a diverse and diffuse population of individuals of means; many of whom have created their own successful ventures. There are no directories of individual venture investors and no public records of their investment transactions. Consequently, the informal venture capital market poses many unanswered questions.The author discusses two aspects of the informal venture capital market: questions of scale and market efficiency. The discussion draws upon existing research to extract and synthesize data that provide a reasonable basis for inferences about scale and efficiency.Private venture investors tend to be self-made individuals with substantial business and financial experience and with a net worth of $1 million or more. The author estimates that the number of private venture investors in the United States is at least 250,000, of whom about 100,000 are active in any given year. By providing seed capital for ventures that subsequently raise funds from professional venture investors or in the public equity markets and equity financing for privately-held firms that are growing faster than internal cash flow can support, private investors fill gaps in the institutional equity markets.The author estimates that private investors manage a portfolio of venture investments aggregating in the neighborhood of $50 billion, about twice the capital managed by professional venture investors. By participating in smaller transactions, private investors finance over five times as many entrepreneurs as professional venture investors; 20,000 or more firms per year compared to two or three thousand. The typical angel-backed venture raises about $250,000 from three or more private investors.Despite the apparent scale of the informal venture capital market, the author cites evidence that the market is relatively inefficient. It is a market characterized by limited information about investors and investment opportunities. Furthermore, many entrepreneurs and private investors are unfamiliar with the techniques of successful venture financing. The author's scale and efficiency inferences, coupled with evidence documenting gaps between private and social returns from innovation, prompt questions about public as well as private initiatives to enhance the efficiency of the informal venture capital market.The article concludes with a discussion of Venture Capital Network, Inc. (VCN), an experimental effort to enhance the efficiency of the informal venture capital market. VCN's procedures and performance are described, followed by a discussion of the lessons learned during the first two years of the experiment.     

A proclivity for entrepreneurship: A comparison of entrepreneurs,small business owners,and corporate managers

Despite intensive inquiry, relatively little is known about the entrepreneur, the central figure in entrepreneurship. The question of how an individual who operates his or her own business differs from a corporate manager remains unanswered. In addressing this question, the primary purpose of this study was to investigate the potential of psychological constructs to predict a proclivity for entrepreneurship. The research model includes three classic themes in the literature: achievement motivation, risk-taking propensity, and preference for innovation.A survey of 767 small business owner-managers and corporate managers was assembled from a 20-state region, primarily the southeastern United States. The participants completed a questionnaire composed of the Achievement Scale of the Personality Research Form, the Risk-Taking and Innovation Scales of the Jackson Personality Inventory and questions pertaining to numerous individual and organizational variables. Respondents were first divided into two groups, managers and small business owner-managers. Subsequently, due to the often cited variations in entrepreneurs, the owner-managers were further categorized as either an entrepreneur or small business owner, using the widely cited Carland et al. (1984) theoretical definitions. Entrepreneurs are defined by their goals of profit and growth for their ventures and by their use of strategic planning. Alternatively, small business owners focus on providing family income and view the venture as an extension of their personalities. In this study, both groups of owner-managers were simultaneously compared with managers using hierarchical set multinomial LOGIT regression.The results indicated that the psychological constructs are associated with small business ownership, but with some important caveats. As hypothesized, those labeled entrepreneurs were higher in achievement motivation, risk-taking propensity, and preference for innovation than were both the corporate managers and the small business owners. This profile of the entrepreneur as a driven, creative risk-taker is consistent with much of the classic literature concerning the entrepreneur. Nonetheless, not all of the owner-managers fit this profile. When compared with managers, the small business owners demonstrated only a significantly higher risk-taking propensity. In terms of the constructs studied, the small business owners were more comparable to managers than to entrepreneurs.In addition to theoretical and methodological implications, the results presented here have important implications for small business owner-managers of both types. A major issue is the connection between the owner’s psychological profile and the characteristics of the venture, including performance. It would appear that psychological antecedents are associated with owner goals for the venture. Some owners will be more growth oriented than will others, and performance should be assessed in light of the owner’s aspirations for the venture. Moreover, owners should be aware of their own personality sets, including risk preferences, which may be more or less suited to different venture circumstances, including those with relatively high levels of risk.Planning in small businesses appears to enhance venture performance. Research has demonstrated the connections between psychological factors and planning behaviors in small businesses. Those labeled entrepreneurs in this study have goals of profit and growth, and tend to engage in more planning. An awareness of these psychological preferences and concomitant attention to planning behaviors have the potential to improve the performance of the venture, irrespective of owner aspirations.Venture teaming is becoming more popular among entrepreneurs. Balanced venture teams appear to improve the chances of entrepreneurial success (Timmons 1990), but a common source of conflict among venture team members is inconsistent or ambiguous motives for the new venture. Awareness of venture partners’ psychological predispositions in areas such as risk-taking could be used to identify and reconcile areas of potential conflict, and enhance the planning process in the small firm. In sum, an individual’s awareness of his or her psychological profile provides a number of advantages, not only to existing entrepreneurs, but also to aspiring entrepreneurs who should assess their perceived entrepreneurial opportunities against the backdrop of their psychological proclivity for entrepreneurship.