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.     

Evaluation uncertainty of venture capitalists' investment criteria

This paper analyzes the decision process of venture capitalists. The study focuses on aligning the evaluation uncertainty in the decision criteria of venture capitalists with the progress of the process. The reasoning builds from the concept of search, experience and credence qualities, which was developed in the economics of information and allows the identification of the varying uncertainty of a single decision criterion compared to other criteria, along with uncertainty variations throughout the process. Exploratory empirical evidence suggests that in the early steps of the process in particular, management criteria are uncertain, while at the end of the process other criteria couple with uncertainty.     

Effects of relational capital and commitment on venture capitalists' perception of portfolio company performance

In this study, we examine how relational capital and commitment affect a venture capital firm's (i.e., VCFs) perception of the performance of its portfolio companies (i.e., PFCs). That is, we examine how perceived performance is affected by the social nature of the relationship between the VCF and PFC. The study's hypotheses are tested by applying quantitative analyses to survey data collected from 298 U.S.-based venture capital firms. The data from the survey are complemented with additional information drawn from secondary data sources and interviews with several venture capitalists. We found that the amount of relational capital embedded in the VCF–PFC dyad and the extent to which the VCF is committed to the PFC are strongly related to perceived performance. We speculate that relational capital and commitment enhance learning, an effect that increases VCFs' perceptions of performance. Further, these perceptions of performance will also be amplified by the positive affect generated by relational capital and commitment. We discuss the limitations and contributions of our findings and provide directions for future research.     

Missing the boat or sinking the boat: a study of new venture decision making

Taking two conceptualizations of risk, Dickson and Giglierano's [J. Mark. 50 (1986) 58] nautical analogy of entrepreneurial risk (sinking vs. missing the boat) to represent the likelihood of loss element of new venture risk, and March and Shapira's [Manage. Sci. 33 (1987) 1404] risk as hazard (boat size) to represent the magnitude of loss element of new venture risk, we investigated how two contextual factors, the suitability of entrepreneurs' skills and their sources of funds, and two individual differences factors, the entrepreneurs' risk propensities and their perceptions of risk, influence their new venture decision making. Metaphorically speaking, we found that most entrepreneurs would rather risk missing than sinking the boat, and that they preferred to pilot bigger craft than smaller ones. Perhaps surprisingly, our sample of highly successful entrepreneurs made relatively risk-averse choices, with 83% choosing either of the two ventures for which the chances for loss were lowest. We also found that the source of new venture funding—the entrepreneur's own money versus that of investors—influenced our subjects' choices between ventures whose chances for loss or gain differed. A similar effect was found for the entrepreneur's risk propensity. On the other hand, we found that the risk the entrepreneurs perceived in the choice set also influenced choices, but only where the magnitude of the new venture's potential gain or loss varied. When viewed in total, our study and results suggest a risk- and reward-based typology of new venture opportunities, one that may provide a conceptual foundation for future explorations of a variety of questions relevant for entrepreneurs and theorists alike.     

New insights into venture capitalists' activity: IPO and time-to-exit forecast as antecedents of their post-investment involvement

We examine how VCFs' forecast of an IPO exit affects their breadth of advising and the likelihood of founder–CEO replacement shortly after they invest in a new venture. Moreover, we examine how the expected time-to-exit moderates these relationships. Our findings show that the likelihood of founder–CEO replacement upon receiving venture capital funding is significantly greater if a VCF perceives this company as a potential IPO as opposed to a trade sale, and this likelihood increases if the forecasted time-to-exit is short. We also illustrate how the breadth of advice varies as a function of the forecasted IPO and time-to-exit.     

Venture capitalists' expertise: A call for research into decision aids and cognitive feedback

This article proposes that research into decision aids can improve venture capitalists' (VCs) decision process and decision accuracy and speed up the acquisition of expertise. After reviewing research into the accuracy of decision aids such as bootstrapping models and the use of these models in cognitive learning, we propose that theory on the use and performance of decision aids can have important implications on how VCs gain expertise in predicting new venture performance. This discussion leads to a proposed research agenda.     

What you are is what you like—similarity biases in venture capitalists' evaluations of start-up teams

This paper extends recent research studying biases in venture capitalist's decision making. We contribute to this literature by analyzing biases arising from similarities between a venture capitalist and members of a venture team. We summarize the psychological foundations of such similarity effects and derive a set of hypotheses regarding the impact of similarity on the assessment of team quality. Using data from a conjoint experiment with 51 respondents, we find that venture capitalists tend to favor teams that are similar to themselves in type of training and professional experience. Our results have important implications for academics and practitioners alike.     

经济管理中的决策制定

领导的过程就是制定决策并实施决策的过程.决策正确与否,关系到事业的成败,经济的兴衰.因此,在经济管理中按照科学的秩序和方法,制定和实施决策,实现决策科学化,这是市场经济的需要,是事业发展的需要,也是检验现代领导者经济管理水平的重要标志.     

Strategic decision making within Chinese firms: The effects of cognitive diversity and trust on decision outcomes

Basing the hypotheses on group process theory, the effects of cognitive diversity on commitment and decision quality were examined, as well as the moderating effects of cognition-based and affect-based trust on cognitive diversity and decision outcomes. Using a survey of 252 Mainland Chinese executives from different firms, it was found that cognitive diversity has a strong negative relationship with commitment and decision quality. In addition, results show that affect-based and cognition-based trust have moderating effects on cognitive diversity and decision outcomes.     

Consumer decision making and the nature of the product: A comparison of husband and wife adoption process location

Many studies investigating consumer decision making have implicitly assumed that one individual in a family (most often the wife) makes all of the consumption choices for the family. This study investigated and compared the independent responses of husbands and wives concerning their adoption process location for a series of products. Significant response discrepancies were observed, primarily for products for which the adoption decision likely involves lower levels of involvement. Relatively little agreement was observed between husbands and wives on whether a product was adopted. © 1993 John Wiley & Sons, Inc.     

Decision neuroscience and consumer decision making

This article proposes that neuroscience can shape future theory and models in consumer decision making and suggests ways that neuroscience methods can be used in decision-making research. The article argues that neuroscience facilitates better theory development and empirical testing by considering the physiological context and the role of constructs such as hunger, stress, and social influence on consumer choice and preferences. Neuroscience can also provide new explanations for different sources of heterogeneity within and across populations, suggest novel hypotheses with respect to choices and underlying mechanisms that accord with an understanding of biology, and allow for the use of neural data to make better predictions about consumer behavior. The article suggests that despite some challenges associated with incorporating neuroscience into research on consumer decision processes, the use of neuroscience paradigms will produce a deeper understanding of decision making that can lead to the development of more effective decision aids and interventions.     

The influence of gender and culture on Generation Y consumer decision making styles

Through the use of case studies of Cardiff (UK) and Charlotte (USA) this paper provides a comparative study of the retail structure of British and American cities. Three of the most striking contrasts can be seen in the intra-urban location of retail activity, the role of planned and unplanned shopping centres, and in the amount of retail space provision. Retailing in USA cities tends to be more decentralized, with a greater role for planned shopping centres and more retail space than in British cities. Reasons for this are explored.     

The effects of time pressure and information load on decision quality

This study attempts to identify conditions under which consumer information overload occurs. A theory which states that information overload will occur when the time-related task demands exceed the capacity of the system is suggested and tested. An experiment is reported in which an inverted U-shaped function relating decision quality to information load occurred when time pressure was present, but did not when it was absent.     

Household preference revisions and decision making: The role of disconfirmation

In this paper, we examine the role of disconfirmation as an important determinant of household preference revisions and decision making. Although prior research has examined decision influence and information exchange in household decision making, the impact of disconfirmation on individual family member preferences and the joint household preference has not been explicitly studied. Analogous to the main types of social influence found within groups, we identify two types of disconfirmation that impact individual preferences arising from family interaction or discussion. These two types of disconfirmation are informational disconfirmation, related to new product information revealed in family discussion being different than one's prior beliefs, and preference disconfirmation, where a family member has incorrect expectations of the preferences of other influential household members. An empirical study involving a household vacation decision demonstrates significant disconfirmation effects in explaining individuals' post-discussion preferences, as well as the joint household preference and decision. Based on the empirical results, we discuss various implications and suggest future research to study the specific consequences of disconfirmation in household decisions.     

Conjoint models of family decision making

The objective of this research is to develop viable approaches to modeling joint decisions. Using conjoint-analysis-type preference data, three methods are developed to combine individual preferences to approximate joint preferences and predict joint decisions. The first is an equal weighting model, which is a simple average of individual members' part-worth utilities. The second is a relative influence model, which combines individual utility functions using a measure of derived influence. The third is a conflict resolution model, which combines utility functions using a measure of conflict. In addition to these three combination models, individual member models and a joint model based on the joint preferences are available.The application area in which the models are operationalized is family decision making. The decision involves choice of a job by MBA students and spouses at a major private university. The models are first calibrated using preference data on hypothetical jobs from MBAs, spouses, and couples and then evaluated on their ability to predict the actual job chosen.     

Buyer-supplier relational characteristics and joint decision making

This paper explores propositions dealing with the influence of buyer-supplier relational characteristics on their joint decision making. Specifically, the proposed conceptual framework focuses on the link between three relational constructs (trust, commitment, relationship maturity) and two types of joint decision making (strategic and tactical). Strategic decisions are those that “expand the pie” for both parties (integrative decisions), and tactical decisions are those that “divide the pie” between the two parties (distributive decisions). We propose that the effect of relational characteristics on joint decision making is likely to be moderated by the characteristics of the supplier organization (such as team orientation) and its environment (such as competitive intensity). We conclude with a brief discussion of the implications and possible extensions of the theoretical model.     

The influence of stated organizational concern upon ethical decision making

This experimental study evaluated the influence of stated organizational concern for ethical conduct upon managerial behavior. Using an in-basket to house the manipulation, a sample of 113 MBA students with some managerial experience reacted to scenarios suggesting illegal conduct and others suggesting only unethical behavior. Stated organizational concern for ethical conduct was varied from none (control group) to several other situations which included a high treatment consisting of a Code of Ethics, an endorsement letter by the CEO and specific sanctions for managerial misconduct. Only in the case of suggested illegal behavior tempered by high organizational concern were managers influenced by organizational policy to modify the morality of their actions. However, the responses to the illegal scenarios were significantly more ethical than the reactions given to the unethical (but not illegal) situations. The implications of these findings are then discussed. Gene R. Laczniak is Professor of Business at Marquette University (Milwaukee, WI) and he is co-author of Marketing Ethics (with P. E. Murphy), Boston: Lexington Books, 1985. He has also written various articles on Business Ethics. Edward J. Inderrieden is Assistant Professor of Management at Marquette University.     

The stakeholder product brand and decision making in retail financial services

Stakeholder products were introduced by the UK Government to help assist decision making in retail financial services. Such products are targeted particularly at low- to middle-income consumers and those in a position of vulnerability/weakness in personal finance markets due to low expertise and familiarity and a lack of interest and involvement. The current study offers a detailed investigation into whether the stakeholder policy initiative is likely to appeal to the specified target market and, hence, help the Government fulfil its objectives. A sample of 1002 consumers is employed in a quantitative study. Findings show that the stakeholder product brand (SPB) enjoys a relatively high level of general acceptance, but that it does not resonate particularly with the target market. The SPB is likely to be recognized as useful in aiding decision making by high-involvement consumers, as well as those consumers who are more familiar with financial services. Those who suffer from the illusion of expertise have marginally less positive attitudes towards the stakeholder brand when compared with other expertise groups. The data are indicative of few meaningful relationships between demographic variables and attitudes towards stakeholder products. Policy implications are highlighted.